Can we improve the economy?

Yes we can, but the coalition government is starting out with a credibility deficit.

Following the release of statistics that showed that the NZ economy had dipped into a recession in the latter half of 2023, I asked (in The Conversation) what this means for the government’s budget and economic strategy. The National Party styles itself as the best “economic manager”, but the coming year will test that. It’s been questioned whether their promised tax cuts and landlord rebates are fiscally prudent. But finance minister Nicola Willis has stated that tax reductions will be funded through savings, reprioritisation and additional revenues, and not by further borrowing. How deep will those “savings” go, and where will they come from?

It appears that the Treasury is still preparing “updated fiscal forecasts”. Naturally, opposition parties are preying on the uncertainty surrounding the new government’s first budget. But Labour want to distract attention from the claim that they’d left booby-traps in the form of “initiatives with only time-limited, and expiring, funding” that had made projections look better than they really were, leaving Ms Willis with difficult choices.

What can be done, then, about NZ’s ailing economy?

On 19 March, the International Monetary Fund released a helpful briefing about NZ. This deserves closer attention. For example, it said:

“The recent change to the RBNZ’s [Reserve Bank’s] remit reinforces the price stability objective and is not expected to affect monetary policy.” (IMF)

That was a kind way of saying that the National Party’s big idea of repealing one phrase about employment from the Reserve Bank Act wasn’t bad but, on its own, won’t make any difference. Interest rates were expected to decline in 2024 anyway, regardless of that amendment to the law, while unemployment is expected to rise. Luxon used that amendment as PR about how he’s “growing the economy” – but hundreds of people’s economies are shrinking as they lose their jobs.

The IMF was predicting that 2024 would see modest growth of 1.1%. As you’d expect, they advised fiscal responsibility, and hence some cuts in spending, but: “Outlays on high-value infrastructure and support to the most vulnerable should be protected.” Disability support and school lunches belong in that set of things worth protecting. And the government views roads as “high-value infrastructure”, but not public transport or inter-island ferries.

In the interests of productivity and equity, according to the IMF team, tax reforms “should combine comprehensive capital gains tax, land value tax, and changes to corporate income tax.” The Labour Party would surely have noticed that line as they rehearse their impending U-turn.

The IMF report reinforced a well-known point about decades of slow growth in NZ’s labour productivity. Skill shortages are a big part of this problem. This can be partly addressed by immigration, but the IMF rightly points to the need to improve educational achievement and “skills matching”. New Zealand has had declining PISA test scores and relatively high inequality in educational outcomes. And, at the high end of qualifications, “New Zealand lags other advanced economies in terms of post-graduate degrees, partly due to emigration of skilled New Zealanders”. The education system needs to improve at all levels. But, if you think about the public investment that goes into educating people to post-graduate level (masters or doctoral degrees), it’s a great pity that they’re often to be found in Sydney or London. NZ loses too many of its brightest. There are too few opportunities for them at home as the country under-invests in advanced and applied research and in much-needed engineering projects.

“Public investment in R&D, new infrastructure, and maintenance of the existing public capital stock are critical.” (IMF)

But successive governments have ground universities into the dust, compromising the country’s R&D capacity. There’s been a glimmer of hope as ministers Judith Collins and Penny Simmonds announced advisory groups on the science and university sectors, with an eye to changes that will boost productivity and economic growth. And tertiary education minister Simmonds has decided not to rerun the individual quality evaluation for the performance-based research fund (PBRF) in 2026. (The funding stream itself is secure for the time being.) Readers outside of NZ universities probably don’t know what this PBRF thing is, but I can tell you from experience that doing away with its evaluation process means a huge weight off the shoulders of thousands of academics. The time-wasting cost of compliance cancels out the marginal gains – not to mention its unethical and discriminatory conditions and its invidious and unintended effects on employment relations. These new advisory groups should think about fairer, more efficient ways of allocating public-good research funding that don’t violate the principle of informed consent. But one could wager that they’ll invent something even worse. Will the humanities be valued even less than they are at present? I fear they will be, but, in a future shaped by AI, we’ll need the humanities more than ever.

At quite a different level, it was good that the corrections minister, Mark Mitchell, was talking about getting prisoners to acquire basic skills, such as drivers’ licences, before their release, but he spoke as if it was, for him, a “light-bulb moment”. This is not a new idea, however, and no one needed National’s “social investment model” to get it. The punitive attitudes of conservative Kiwis have stood in the way of any perceived “benefits” going to people convicted of crimes. Even heating their cells has been a cause of intense resentment. But, if “the social investment model”, backed by ridiculously expensive reports from Australian actuaries, are what it takes to silence that backward thinking, then so be it. As the aim must be to reduce recidivism and to break cycles of disadvantage, regardless of who’s in office, then training and education programmes in prisons are essential. A post-grad student could do the literature review to back it up – or to prove the bleeding obvious – for a few thousand bucks.

The IMF noted the relatively high unemployment rate of Māori.

“Active labor market policies and expanded training opportunities can help the labor market be more inclusive.” (IMF)

That was another piece of common sense. But the coalition government needs to come up with something more useful than just punishing beneficiaries who don’t try hard enough. “Expanded training opportunities” sounds like a great suggestion.

Former ACT Party leader Richard Prebble has said, in a panic-button piece in NZ Herald: “Economic credibility is Luxon’s greatest asset. If he throws it away, he will never get it back.”

Prebble joined a chorus of commentators who are suggesting that Luxon’s promised tax cuts may need to be delayed. Meanwhile, a briefing from the IMF knocked a few holes in the government’s defences.

Luxon may have past managerial credibility, but he and his team can’t throw away economic credibility if they haven’t earned any yet. The people of New Zealand need to see action and results before they decide whether Luxon & Co are a credible brand.