New Zealand is transitioning from a middle-income to a low-income economy
The New Zealand Treasury’s Half Year Economic and Fiscal Update predicts a cyclical downturn with 0.5% economic growth in the current fiscal year ending June 2025. But it’s likely to be worse than that. The Department of Statistics has reported a 1% contraction in the September quarter.
Damien Grant, argues that the country is facing serious economic issues due to poor decisions over three decades, including low productivity growth, a generous social welfare system and a complex set of rules hindering development.
However, the most damaging to the economy is that New Zealand values ideological conformity over the truth. “We cancel those we disagree with rather than engage in debate which means we will not tackle any of the really hard issues,” Grant says.
The Crown will not cut spending to match the fall in revenue and will eventually raise cash with new and economically destructive taxes on capital when debt becomes too expensive.
Grant believes that New Zealand is transitioning from a middle-income to a low-income economy.
Are we in a cyclical downturn – or is this something darker?
By Damien Grant as published by Stuff on 28 December 2024
Are we in a cyclical downturn, or are we on the precipice of something darker? In the Half Year Economic and Fiscal Update; the HYEFU, released on Tuesday [17 December], Treasury believes the former. Things are difficult, with economic growth in the current fiscal year (ending in June 2025) expected to be just 0.5%, but will bounce back to 3.3% the following year.
Sadly for the economists at Number One the Terrace, the quants at the Department of Statistics debunked that optimism on, let me see, Wednesday [18 December]. Our economy shrank 1 per cent in the September quarter and all indications are the economy continues to contract. It would require a heroic surge in productive output in the remaining six months to get us to half a per cent economic growth this fiscal year.
The forecast wasn’t pretty even with this optimistic growth forecast: “Core Crown expenses grow from $139.0 billion in 2023/24 to $162.9 billion by 2028/29. The growth in core Crown expenses is driven by three key factors – increases in benefit expenses, increases in finance costs and forecast new spending.”
Meanwhile, revenue rises, mostly due to that imagined economic growth. The deficits, expected to fall from 2.4% of GDP in the current year to 1.8% in the next and surplus by 2028 are based on those economic growth figures that are wilfully optimistic.
And then we have the issue of productivity; the amount of output we produce for every hour of labour. According to Treasury’s analysis productivity growth averaged 1.4% each year between 1993 and 2013 but only 0.2% annually over the last ten years.
There are many drivers of low productivity but our failure in education is the greatest. A 2022 study of NCEA graduates showed only a third passed the required level of literacy. Illiterate workers are less productive than literate ones, and therefore get paid less and pay less taxes.
Treasury is live to the problem. In a report in May, it looked into the impact of low productivity on its forecasts and projections and if this can be improved. The authors looked abroad, considered developments like Artificial Intelligence, and concluded: “… New Zealand may not be well-placed to successfully absorb new productivity-enhancing innovations given falling educational attainment, our relatively low managerial capability and low, albeit growing, levels of research and development.”
Coming back to Treasury’s HYEFU, they anticipate a return to 1 per cent productivity growth but give no data indicating a revival in the output of Kiwi workers and managers. The numbers also preclude any economic shocks like, an earthquake, plague, overseas war or Chris Hipkins becoming Prime Minister again; and at least one of those is probable in the near future.
At some point, we forgot that actions have consequences. As a result, we are living with the cumulative impact of poor economic decisions spanning three decades.
We have a generous social welfare system that rewards indolence and a progressive taxation system that penalises effort. We institute a complex set of rules around development that hinders building. We have become focused on a person’s ancestry and gender and not their capability.
We discourage mining and exploration and overseas investment and are reluctant to allow foreigners to buy and develop land. Most damaging; New Zealand values ideological conformity over the truth. We cancel those we disagree with rather than engage in debate which means we will not tackle any of the really hard issues.
The current government is making progress; Erica Stanford, Chris Bishop and Simeon Brown are all making improvements in education, construction and transport respectively, complementing the work done by Seymour on foreign investment and charter schools, but these are but the Three Hundred against the size of the problems our country is facing.
The Crown will not cut spending to match the fall in revenue and will eventually raise cash with new and economically destructive taxes on capital when debt becomes too expensive. The Treaty will continue to be used as a means of extracting economic rent from one sector of society against another and not just addressing past wrongs. We will not make the reforms in health needed to lift a moribund system where we ration access to health by seeing who dies on a waiting list and nor will we tackle the Universal Basic Income we pay to those over 65.
And the teacher unions can be confident that education reforms will not alter the single-payer model that is responsible for the current malaise.
Treasury’s forecast assumes a cyclical fall in output that will reverse itself without any structural change. It is more probable that we are in the early stages of a transition from a middle-income to a low-income economy that we are now unable and unwilling to prevent.
The challenge we face as a nation, and for those who we elect, is that our default response to any crisis is increased government intervention paid for with higher taxation and increased debt. Which is what the public wants and, being a democracy, is what we will get. But. If I may suggest, it isn’t a cure. It is how we got here.
Featured image: The Treasury, Beehive, and Reserve Bank, Wellington. Source: New Zealand Treasury
