The big kahunas - facing up to NZ's top economic challenges

Brian Easton's post this week raise questions about the serious and long-term issues facing not only this new government, but several to come. Can a consensus be achieved?

Brian Easton's post on a sustainable New Zealand should invite lots of thought and discussion, but it seems many of the political class are absorbed by the Labour Party's leadership battles. It does look awfully messy at the moment, but maybe all will be forgotten if the new leader can unify the party and get momentum against the government given the challenges it faces... which brings me back to Brian's analysis.

His basic thesis is that the New Zealand economy is not sustainable in its current form. And he raises these key issues.

  • Fiscal sustainability,
  • Oversea borrowing, especially for housing,
  • Dependence on China,
  • Child poverty,
  • Digital disruption.

Space will limit me to only dealing with the first three.

Brian also covers some other issues such as the environment and inequality, public sector capability but does not seem to see them as such a risk as the four main ones.

Fiscal sustainability is mostly about the long-term trends of an ageing population, in both healthcare and superannuation. The baby boomers are now just starting to draw their Super. But on average they are living longer and more healthily than their parents, and many are staying in the work force. National Super costs are among the lowest in the OECD at around 5% of GDP, and this does not really rise much until 2020.

In any event all the talk of raising the age of eligibility will not affect the boomers; they will just about all be drawing the Super by 2030. Those who are aged less than 50 now could once again accuse the boomers of pulling up the drawbridge after them since increasing the age of eligibility will specifically hit them. It is a repeat of the story of boomer action on student loans.

Healthcare costs are steadily rising. Around 10 years ago they were 8% of GDP; they are now nearly 10%, with 12% being clearly on the horizon.

By 2030 Super and Health will be taking an additional 4% of GDP, in today’s dollars around $9 billion. It clearly limits future tax cuts to pretty much inflation indexing.

This brings me to one of Brian’s lesser points, which is the overall economic size of government. For the Nats the goal is around 30% of GDP (excluding ACC, SOE’s and local govt). For Labour (1999 to 2008) the typical size of government has been 35%. But we know that by 2030 the increased cost of aging is going to add 4% to either of these figures. By OECD standards (at least the European part) this is not particularly high. They are mostly above 40% with Denmark being over 50%. So I reckon we will cope pretty well, irrespective of whether Labour or National leads the government over the next 16 years to 2030.

Overseas borrowing is a perennial for New Zealand. We have been doing it since 1840. In the early years the development of the country almost entirely depended on overseas capital. And in the 21st century we will continue this pattern.

It does mean a lot of the major companies will be overseas-owned - nothing new there. But we will keep growing new entrepreneurial companies with a combination of local and international capital. Some of them will become global successes; look at Weta Digital and Xero. But the overseas ownership of land will remain controversial.  

The China question is perhaps the most vexing. New Zealand has benefitted enormously from being the first developed country with a full free trade deal with China. It makes our products more competitive than the exports of any other developed country, and has spurred the overall increase in export volumes, especially of dairy products. These facts helped New Zealand get through the recession. Of course it also means that our exports have been diverted away from other more protected markets to China, because the Chinese market is fundamentally more profitable for New Zealand.

But free trade agreements do not prevent commodity price cycles. Since the beginning of the year global wholesale dairy prices have halved. The Chinese market spurred global production of dairy products. And this is the thing about commodities, the supply can be readily increased, since by and large they are basic products and many nations can produce them. New Zealand may have a competitive edge in the cost of production, but we can’t significantly influence the global price.

So perhaps the issue is less about China, and more about our vulnerability to commodity price swings.

There has been much said about the need to diversify our economy and the need to build a more resilient high tech and advanced manufacturing sector. This issue is about exports, not import substitution. The Hillside railway workshops are gone, and won’t be coming back. They made no more sense than assembling cars in New Zealand.

There is a consensus that we need to do more to build advanced manufacturing and high tech, though less agreement on how to do this. This issue is a central challenge for New Zealand.

What are the prospects of building an enduring consensus, not just on the need to do so, but also on the pathway to get there?