Original photograph by Brett Phibbs/New Zealand Herald. Colourised by Adrian Clapperton
Labour swept to power in 1999 promising to transform New Zealand into a world-class, knowledge-led economy. Instead, they reverted to ‘Old Labour’ habits of taxing, regulating and centralising.weighs up Labour’s promises against its achievements and wonders what’s next
Picture this: an election is upon us. We’ve just completed two quarters of negative growth, the government is a patchwork of parties built upon a bizarre deal with Winston Peters, the Prime Minister finds herself less popular than her opponent, and it feels like the whole country has run dry on ideas, and out of patience. Oh, and we’ve just bombed out of the World Cup at the hands of the French.
Sound familiar? That was September 1999. Jenny Shipley’s National government was about to be soundly trounced by a jubilant and unified Labour Party—and the Nats felt decrepit. A lasting memory I have of 1999 is of Shipley and her cabinet delivering a ham-fisted policy called Bright Futures. It involved a few tweaks to science and telecommunications policies, with rhetoric borrowed from the New Economy. It was as close to intervention as the Nats could tolerate, since they were stuck in a ‘no-government is good government’ mindset. In every area, the policy answer seemed to be a monochrome, laissez-faire shrug of the shoulders.
Today, it’s Labour’s turn to look flat-footed. Its stuttering, knee-jerk reaction to John Key reveals a Cabinet empty of fresh talent and ideas.
But there’s a big difference from 1999. This is an idea-less election. There are no ideological arguments that matter to the punter, or policy clashes of significance. Our political discourse feels personal, embittered, mean. It involves secret tapes and email leaks.
In ’99, Labour swept in with an agenda to transform the New Zealand economy. It launched the Growth and Innovation Framework—a whole-of-government approach that placed innovation as a central theme across all economic policy. It set up public–private taskforces in design, biotech, ICT; it announced a package to boost the regions and revived the old-fashioned idea of planning, including restoring the Ministry of Economic Development. Most importantly, it declared that ‘economic transformation’ would lead us to a knowledge-based, world-class economy. Optimistically, Labour promised to get us into the top half of the OECD by 2011.
In that first term, Labour reached for a few familiar tricks, ditching the much-hated Employment Contracts Act and renationalising ACC. But it also seemed intent on pursuing the successful Third Way programme established by Tony Blair in the UK and Bill Clinton in the US. Its main aim was finding a new way to partner with the private sector to stimulate economic growth.
In 2002, then-Deputy Prime Minister Jim Anderton declared it was the most successful government in a generation. A great sentiment—if only it were true. What happened to the bright-eyed reformers who swept into the Beehive in ’99?
Let’s start with the good. The economy has grown. We’ve seen the lowest unemployment levels since the 1960s. Disruptions such as strikes and infrastructure failures have been minimal (thank goodness it rained!). Labour has grasped the nettle on climate change, first signing up to Kyoto and now promoting the unpopular Emission Trading Scheme. And it has saved the best stuff till last: planned tax cuts, R&D tax credits and international tax reform, a broadband competition shake up, KiwiSaver, the China Free Trade Agreement.
Many of these ideas were set out at that first Knowledge Wave conference in 2001 as practical first steps. What’s taken so long? Under Labour’s management the economy hasn’t fundamentally changed since 1999. The exchange rate is still pegged to interest rates, most of our exporters are price takers rather than price makers, and we are extremely indebted to the world. On many important measures, we’ve actually gone backwards (see below for the full story).
Labour knew what had to be done to get New Zealand’s economy off the road to nowhere, but has done far too little, much too late. Despite a good start and despite being armed with full knowledge of what transformed the similar economies of Ireland and Finland, Labour surrendered the task through a lack of willpower and ideas. When it was time to step up, Labour reverted to type.
“In 2002, then-Deputy Prime Minister Jim Anderton declared this was the most successful government in a generation. A great sentiment—if only it were true. What happened to the bright-eyed reformers who swept into the Beehive in ’99?”
The greatest failure, in my view, is that Labour’s rhetoric about transformation has proven to be just that. Fancy talk. The Growth and Innovation Framework was dropped around 2004. Of the three major task forces established in design, ICT and biotech, only design continues. The science and research that was to emerge from such a framework has simply not occurred. In fact, the science system may be in a worse state than when Labour took power.
And remember that bold idea to get us back into the top half of the OECD? Here’s a reminder: “This government has set itself an ambitious target. It wants to see New Zealand once more in the top half of the OECD league table of average real incomes by 2011. I believe that in years to come the New Zealand economy could be the Pacific tiger.” That’s Anderton, then Minister for Economic Development, in 2002. When the enormity of the task hit home, the government began to backtrack, making the target more aspirational than essential. As for a serious strategy, with benchmarks and milestones—it never appeared.
Or take infrastructure. Ever since the mid-90s, we’ve badly needed to invest in roads, public transport, energy, airports, rail and broadband. The previous National Government simply abandoned the task, leaving the job to a non-existent market—and a problem for Labour to inherit. But while the Australians have deployed public–private partnerships in infrastructure and state services, this government reverted to the old Labour policies of taxing, regulating and centralising. It now owns ACC, Air New Zealand, KiwiBank, KiwiRail and four power companies. The government has turned the idea of private ownership of strategic assets (even as partners with the state) into an anathema and hobbled crown entities with high dividends and restrictions on how they can raise capital.
And whereas the Blair government re-energised its public services and brought in much-needed entrepreneurship and investment by working with the private sector, Clark’s Labour has simply added more bureaucrats. Total government spending has increased from 36.1 percent of GDP in 2000 to 41.4 percent last year. Core government spending—excluding the impact of State-Owned Enterprises and Crown entities—is 33.4 percent of GDP, below the OECD average but skewed towards unproductive activities. In Idealog #16, former Minister of Education Steve Maharey told Matt Cooney that he’d wanted to rebuild the nation’s schools, “but I never could find money for that”.
This government is a giant accumulator of workers and office space. Journalist Bernard Hickey says it well: “Essentially, the government is eating the economy from the centre, pushing wages and inflation from Wellington outwards. It is sucking in workers, office space and other scarce resources and pushing up both prices and, therefore, interest rates. Prime CBD office rents in Wellington are up 18 percent in the last year.” Seen against the last two terms, Labour’s 1999 language of partnership seems laughably quaint.
In 2011, New Zealanders may not be celebrating our arrival in the top half of the OECD. We will, however, be enjoying the fruits of one notable Labour accomplishment—the Rugby World Cup. Winning the right to host the cup was a triumph, and a brilliant example of how government and private sector can partner for success.
And then Trevor Mallard got involved. His inept handling of funding the Eden Park refurbishment—or building the proposed waterfront stadium, or buying back Carlaw Park, or giving it to Albany Stadium or maybe even Lancaster Park—sums up exactly Labour’s faults. Mallard’s approach was high-handed—and stupid. Telling Aucklanders they had ten days to make such a momentous decision as giving away their waterfront to a stadium—that had already been designed by a favoured architect and awarded to a favoured construction firm—showed an arrogance that only too much time in power can foster.
Now, finally, we’re promised tax cuts, after years of refusing cuts in case naughty New Zealanders immediately spent their money on inflationary goodies instead of investing it. But it’s a begrudging concession; Michael Cullen couldn’t make it much plainer that he’d rather be spending our money on something more concrete. Wonder what Telecom would cost?
Compared with some of its predecessors, the Fifth Labour Government was relatively enlightened (even Mallard would never push policies like, say, carless days or a wage and price freeze). But Labour arrived with a reformer’s zeal and will leave with its ambitions largely unmet.
That’s a tragedy, not for them but for us. Labour has not fixed our enduring economic problems and while we may still enjoy a first world living, our children may find themselves living in what economist David Skilling calls ‘Fiji with snow’.
But perhaps the worst indictment of this term in particular is that a visionless, shades-of-grey National is sleepwalking to power. I wish Labour would at least make them work for the right to govern.
The big stuff
Labour promised to address the big problems facing our economy. Did it?
Standard of living
In 2002, the Government announced it aimed to return New Zealand to the top half of the OECD. Originally there was a timeframe—by 2011—but that was dropped and replaced by a more elastic stretch of “over time”.
Nonetheless, on average our GDP per capita for most of the last nine years grew just that little bit faster than the OECD average.
But as an indication of the size of the task the Government set, we still managed to slip to 22nd among the 30 OECD nations from 20th in 2002. Admittedly, Greece moved ahead of us mainly thanks to an upward revision of its national accounts, but by the Government’s own measure we’re still going in the wrong direction.
It’s a boring topic, but productivity is fundamental to increased prosperity. High productivity equals high wealth—it’s that simple. It’s no coincidence that our wealth ranking and productivity performance among OECD countries are the same: 22nd.
For some time, our GDP per hour worked (which combines how hard we work and the pay-off) has been among the lowest in the OECD. New Zealand’s old wealth was founded on the seemingly inexhaustible ability of our farmers to cost-effectively extract more from their land. Our current wealth is based on this innovation and use of knowledge too—unfortunately, other modern economies have found ways to turn their resources into even more lucrative products and services.
So what has Labour achieved to help us catch up? Not much.
Between 2000 and 2007, New Zealand’s annual labour productivity growth averaged 1.1 percent in the 73 percent of the economy included in the statistics (the big exclusion was the public sector).
“ Much of the improvement in productivity was wrung out of the workforce through longer hours. Our hours of paid work per head were the seventh highest in the OECD in 2005”
This is less than half the average growth rate achieved in the 1990s and it’s significantly lower than the OECD average of 1.8 percent for roughly the same period.
And our hopes for a knowledge-based economy? Multifactor productivity, which measures the impact of new technology, knowledge and processes, grew an average 0.4 percent between 2000 and 2007, less than half the average of the last 30 years.
Much of the improvement in productivity was wrung out of the workforce through longer hours. Our hours of paid work per head were the seventh highest in the OECD in 2005.
There’s stuff-all prospect of improvement, either.
Savings and investment
Okay, the KiwiSaver scheme is great (for the moment overlooking some of its rough edges), but why did we have to wait till mid-2007 to get it?
Saying New Zealanders are poor savers will get you an argument in some quarters, but by international standards we’re shockers. Our national savings, after climbing in the late 1990s to get within a couple of percentage points of the OECD average, hit a plateau in the early 2000s before diving to more than seven percentage points adrift from the OECD in 2005.
New Zealand households save a low proportion of their disposable income. Thanks to the wealth effect of higher values of housing encouraging more debt, we have been dis-saving (consuming more than we earn).
The consequence is that we need a sizeable top-up of overseas funds to maintain the living to which we have become accustomed. This appetite for debt has increased the cost of capital for our businesses. All the same, business investment as a percentage of GDP has been roughly around the OECD median for the last ten years.
The New Zealand Institute, in some excellent research on savings, listed the benefits of increased household savings: a larger pool of domestic capital will help companies grow, lift productivity and reduce the cost of capital; moderate exchange rate fluctuations; create a more supportive home base; and help New Zealand retain ownership of its companies.
If KiwiSaver can make inroads into this extensive list—and I think it will—the scheme could be the single most positive policy Labour introduced in the past nine years.
Innovation and entrepreneurship
I’ll hand over to the country’s leading scientists on this one. The National Science Panel, in its Plan for the Recovery of New Zealand Science, compared our science system—that’s our innovation, research, science and technology—to a forest that supports our prosperity, health, sustainability and credibility.
“The forest is neither strong nor healthy and the bird calls are too few,” said the panellists, a who’s who of New Zealand science. The challenge, they said, is urgent. The sicknesses are low levels of funding, high transaction and compliance costs (that’ll be bureaucracy) and insufficient intakes of high quality students from our secondary schools.
They called for a national science strategy and a clear national innovation policy. The date of the report: April 2008. What’s been happening in the previous nine years?
The panel’s alarmist tone may have been designed to get science some attention, but the facts speak for themselves: our expenditure on R&D, particularly by the private sector, is low by OECD standards and static based on comparisons of business and gross R&D expenditure between 2003 and 2006–07.
World Economic Forum’s latest Global Competitiveness Report identifies New Zealand as one of 31 economies that are innovation-driven. Sadly, we rank just 25th in our ability to use innovation to develop new and unique products.
Government and tax
More tax income and higher government spending went hand-in-glove with Labour.
The ever-increasing tax take funded its spending and interventionist inclinations, which played out in the economy, business, health, education and in our homes.
During its time in power, the tax to GDP ratio increased from around 31 percent to 35 percent.
Most of this was the result of improved profitability among businesses translating into bigger tax bills. The country’s total tax burden is around the OECD median.
At some point the size of government becomes a net dead weight on the economy. We’re nowhere near that point yet, but with the nationalising of rail, banks and airlines, we’re heading in the wrong direction at a reasonable pace.
Early on, the Clark Government made one of its worst moves by increasing the top tax bracket to 39 cents in the dollar. It’s a tax on talent, hard work and ambition.
We need every bit of human talent we have to stay, and we need the world’s talent to come here—this tax encourages neither.
Recently announced cuts to the corporate and personal tax rates, R&D tax breaks and the international tax reforms are great, but why did we have to wait till 2008 to see it happen?
The true state of New Zealand’s infrastructure compared with the world is a bit of a mixed bag, but it’s clear Kiwis don’t like what they’ve got.
We came 33rd out of the 125 countries surveyed in the latest Global Competitiveness Report, thanks to weaknesses in our road and rail infrastructure and electricity supply.
Singling out electricity, you have to ask why we faced another electricity supply crisis this year when we went through the same drama in 2001 and 2003. Whether it was a crisis depends on where you sat, but it was a nasty situation for all those businesses that sacrificed production so we could avoid blackouts.
How come more power stations haven’t been built? A good place to start the blame game is government inaction over a planning environment in which only the brave or foolhardy would ever push to build a new power station. Have a look at the hoops generation companies have to go through to build a wind farm, a form of generation actually favoured by the government.
What about the information highway?
We’re about average in terms of investment in ICT compared with other OECD countries while growth rates in broadband subscription are higher than average.
But looking at broadband purely from an economic perspective, subscription rates are not a good measure of any improvements. Like the New Zealand Institute I believe we’re heading down the wrong track by focusing on penetration rather than speed.
This means more fibre.
In an assessment of New Zealand’s current broadband progress, the Institute says our speed in fibre rollout is inadequate and by 2012 our upload and download speed will be a “long way” from world-class. “The announced investments in fibre will only allow New Zealand to obtain a small proportion of the potential economic gains.”
While successive ministers have talked tough over Telecom, no one’s been prepared to invest in broadband infrastructure without knowing whether Telecom’s network would be opened to competitors. Now, while we finally celebrate access to copper, our OECD competitors are laying fibre.
The good years
The past nine years, by the standards of the past 30, were good ones. But by comparison to other nations we like to consider our economic equals, it was a middling performance and certainly not good enough to advance us up that OECD table.
In its current term Labour has begun to seriously address some of the more fundamental issues holding the economy back through policies such as KiwiSaver, R&D tax credits and international tax reform.
These will produce considerable dividends in the future, but you have to wonder how much better off we’d be if they had put them in place at the start, rather than what is shaping to be the end, of their stay in power.
And will the Nats be any better?
Financial Statements of the Government of New Zealand (The Treasury, 2000–2008)
No Country Is An Island: Moving The New Zealand Economy Forward By Taking It To The World by David Skilling & Danielle Boven (The New Zealand Institute, 2005)
Productivity Statistics: 1978–2007 (Statistics New Zealand, 2008)
OECD Statistical Profile for New Zealand, 2008
Economic Development Indicators 2005 and 2007 (Ministry of Economic Development, The Treasury and Statistics New Zealand)
Global Competitiveness Report 2007/08 (World Economic Forum)
Assessing New Zealand’s Current Broadband Path: The Need For Change (The New Zealand Institute, 2008)
Michael Cullen, Budget 2008 speech to Parliament
Helen Clark, Budget speech to Auckland Chamber of Commerce, May 2008