Part 1 of this post noted the end of the “Washington Consensus” in economics. Part 2 noted that newly naked economists need some new clothes. In this part I want to stimulate discussion about priorities for the NZ debate going forward.
In the 2010 Budget debate I reckon Labour won the argument that average Kiwis will be worse off after 5.9% inflation next year devours their “tax switch”.
The next stage of the debate will focus on which policies deliver on rebalancing our economy and leaving NZ families better off.
Let’s cut to the chase on “rebalancing”.
The NZ economy is “unbalanced” because:
- we borrowed too much from overseas lenders, building a huge national debt
- we spent it on bidding up property prices, not making things we can sell
- we export too little and keep bleeding on our current account
- we are slipping behind in innovation, technology and productivity
The heart of the rebalancing process therefore requires:
- lifting savings
- growing exports
- innovating more
- reducing (mainly private) international debt
Policies that would logically achieve that include:
- boosting (not cutting) Kiwisaver and other savings vehicles
- pre-funding (not suspending) the NZ Super Fund
- monetary reform to improve exports (not over reliance on the OCR)
- modernising and strengthening (not cutting) economic development
- comprehensive innovation policies (including R & D tax credits)
- fiscal responsibility and credibility (not more borrowing for tax cuts)
We need a government that has a credible and coherent economic strategy. Confidence is eroded by stop-start, poll-driven initiatives.
Our future is weakened by an underlying agenda that will worsen inequality, driving wedges between Kiwis, their communities and their environment.
Time for a reality check. This is not only a government that has no coherent plan to credibly achieve the rebalancing NZ needs.
Its short-termism and flip flops mask an underlying agenda – whether made explicit or kept implicit – that is individualistic and materialistic.
It does not reflect the Kiwi way, nor embody our highest aspirations.
Their policies are flawed. Their vision is narrow. Their time is limited.
Great post, I completely agree on the aspects that need rebalancing and the policies for doing so (except 3 – without more detail, and 4)…
That sounds like electioneering, a rallying call to the faithful or a shot at the leadership perhaps?
Compulsory Super.
Their policies are flawed. Their vision is narrow. Their time is limited.
Are you sure David? They did give the job of Economic Development to one of the great minds of the National Cabinet – Gerry Brownlee.
Oh, I see your point.
Very sensible David
National Ltd™ Lite rhetoric.
LOL
David, what do you expect when Johnboy runs his politics like a giant Ponzi scheme? Bernie kept it up for years. Not sure this guys can pull it off for too much longer, though.
Here’s a question – how do we stay on course for the 10-15 years needed to make some of these changes?
One slip, one general election, and the NATs are back in selling off the assets you have built up, decimating the surpluses and the savings you have on track, and generally having a huge party at the country’s expense.
How do we do a Norway, not a UK.
One of the aspects of the Berl Report on making the train cars shows is that the value of the NZ$ is far out of whack. For the same price we get almost 3 times more benefit by making the cars than importing them. This would indicate that the NZ$ has a book value almost three times it’s actual value. If this is corrected then our exports should increase until such time as that we can’t actually do any more.
Of course, this does have the problem that we would rapidly run out of actual physical resources resulting in real poverty.
‘we export too little and keep bleeding on our current account ‘
I think the answer there is to import less rather than export more, it’s a laughable suggestion to say New Zealand could ever produce enough exports to outweigh imports in free trade considering our size.
Monetary reform to improve exports that doesn’t include the OCR? What a generic thing to say, What monetary policy are you talking about exactly? Butchering the NZ dollar or something? We don’t really have any taxes on trade left to remove do we?
“we borrowed too much from overseas lenders, building a huge national debt
we spent it on bidding up property prices, not making things we can sell”
David I look forward to a comprehensive tax policy pre election with the fine print, as there are other Lab MP’s who have commented on the need for tax protection for landlords to be subsidies and keep rents at a low level. Also I might offer that yo make Kiwisaver compulsory otherwise we are in the current position and when this was intro that the workers were subsidising the wealthy with tax subsidies, as per Raymond post re cost of living many families are struggling and have been for over 5 years to live within their means, and these are not over geared property speculators, and many were on the 39% tax bracket.
Increasing exports are one wish but that depends upon our competitiviness not just productivity as yu mentioned any great effort to increase this competitiveness was destroyed by the OCR and wide flucations of our currancy. So I also await with great anticipation the repalced to our narrow Res Bank focus. (and as an aside prey that 25 points are not added tomorrow,otherwise Mr Bollard will undo any recovery that we have achieved no matter what Govt policies or which party instigates them)
Dylan do you have any idea what you are talking about.
Ireland is almost exactly the same size as NZ and last year, as their economy was collapsing, they reported a trade surplus of around €40B.
And you will find that they had very strong export growth all through their “Celtic Tiger” period 2000+ as well.
Size of the country isn’t the determinant for export success, Dylan, size of the thinking is.
When David Lange came to power he uncovered a massive debt created by Muldoon. The debt was created by trying to keep a fixed exchange rate. I don’t know any other facts to do with this story nor if memory serves well enough for that to be right but it is definitly a point worth considering, influencing the exchange rate is a vert messy buisness.
They shouldn do a NZ version of Mount Rushmore – Mount Muldoom – and Have Muld
n , Hide, Shipley and … 
Draco , Im not sure you are looking at the manufacturing sector in the right way.
We ‘make ‘ buses, that we then export to Australia, and the designs are used in The US
.http://www.aucklandtrains.co.nz/2010/05/28/new-style-nz-made-buses-arrive/
http://tvnz.co.nz/business-news/nz-buses-may-win-84m-deal-in-new-york-3241888
I think we ‘make’ Fire engines as well. This means we use a mix of imported and local components t create a complex vehicle that is competitively priced. Do we need to doe the same for standardised trucks or even cars , no.
http://www.stuff.co.nz/dominion-post/local/horowhenua-mail/3796886/Levin-gets-100th-New-Zealand-built-fire-truck
The rail cars would have worked the same way, we could have made some parts , mainly the structure/ interior and imported the electrics and the systems. Thus we would have the knowledge to maintain them over the 25 year life.
After all a local computer shop , ‘makes’computers using standardised parts and sells them less than well known brands who have automated factories in Asia and massive buying power.
When you have lived overseas, and then return its quite surprising on the defeatist attitude many people have to what is possible let alone what is all ready happening
gwwnz roger that, I think a hell of a lot of NZ talent, motivation and vision now works offshore, adding value to the economy of other countries.
Hey David
Now you’re talking. I like what I’m hearing. Sounds like a right course.
@GWW: “When you have lived overseas, and then return its quite surprising on the defeatist attitude many people have to what is possible let alone what is all ready happening”
In other words, the “McD’s nation” as defined by David Harris (of Pegasus Mail fame).
We have no trouble in producing the know-how. The trouble is that, apart from a few exceptions such as Sam Morgan, those with the money don’t have the vision, those with the vision don’t have the money, and never the twain shall meet.
@ BLiP LoL – nice tag!
@ Loota How to be more like Norway… Well, more progressive taxation (all the Scans), invest in innovationa and technology (Finland, Sweden, Denamrk all did too). Norway is a special case with its massive oil endowmnet – which it has NOT used for current consumption.
Develop a strong international brand (high quality, neutral and peace-building…) Some of that might sound familiar. there are other small country strategies that standout: Singapore, Israel, Ireland, Korea – all with pros and cons.
Here’s the challenging thought – the smaller and more fragile the economy, the more important it is to have a clear, evidence based strategy and then implement it.
@Jennifer – how to embed that? Well culture is the slowest to change and actually the most powerful driver. Building a stronger, more self aware culture around inclusion and innovation, community and environment as part of the Kiwi Way is part of that.
That is the worst part about Key and his ‘aspirational’ rhetoric, it was just another talking point ( from overseas experts), as when asked further he just goes blather blather.
Just a few weeks back when I was in an out of the way part of the Viaduct harbour there is almost a production line of super yachts which are in the finishing off stages.
They take your breath away. And yet this sort of business is killed by the high dollar ( which has wild gyrations as well), all so we can pay high interest rates on easy credit from overseas pushed by Aussie banks ( which will be stoked by Nationals PPI deals).
You can almost hear the baying for the RB to push up interest rates, which only benefits those who borrow short to lend long and kills those actually who make something worthwhile and lasting.
* boosting (not cutting) Kiwisaver and other savings vehicles
* pre-funding (not suspending) the NZ Super Fund
* monetary reform to improve exports (not over reliance on the OCR)
* modernising and strengthening (not cutting) economic development
* comprehensive innovation policies (including R & D tax credits)
* fiscal responsibility and credibility (not more borrowing for tax cuts)
Seems like there’s something missing there: will profits made from investing in property speculation still be tax free under a future Labour government?
The Celtic tiger relied on billions of Euros being pumped into the country from the EU, something NZ doesn’t have access to. Have you seen what the Celtic tiger did to property prices in Ireland? It would make you’re eyes water.
“Seems like there’s something missing there: will profits made from investing in property speculation still be tax free under a future Labour government”
I hope David has more than this to “manage” property speculation, say perhaps a limit on interest that can be claimed for tax deductions as a $ term if any at all. playing around the edges just allows the party to use the rhetoric (Like Lab and Nat re longer prison term) yet in relatity nothing is achieved in real terms. If there are no measures to reduce the reasons for being a land lord then just more rhetoric.
The “Kiwi Way” I like it!
That would be doing little things to help out a fellow human in need like weeding their garden when they are not so well!
@ghostwhowalksNZ – Key’s one liners are more sinsiter than that in two respects: first they are the product of vast and expensive empirical market research – he knows who they will reach and how; and the Nats are very disciplined in how they use them.
Second they are not philosophically random – Key personifies a false brand: state house boy got rich – not only pulling up the ladder after himself so others dont have the same cahnce, but also defining success in individual and material terms.
Our agenda is bigger and truer than that. Human life should not be measured by a person’s bank balance. Wealth is not the result of moral virtue, nor poverty the result of moral fault. Therefore equality of opportunity is crucial and something to be fought for.
@Danyl – my personal view is that the profits of property speculation should be fully taxed. Depreciation is a timid step in that direction.
@CraigGlenEden – I hear some blokes do so much good around the place they deserve the odd hand themselves occasionally.
I wonder how this vision gels with Charles Chauvel’s call today for $2000 each for old car owners so they can trade up
does if lift savings? Nope
Does it grow exports? Nope
Does it mean more innovation? Nope
Does it reduce (mainly private) international debt? Nope
But Charles thinks it’s a really good idea…Perhaps you need to have a word in his shell-like David.
@Loota Ireland has over double the GDP of NZ.
Clearly you don’t know what your talking about because you didn’t give any reasons or explanation as to why Ireland has a trade surplus of 40 billion or weather that reason is something New Zealand could capitalise on.
The size of the thinking? What are you talking about I wish you would tell me instead of dropping generic statements like that with no examples/specifics to back them up. Not as generic as ‘monetary policy other than the OCR to boost exports’ though. What monetary policy. I wish David would say but he didn’t answer me.
Dylan I was responding to your comment:
Now last I looked Dylan “our size” was 4.38 million people and Ireland’s size was 4.54 million people and as you said, they have over double the GDP of NZ due to their export industries.
therefore
It’s not “laughable” to think that a small country could produce more exports than consume imports, and “our size” is not a factor which rules out that possibility. In other words, the reason you gave in your quote above is invalid.
What is laughable is defeatist thinking which assumes that NZ cannot accomplish these things, when other small, formerly agrarian economies, have done just that.
That’s what I was talking about.
@ Dylan – Sorry for missing your question. The monetary policy background can be found in recent speeches by Hon Phil Goff and Hon David Parker (www.labour.org.nz). Essentially it would seek a less volatile and more competitive exchange rate through broadening the objectives and toolkit of the Reserve Bank (while retaining its independance and current inflation target range). More explicit use of counter-cyclical macro-prudential policies, targeted currency intervention and a possible inbound capital flows tax wedge. Long story and lots of work in train. Worth noting that Labour’s position is fully in line with international (G20, Basel) developments and very similar to Australia’s monetary framework.
This policy will be matched with work to come on savings, innovation and export development.
More on the Celtic Tiger making a hard landing on its face.
NZH – Folly of Tiger is a warning for NZ
Loota I didn’t mean size as in population I meant size of the economy. Maybe Ireland has more resources than us, maybe they have a greater productive capacity for all sorts of other reasons I don’t know and for all I know you don’t either because you still haven’t said exactly how Ireland managed to do that. Also note I mentioned under free trade I would be curious to see if Ireland practiced more protectionism than us.
@David Thanks for that. ‘inbound capital flows tax wedge’ Does that mean you want to reduce those financial transfers in the balance of payments that don’t concern exchanges for real flows through taxing them? Because that has nothing to do with ‘boosting exports’ but it does have everything to do with the current account balance and sounds pretty reasonable.
‘counter-cyclical macro-prudential policies’ Ok what the h3ll man. Point proven maybe I am being a d1ck in asking for things I don’t understand yet. But I try as much as possible to avoid Jargon on this website and when I do I try my best to explain them straight afterwards maybe I should stop doing that if that is something that won’t be returned to me (although that’s what leads to those really long posts). But come on I am only a young aspirant in economics give me a fair go, if it takes too long to explain it in ordinary english then at least tone the jargon down a couple of levels and I will get it.
What how is that in moderation? You need to tone down the moderation guys seriously that contained NOTHING offensive except one minor slang that was aimed at myself.
What I was getting at was that the price doesn’t reflect the full benefits. The Berl Report tells us that to make the train cars here for domestic use alone represents so much more benefit that to import them to get the same benefit the price has to be 1/3rd of the price to manufacture here. That could also be represented by dropping the value on the NZ$ to about 1/3rd it’s present value which would make the price for the imported cars 3 times higher and properly reflect the full benefits of making them here. Doing that would also boost NZ exports and pretty much kill any imports which would rebalance the trade deficit that we presently have.
The problem I see with this process (and the entire market philosophy actually) is that boosting our exports will also boost our need for raw materials and although we would be able to import some most of them would come from NZ which must result in NZ eventually running out of resources. Once that happens we will be very very poor.
It’s endemic to a free-market system that requires growth based in a finite resource that eventually it must use up all resources. National, Labour and even the Greens are pushing us towards a Malthusian Correction and very few people are actually asking what happens when we run out of resources.
@CGE: “The “Kiwi Way” I like it!”
Perhaps People for the American Way could be the basis for a NZ equivalent – People for the Kiwi Way, or People for the New Zealand Way, whichever rolls off the tongue better. They were originally formed in reaction to the rise of Pat Robertson & Jerry Falwell.
David
You have left out one of the main drivers for out demise.
IMPORTING TOO MUCH and at the mercy of profit takers hands of with little restriction. It takes an economic crash to slow it.
Why is it left out. is it because of the popularity of buying unnecessary junk.
Are you afraid of upsetting traders who help the mess along for a profit of course.
We also have massive exports not mentioned – Money to over seas interests. We even encourage such foreign fortune hunters to plunder our country.
Why is it distasteful to shrug off the hype of business leaders who hold no social responsibility for the outcome of their wants.
Why are NZders subjugated and pessimistic. Read the papers carefully and listen to the news each day. We are fed mind setting crap and half truths continuously. Small snippets of rubbish go unchallenged. They accumulate and are built on. That is how the right wing political machine works here. Look who owns and controls news sources.
If you summarise what this Govt has done then the legacy of growing misery that hangs over many peoples lives is depressive.
Lets not get carried away by Irelands GDP , which has been falling massively. Part of the reason it is so high is because a lot of companies use their low corporate tax rates ( 12.5%) to ‘wash’ their international profits through Ireland.
ie Google passes all its worldwide ad revenue via its Irish subsidiary. along with other major US corporates like the investment banks which have their traders in London but the ‘back room’ in Dublin.
When you look at Irelands GDP its about 20% MORE than their GNP.
“GNP is the value of final goods and services produced in a year by a country’s nationals ” and excludes all repatriated profits and income ( which is included in GDP).
Most countries they are very similar but in Ireland GDP is 25% more than GNP
http://neweconomist.blogs.com/new_economist/2005/09/is_ireland_real.html
These ‘profits’ dont benefit Ireland other than a very small way as they would normally pass back to the parent company or invested elsewhere as reserves.
Would you put your money in an Irish Bank ???
DTB
Running out of resources ? LTG ?
No way . MIT is wrong and so is CSIRO
The world is only limited by the imagination.
We can dig up more coal, mine more conservation estate, import more people so consumer demand is heightened for internal trade and live off the land by selling it to foreigners.
Finance is unlimited as you just create credit and trade it.
Just refuse to admit resources are limited and all will be well.
As long as a dividend is paid for this year then things will be alright.
Next year will look after itself.
The most important thing is to keep share prices rising and knowing when to sell.
Our country’e alright . We have a banker as PM.
Good stuff thanks commentators. A fewpoints to respond to:
@Dylan – yes the possible tax wedge on inbound flows would address the financila aspect of te current account more than the goods balance, which is critical as 3/4 of the deficit or more on average is financial.
Sorry ’bout the monetary jargon but you did ask for it…. that stuff is about using financial sector risk managment tools like the core assets ratio to either warm up or cool down the economy alongside the OCR. The Bank is already moving in that direction but doing so arguably strains the breadth of hte current Reserve bank Act provisions….(PS Dylan I was not at all offended by your language).
@John W – good point about imports. I should have said ‘net’ exports as managing import demand is a factor (although the levers are indirect at best). The point also relates to the capital available for domestic business investment. More importantly (as evidenced by Bollard today) there is no aggressive rebound (Key’s words) underway. Conversely this has got to be the weakest “recovery” in memory.
There is something seriously and fundamentally wrong with this economy adn the government appears oblivious to it. I think capital scarcity is at the heart iof it. But that can’t be sold by flogging assets and just borrowing more offshore – we must save and invest to build the stock of local capital over time.
And yes, the PM is a Banker.
LOL
1984: “The country could not continue to be run like a Polish shipyard.” – David Lange
2010/11: “The country can’t continue to be run like a Merrill Lynch branch.”
@David, when we are spending $1.22 for every $1 earned and we are reaching the point where we can’t publicly spend what is required without our credit being downgraded (what the 09 Budget was about), the options for borrowing for productive investment become very limited at attractive interest rates at that point – the only option is assets sales…
We are Spendsville, so is the US, UK, EU and to a lesser extent Canada and Aus… China, Singapore, some of the Middle East and SE Asia, and Hong Kong are Thriftsville… Given enough time Thriftsville owns Spendsville, but boy did we have fun with our pretty environmentally destructive toys while we were sliding down…
The future massive push of young Kiwi’s to Australia due to the far, far superior handling of Superannuation is not the only reason we should make Kiwisaver compulsary at 4.5% matched by an employer 4.5% with $1000 government start up and yearly tax credit…
@David, 3/4 of the current account deficit is due to financial transfers? I had no idea. Placing a tax on these to me sounds great, it sounds like protectionism and a true labour policy, but couldn’t that easily be done through fiscal policy? Why do we have to tamper with the RBNZs goal of keeping Inflation down, isn’t placing taxes on things the responsibility of the Government? (and one other question. when you say inbound capital flows do you mean those coming into the country through foreign investment/savings or our financial sector lending more money to our own buisnesses than is being saved or both).
Yeah but I don’t get that second bit at all
@John yeah I pointed out how we imported too much also, net exports should have been said
I am glad to see you say that capital is at the heart of our economic problems, that is something I whole heartedly agree with. You say to solve the problem of lack of capital we must save and invest to build up that up. That makes sense but I don’t see how savings always leads to investment. To me organising and collecting together the capital that we do have to aim it at larger investments would be an important part of building capital. e.g One person on super annuation isn’t going to necasserily invest that money in our industries when they retire. I would rather see the Government increase tax save that money and then spend that money on large investments in the economy so the capital is organised and aimed in the right places and isn’t floating around the masses waiting to be spent on consumer goods when they reach 65.
@JMH – yep – we have a very hard problem to dela with now – the combination of high accumulated debt, not paying our way, and endemic capital scarcity. gues we can’t solve that by focus groups and polling, like Key does.
DC
“Key personifies a false brand: state house boy got rich – not only pulling up the ladder after himself so others dont have the same cahnce (sic), but also defining success in individual and material terms. ”
That sums up exactly my feelings about what I’ve been seeing since prior to the last election… he’s slick but he’s fake
For all those who dont like Nicky Hager, he did seem to peg Key and his pals when he called them “Hollow Men”
@Tracey: isn’t it called astroturfing?
Dylan said:
Ireland was a country of poor farmers 40 years ago, that country found themselves a path forwards time we did too. And we can learn a lot from the Celtic example – things to do and things not to do.
@Tracey – i like your line on key- slick but fake – mind if i use it?
@Loota hmm do those things involve any kind of protectionism on trade if so my comment still stands
Dylan yep many old forms of protectionism are no longer allowed under the rules set by those who rule (import tariffs and the like), but there are still many ways and means of advantaging one own’s country in the field of trade and industry.
And damnit, its our duty to do so.
Loota you know what comes to mind? Ireland is a part of the EU, we aren’t, Ireland is a country of farmers as we are (going by what you’ve said) and they have access to agricultural export markets that we don’t have access to. Maybe Ireland is a country that has gained from the loss we had when Britain joined the EU