Opinion: A new target for a new leader

Real GDP per hours worked from 1999. Source: Statistic NZ/ Michael Reddell

For the convenience of subscribers, here's my weekend column in which I argue Bill English should refocus economic policy on increasing GDP per hour worked, rather than just total GDP.

Leadership change is always the best time to reassess what any country or Government should focus on. Within the next day or so, New Zealand will have a brand new leader with a different set of perspectives and priorities, so here's few suggestions on what the new Cabinet should be targeting.

GDP growth for the sake of it seems attractive on the face of it. What's not to love about increasing the total output of the country? There's also a theory, which Prime Minister John Key ascribed to in his resignation press conference, that a strong tide of overall economic growth will help lift everyone's boats.

Strong growth certainly helps fill the Government's coffers with GST revenues and income tax revenues. New Zealand's broad-based and low rate tax system is one of the best in the world at ensuring the Government's bottom line does much better when the economy grows. This week's Budget figures showed just how much room that gives to any Government to direct extra funds to the poorest in society and to lift wellbeing through social spending and carefully targeted tax and benefit cuts.

But that's not the whole story and it also ignores a fundamental driver in any economy: output per hour worked. This is what a Bill English-led Government should be focused on -- relentlessly changing policies, investing and spending to boost productivity. It's the only thing that matters in the end, and here's why.

Increasing output per hour worked increases real hourly wages. It makes an economy properly richer, not just richer on paper or richer because more borrowed money chasing the same number of houses has increased a price.

Amidst all the political and tectonic dramas of the last couple of weeks, a small grenade of an academic paper was rolled out into the political and economic debate, and it has yet to explode or at least stun the players in that debate. The Productivity Commission set up by Bill English published an 86-page paper on achieving New Zealand's productivity potential.

It is a type of magnum opus that explains why New Zealand's economic performance has lagged so far behind our developed world peers over the last 30 years, and how very little is changing. In fact, it's actually getting worse. Our output per hour worked has stagnated over the last three years and has been slowing down for more than a decade. It has been slowing elsewhere too, but our slowdown has been worse than our key peers, and Australia in particular.

The reason our economy grossing faster in gross terms than Australia's and much of the rest of the developed world right now is that we are adding more people to labour force through stunningly-high migration growth, an increased participation rate among older workers and by working more hours per person per week.

Essentially, there's just more of us working harder every day. We're not working smarter or working with better machines that allow us to produce more from every hour of work. We're not engaging much more with the rest of the world, which is the key way that most countries spread the joy of productivity growth through their economies. Internationally exposed companies are the best at spreading the best machines and techniques through the economy, and they're most likely to benefit from the economies of scale that comes from connecting into much bigger markets.

The major failure of the Key Government and it's much-touted Business Growth Agenda was to increase the export share of the economy. It just hasn't happened. We are employing more baristas and real estate agents, and not nearly enough exporters.

The end result is that hourly wage growth has been stagnant in recent years because ultimately real wages are a product of real output per hour worked.

A new Government should refocus on increasing that real output per hour worked, and on all the tweaks and reforms needed to grow productivity. The Productivity Commission's paper has plenty of suggestions, including beefing up our competition laws. But much more needs to be done around changing the incentives for investing, improving the skills of both workers and managers, and mostly by making New Zealand more connected to the rest of the world.

That's all about focusing on investing in companies that make things and code and services for the rest of the world. It's not about spending more on buying each other's houses, and then borrowing against those inflated values to buy an SUV and go on an overseas holiday.

Bill English lamented this export-weak and real estate-driven structure of our economy when in Opposition and in his early years as Finance Minister. His boss, John Key, was less keen on diluting the value of people's homes with real changes, saying home-owning voters actually preferred higher house values.

Now is the time for the new boss to step up with a new target that actually changes the engine in the heart of the economy and society, rather than just giving it a new lick of paint and putting on a deck out the back.