A cure for a productivity recession

OECD chief economist Catherine Mann and Finance Minister Steven Joyce. Photo: Lynn Grieveson

The OECD has offered up a cure for New Zealand's economic achilles heel of poor productivity, but it's also hopeful that recently strong immigration will drive an improvement in the long run.

The OECD's bi-annual survey on the New Zealand economy was released with plenty of fanfare yesterday by OECD Chief Economist Catherine Mann and Finance Minister Steven Joyce. It was largely positive about the short term out-performance of the New Zealand economy relative to others, but it warned that households were vulnerable to a housing correction and that New Zealand's productivity was poor.

The report's focus on productivity proved topical, given GDP figures for the March quarter released the same morning showed a second consecutive quarterly fall in GDP per capita and a fall of 1.3 percent in GDP per hour worked in the last year. The key factor in the fall in GDP per capita at the same time as a 0.5 percent rise in overall GDP for the quarter was a 0.6 percent rise in the population.

The appearance of the OECD's Chief Economist to release the report was notable, given lower ranked officials have previously released the report in New Zealand.

Mann said New Zealand's economic growth of three percent per year for the last three years was enviable.

“The challenge going forward is to enact reforms that will boost productivity, to improve on today’s strong performance and ensure that future generations also share in the prosperity," Mann said.

The OECD set out a range of ways New Zealand could improve its productivity, specifically by improving business investment, creating better connections with the rest of the world and generating more competition.

Those recommendations included:

  • Narrowing screening of foreign investment to reduce compliance costs and predictability for foreign direct investment

  • Considering reviewing income and corporate taxes, and looking at new tax bases

  • Enhancing councils incentives to generate growth by sharing the tax base linked to economic activity and by applying user charging more broadly for infrastructure, including congestion charging

  • Toughening competition law to focus on the effects of anti-competitive conduct, rather than the intent, and giving the Commerce Commission the power and resources to conduct market studies

  • Increase Government spending and tax breaks for research and development.

Mann highlighted New Zealand's poor productivity performance relative to the United States and Australia in a news conference with Joyce.

"There is also a bit of concern here when we see the trend," Mann said, pointing to a chart showing New Zealand well below Australia and America.

"It’s lower and the trend is a downward trend, and that is opposite to the direction we would want to go when thinking about longer term potential output and the capacity of the NZ economy to make good on its expectations," she said.

Mann pointed out the high immigration of recent years was part of the reason for the low per capita output, but that higher productivity from migrants as they aged and settled in was likely to help in the longer run.

The source of growth coming from immigration – educated workers supporting the economy to grow in the longer term – this is clearly an asset for New Zealand going forward.

"The fruits of all those people coming in are only going to gain over time, as people enter their middle-aged earning years," she said.

"You see the benefits already from the standpoint that those people are skilled, they are high earning, they are working, they are part of the lower unemployment rate and the high participation rate. So you are already seeing benefits follow through to GDP, it’s only when we look at GDP per capita that the denominator (population) stands out."

Joyce agreed in the news conference that the improvement in productivity had to be a longer term story.

"If you look at the areas where the OECD is encouraging us they are areas where significant change is underway, but this is not a five minute solution," he said.

He downplayed the OECD's suggestion of a cut in the corporate tax rate, given New Zealanders receiving imputed dividends were not double taxed, and a lower corporate tax rate would benefit overseas shareholders most.