National 08-16: economics

Someone reckoned I was being a bit partial in my previous post about John Key. Whatever. Who isn’t? Anyway here’s a slightly more detailed analysis of the last 8 years. We’ll start with the economy.

The government reaped about $4.7b from the partial sales of Mighty River, Genesis, Meridian and Air NZ . Just two side notes on all that. First, I was surprised to see Air NZ in the list. I thought that was taken off the table. Seems not. Second, total revenue from all asset sales since Labour came up with the idea in 1988 is about $23b.

The lost revenue (from dividends and retained profits) from this government’s asset sales is conservatively estimated at $360m per year. The reduced interest on debt enabled by that revenue is about $266m per year. Asset sales therefore cost us $94m per year, based on current pricing (as of 2014) etc.

The current surplus is about $1.8b. Clearly, asset sales have something to do with that. But as the Greens were keen to point out, assets earned more than the cost of servicing the government’s debt: we made money out of them. Reducing the debt also reduced our income.

Unemployment has reduced from 6.5% to just under 5% since 2010. Under Labour it came down to an all time low of just over 3%. But we can’t take away from National the fact that – since the GFC – unemployment has trended downwards.


Over the same period (2008 – 16) employment participation grew about 2%, which equates to about 50,000 jobs (as a % of 2.5m working kiwis).

And the economy is growing. The Reserve Bank recently identified growth to be higher than the 20 year average, going steady at about 3.5%, while inflation, unemployment and current account deficit as a share of GDP are all lower than the 20 year average. In the same document linked above, Governor Graham Wheeler describes the growth as ‘longer but weaker’ than previous growth cycles. Maybe that’s a god thing. At what rate of growth do economists get jumpy?

On the other hand, some people say any growth is bad: a finite economic resource (e.g. planet Earth) and infinite economic goals (aka continuous growth) are indeed hard to reconcile. But that’s another song.

Wheeler (and plenty of others) identify construction, tourism and migration as the main drivers. Dairy is nowhere. The 2.5% rise in job numbers may look even more impressive against a 5% rise in the total workforce. But it’s not. In fact, there’s a gaping problem.

Productivity is ‘particularly week’, says Wheeler. Historically, productivity has tended to correlate with investment. But capital investment has trended upwards in the last 5 years, and productivity has not increased in proportion to that. It would appear that lower value jobs are increasing while higher value jobs are retrenching.

I’ve spent quite a while looking at this, and discussing with my friend and economist Russell Lerew.


Since 2011, labour has made an enormous contribution to GDP which is still growing. Capital has made a modest contribution to GDP and is level. And total factor productivity is slowly but steadily disappearing. That means more people are working harder for less reward.

Wheeler’s explanation for this seems a bit glib. To summarise: we’re small and far away. But that’s no different now than ever (and wasn’t the internet supposed to cure all that?). What’s different is that the current upswing doesn’t have anywhere near the same amount of capital behind it. It’s being driven by labour, not investment.

I believe this also means there are more low value jobs , and fewer high value jobs. Which is where immigration comes in. Increasingly, New Zealanders can not afford to take the kinds of jobs which the economy is providing. Employers need to bring people in from lower wage economies to do them for us.

According to last week’s Herald, the Skilled Migrant Category has allowed roughly 15,000 chefs, cafe managers and retail managers into the country in the last 10 years (in addition to more skilled types such as tradies, medics etc.). Migration makes it easier for employers to employ more people for lower wages, and increases New Zealand workers’ exposure to competition from low-wage, low-value economies.  It’s hard to see how that’s of any long term value.

Under National, record net migration was at a record high every month for two years from October 2014 to October 2016. Immigration is one of the big cogs in what some call ‘the two speed economy.’

The other big cog is housing. If you own a house, and can afford to keep it, and – better yet – use it as collateral to buy another one, you’re probably doing ok. Home ownership has reduced steadily through all governments. A quick search gave me a chart going back to 1972 when home ownership was at 73%. It’s currently at 64%.

Many politicians have regarded home ownership as a vital component of healthy communities. That’s easy enough to grasp. But I also wonder if it’s hopelessly unrealistic. There must be plenty of healthy neighbourhoods around the world where none of the residents can afford to own their own home. If not, we probably  need to figure out how to do that, now.

Immigration can only put more pressure on housing, as does the extraordinary policy to allow anyone, anywhere, to buy anything in the land. Supporters of National say ‘people want to come and live here, because the economy is strong, so that’s a good problem.’ But it’s completely disingenuous. The ‘good problem’ is that New Zealand residents and citizens are being undercut by foreign workers, while – at the same time – being out-bid by foreign investors. Where’s the good part in all that?

More jobs? But increasingly, those jobs don’t pay enough to pay the rent. High employment is not the sunshine. It’s the silver lining.

Both Key and Andrew Little have used the phrase ‘blunt instrument’ to describe capital gains tax. I don’t know why they’re so fussy. It’s not keyhole surgery. We know that most New Zealanders’ capital is tied up in non-productive housing, and we can see (above) that however capital is being used, it’s not in a way that is stimulating productivity.

Capital urgently needs to be diverted into more productive economic activity. It’s not the workers’ fault. It’s the investors, who are simply doing what government policy is telling them to: trying to make money out of nothing (aka a second hand rental house).

Meanwhile, National fiddled with the minimum Kiwisaver contributions of both employees and employers. The contribution levels have changed, but have remained lower under National than at any time under Labour. National’s argument was initially that this gave more flexibility to both workers and bosses at a time when it was most needed: the 08 – 09 credit crunch. But since then, we’ve heard time and again about the rock star economy. So when do the benefits flow directly to the people?

Now that the housing market is spiralling ever upward, there are signs that household debt is doing likewise. It’s currently at about 90% of GDP. That might or might not be a problem, depending on who owns it, and what their chances of defaulting are. Wealthy Switzerland’s ratio is up at about 125%, and Norway, Australia, Canada, Denmark and the Netherlands are all higher than us on this factor.

But the enforced savings of KiwiSaver might at least provide some options for a few of those people who get caught out (either through turning 65 or by appealing under hardship to access their KiwiSaver). Having reduced their KiwiSaver contributions will not have helped them in any way. It will simply have given them more money to spend, and less to help them now.

So we can thank John Key for at least keeping the economy intact while many others (Australia, Canada, UK) are still bogged down with lag factors, most of which sheet back to the GFC. But it’s wrong to say that New Zealand has triumphed where others have failed. Key’s strategy was to keep employment high by driving down wages. More people are working harder for lower returns.

It’s not that the average wage is going down. It’s not. It’s that everything else is going up, especially accommodation. I don’t have very recent data on this, but there’s a beauty from 2014 over at Transport Blog.

Key – or more specifically, Bill English – also increased GST from 12.5% to 15%. So not only are people’s earnings reduced, but at the same time, the cost of living is going up. No wonder the government’s now in surplus (two years later than Key and English promised). And GST is regressive, because the 15% on a loaf of bread is harder to afford if you’re poor than if you’re rich. The higher your GST, the harder you hit your workers.

Indeed, many rich people don’t pay much GST at all, because much of what they buy, they buy through their companies, for whom much of the GST is rebated.

There is a very clear list of outcomes that the government needs to prioritise:

  • Investors need to be motivated into something more productive than second hand housing
  • Employers need to be motivated to find more high value employment opportunities

Some of the specific levers to achieve this could include

  • Reducing immigration
  • Raising the bar on the Skilled Migrant Category (which is starting to happen)
  • Restricting property sales to New Zealand citizens and residents
  • Incentivising high value adding activity (such as the R&D tax break, scrapped by National)

The last of those needn’t be all that abstract. The growing appetite for sustainable solutions to our lifestyle problems is emerging as one of the zeitgeists of our age. You only have to look at Elon Musk and the Tesla car marque to see one example of that. That’s potentially one of the biggest losses of the sale of state energy companies: the motivation to exploit the green energy revolution.

Let’s look at that, next up.

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