Slide1: Roderick Deane An address to the Dunes Symposium, A Public Policy Forum for NZ Business Leaders, 2-3 August 2007 www.independenteconomics.com Observations on the State of the Economy To Whither or Wither ?


Slide2: Dr Roderick Deane is Chairman of Fletcher Building Ltd & the NZ Seed Fund, & a Director of Woolworths Ltd in Sydney. He is also Patron of IHC & Chairman of the IHC Foundation. Until 30 June 2006 he was Chairman of ANZ National Bank, Telecom Corporation of NZ Ltd, Te Papa Tongarewa (The Museum of NZ), City Gallery Wellington Foundation, & a Director of the ANZ Banking Group Ltd in Melbourne. Previously he was CEO of Telecom, Electricity Corporation of NZ Ltd, Chairman of the State Services Commission, & Deputy Governor of the Reserve Bank. He was also Professor of Economics and Management at Victoria University of Wellington for some years Dr Deane is very appreciative of the assistance he was given in preparing this material by the Economics Group of the ANZ National Bank and by Bryce Wilkinson and Roger Kerr. www.independenteconomics.com


A long-run perspective on New Zealand’s economic growth: A long-run perspective on New Zealand’s economic growth GDP per Capita (1866-2006) Real Commodity Prices (1900-2006) The rise and fall of NZ’s relative place in the world: (1820-2005) NZ’s Current Account History (1955-2006) Sources: Statistics NZ; IMF; ANZ National Bank; OECD (Luxembourg and Iceland are excluded due to lack of data).


Current macroeconomic settings have improved significantly: Current macroeconomic settings have improved significantly GDP Growth per Capita (1966-2006) Consumer Price Inflation (1966-2007) Fiscal Balance (1972-2006) Unemployment Rate (1966-2006) Sources: Statistics NZ; Treasury; ANZ National Bank.


Terms of trade, productivity: Terms of trade, productivity Terms of Trade (1966-2006) Productivity – Labour (1991-2006 March yrs) Productivity – Capital (1991-2006 March yrs) Productivity – Multifactor (1991-2006 March yrs) Sources: Statistics NZ; ANZ National Bank.


Multifactor Productivity Trend Average Annual Growth Rate: Multifactor Productivity Trend Average Annual Growth Rate Sources: Statistics NZ; Capital Economics


Consequently, NZ has transformed itself from a below average performer to an above average performer: Consequently, NZ has transformed itself from a below average performer to an above average performer Distribution of per capita growth rates for advanced countries, 1870-1998 Sources: Angus Maddison, The World Economy: a millennial perspective, OECD, 2001. Statistics NZ.


We benefited from the mid-80’s to mid-90’s reforms : We benefited from the mid-80’s to mid-90’s reforms A reminder on the Reforms Monetary and fiscal policy vastly improved Dollar floated Low inflation achieved Labour market transformed Internal regulatory structures dismantled Income taxes reduced Size of government scaled back Government offshore debt eliminated Budget moved to surplus Corporatisation/privatisation delivered Exchange controls/import licensing abolished Tariffs greatly reduced Price, wage and dividend controls abolished Outcome: Business sector adaptability hugely increased


The decline has been arrested: The decline has been arrested Sources: OECD; ANZ National Bank. GDP per capita


But closing the gap requires something a lot more: But closing the gap requires something a lot more It took us 20 years to fall down the ladder. Assuming OECD real GDP per capita growth of 2.0 percent, NZ needs to grow at 2.7 percent to close the gap by 2025 Sources: OECD; ANZ National Bank.


We are here, but we need to be there…: We are here, but we need to be there… Distribution of real per capita growth rates for advanced countries, 1870-1998 Sources: Angus Maddison, The World Economy: a millennial perspective, OECD, 2001. Statistics NZ.


Work harder or work smarter: GDP per capita level Source: OECD Population and Participation Productivity 10 20 30 40 50 60 70 80 90 10 11 12 13 14 15 16 17 18 19 20 United States Australia GDP / hours worked ($) Hours worked per capita per week Work harder or work smarter


We continue to rank lowly in the OECD stakes: We continue to rank lowly in the OECD stakes OECD Nation Rankings Richest nation: Luxembourg High income: Norway, USA, Ireland, Switzerland Middle/high income: 14 nations including Australia, UK, Canada, France, Japan Low/middle income: New Zealand, Spain, Greece, Korea, Portugal Lowest income: Turkey Rankings based on purchasing power, taking into account the cost of 3000 items, from a litre of milk to building a house


Are we in fact starting to go backwards?: Are we in fact starting to go backwards? Economic Freedom Index (1970-2004) Work Stoppages (1991-2006) Sources: Statistics NZ; ANZ National Bank; Economic Freedom Annual Report 2006 (The Fraser Institute). Labour Productivity Multifactor Productivity


Core public service employment growth: Core public service employment growth Source: Statistics NZ; ANZ National Bank.


Working less but wanting more: Working less but wanting more Hours worked per full time employee (1986-2006) Core crown spending (1997-2011 June yrs) Unemployed and beneficiary numbers (1980-2006 June yrs) Current Account Deficit (1980-2006) Sources: Statistics NZ; Treasury; Ministry of Social Development, ANZ National Bank.


Household borrowing sky-rocketing: Household borrowing sky-rocketing Household debt Housing affordability Bank & NBFI lending to households Sources: Reserve Bank of NZ; ANZ National Bank. Interest servicing


NZ’s current account deficit is unsustainable: NZ’s current account deficit is unsustainable Source: OECD Economic Outlook, December 2006. Current Account Balances of OECD nations


Infrastructure investment is a key issue: Infrastructure investment is a key issue Capital stock to GDP (1972-2006 March yrs) Transport spending as % of GDP (1992-2011 June yrs) Sources: Statistics NZ; Treasury; NZIER; ANZ National Bank. Utilities GDP vs economy-wide GDP (1987-2006) Investment (ex-buildings) and QSBO Investment Intentions (1990-2006)


Uncertainty is impacting negatively on investment: Uncertainty is impacting negatively on investment Capital stock to GDP and business uncertainty Sources: Statistics NZ; National Bank Business Outlook; ANZ National Bank. More uncertain Less uncertain


At a time when more investment is needed because capacity utilisation is near historical high: At a time when more investment is needed because capacity utilisation is near historical high Capacity Utilisation at near all time highs despite economic slowdown over past year Sources: NZIER; ANZ National Bank; OECD. NZ’s capital stock growth lagging behind


The biggest problem facing small business...: The biggest problem facing small business... Biggest problem facing small business (2005) Source: ANZ National Bank.


Slide23: Main findings of Business New Zealand – KPMG Compliance Cost Survey: September 2006 In 2006 compliance costs increased for four of the six company categories. Tax is still the top compliance concern, followed by employment law issues. Business people perceive compliance costs to have increased in all areas, especially regarding the Holidays Act. … and businesses in general


Tax rates: Tax rates Source: NZ Treasury Briefing to the Incoming Government 2005. Corporate Tax Rate


Tax rates: Tax rates Marginal Personal Tax Rate Source: NZ Treasury Briefing to the Incoming Government 2005.


The regulatory creep: The regulatory creep Source: Parliamentary Library.


Of more recent years … Economic Negatives and Regulatory Interventions: Of more recent years … Economic Negatives and Regulatory Interventions Increase in top tax rate to 39c Restoration of ACC monopoly Employment Relations Act Tariff freeze Re-nationalisation of Air NZ, Kiwibank, rail Takeover regulation Commerce Act more restrictive Re-regulation of telecommunications Re-regulation of electricity Energy efficiency regulation More central control of health and education More lenient welfare rules Kyoto Protocol shambles Re-regulation of banking Privy Council appeals scrapped Resource Management Act Local authorities legislation Securities legislation Accounting standards Corporate governance


Capital Markets: Capital Markets Lack of depth & breadth says RBNZ Governor This limits economic growth Raises vulnerability to crises NZX small and declining in relative importance Agrees regulation needs improvement Private equity becoming dominant Yet all this has been pointed out to RBNZ & Government Ironically been huge increase in regulation and compliance costs in NZ capital markets Regulators complain about the problems they have helped induce


Employment Relations: Employment Relations Numerous re-litigations of legislation Harassment cases a nightmare for employers Work/life balance imbalance Fixed term contracts Union meetings and site visits at will Holidays Act … unintended consequences Days off in lieu at will Discretionary payments double dipping Workplace stress Inequality of power


Kyoto and All That: Kyoto and All That Original estimate of credits $300 million 2006 estimate $609 debits Error $900 million Treasury reported tax would be ineffective Carbon tax policy & NGA’s abandoned 30 months of negotiations wasted Australia did not implement Kyoto but are further ahead than us Another new Government policy announced Dec 2006


Banking Regulation: Banking Regulation RBNZ requires “standalone capability”, particularly when under stress Major systems to be relocated to New Zealand Huge cost and inefficiency Harsh reactions to any reservations All third party contracts to be renegotiated/separated All direct reports to CEO require RBNZ approval No analysis that benefits of all this might exceed costs Individual director attestations Initial aim standalone capability under future stress situations Yet, RBNZ reiterates this is “light handed” regulation


Telecommunications: Telecommunications Once the fastest growing industry in NZ Regulator over-ruled by Govt. Unbundling cost/benefit analysis ignored Regulation wiped $3 billion off Telecom value No compensation for Telecom shareholders Regulation now all encompassing, even over Telecom organizational structure Following same route as failed electricity reforms Competitors predicting losses despite regulation Yellow Pages sale a short term palliative


Electricity Regulation: Electricity Regulation Much regulation, numerous changes Industry largely Government owned Seriously conflicting regulatory objectives Conflicting regulators (Govt & CC & EC) Major transmission outages Lack of security of supply Uncertainty & underinvestment A disaster waiting to happen


Research Study on Regulation: Research Study on Regulation ANZ Bank study December 2006 shows poor regulation hinders economic performance Study found evidence of distortionary effects of regulation Recommended need for five policy changes 1. Quantitative cost/benefit analysis 2. Done by independent body 3. Articulate goals better 4. Ex post reviews essential 5. Negative impact of uncertainty needs policymakers attention


Business adaptability is being rapidly eroded: Business adaptability is being rapidly eroded Regulatory Dilemmas Regulation begets regulation Regulation overrides commercial solutions Regulation and changes induce uncertainty It imposes high transactions costs Diverts energy into rent seeking behaviour And away from focussing on winning in the market Regulation always has unintended consequences It concentrates on past issues rather than future growth Success ironically attracts regulation Regulation reduces flexibility and slows productivity growth It ultimately impedes the competition it pretends to promote Reduces attractiveness of New Zealand for foreign direct investment


Scorecard: Scorecard Positives Monetary policy (but softening eg inflation rising) Overall stance of fiscal policy Favourable terms of trade (thanks to global commodity boom) Negatives Intrusive widespread re-regulation Growing size of Government (big spending increases) Higher taxes Infrastructure mess (roads, energy, telecommunications) Social policy (health, education, welfare) Constitutional issues (MMP, appeal rights ) Foreign exchange market intervention Shrinking domestic capital market (cf, role of private equity)


In summary: In summary Decade of good economic growth, but economy now slowing Given lags, this arose from World expansion Commodity prices Domestic productivity Productivity growth based on Deregulation (promoted flexibility & competitiveness) Stable macro policy (low inflation) Reducing size of Government (since Government redistributes but does not itself generate growth) Labour market conditions and the relative price of capital to labour


In summary (continued): In summary (continued) But, in recent years Increasing size of Government Extensive regulatory interventions Unwinding labour market flexibility Poor Government sector management Who believes health, education, or welfare are well managed ? Sharply slowing productivity growth Huge external imbalance Inflationary pressures thus re-emerging So where do NZ’s comparative advantages now come from? These can only be realized by addressing the fundamentals


Some Solutions: Some Solutions More respect for property rights Greater certainty in the application of the law More certainty in enforceability of contracts Less intrusive regulation and fewer changes in the rules Insist on cost/benefit analysis for new & old regulations Ex post reviews of regulations Need more flexibility and adaptability Smaller Government Lower taxes