The Federal Reserve has been the most bullish, lopping a full 0.5% off its cash rate this week. Of course, you can read that two ways. The market is choosing to interpret it as the Fed boldly declaring peace in our time, with investors bidding up already frothy US share prices. The alternative explanation is the Fed is worried it has overshot, and knows it needs to move quickly to avoid a US recession. Nobody wants to hear the latter right now.
The price of slaying inflation is still being totted up around the world, but, clearly, we have been one of the worst hit. Beating inflation here feels like a pyrrhic victory. Our economy has been going backwards now for three years and the damage is significant.
In terms of the Government’s books, we are in the phase of chasing our tails downwards. Expenditure is starting to come under control, but the tax take is also dropping because of the anaemic economy, so the deficit is the same or worse.
It is worth re-capping why New Zealand has fared so badly.
Firstly, we went too nuts in Covid. Yes, everyone had to damage their economies in an attempt to protect public health, but our approach was puritanical and without any thought to the long-term damage it would create. Hopefully, the revised Covid royal commission will address that for future reference.
The fiscal and monetary over-reaction after the initial shock passed has by now been well documented. It’s just a pity more economists didn’t speak up at the time, given how clear their views are in hindsight. The fiscal waste was legendary.
It is also fair to say that a lot of the policy moves leading up to and after Covid were intentional, and nothing to do with the pandemic. The likely impact of those was clearly flagged at the time but ignored by the Government of the day, which demonstrated a shocking ambivalence to the overall health of the economy.
For example, their actions on the minimum wage have had too little scrutiny. In 2017 the minimum wage in this country was about 60% of the median wage, already significantly higher than the OECD average of 54%. Unaware that you can’t legislate your way to prosperity, Labour embarked on a series of precipitous minimum wage hikes, until it was an almost unheard of 70% of the median wage at the end of last year.
That deliberate policy both stoked inflation, which has left lower-paid workers worse off, and killed the viability of many small businesses, notably in the hospitality sector, which were already weakened by Covid. The mantra of the left at the time was that if businesses couldn’t sustain the higher rates they shouldn’t be in business. And so it proved.
We are also seeing a belated rise in youth unemployment, particularly among low-skilled workers who start out on the minimum wage. There are clearly fewer of those jobs around.
No Government sets out to destroy the economy, but the last one came perilously close, and one can only hazard as to why. Ministers plainly didn’t understand economic cause and effect, and their ambivalence to most of our productive sectors (agriculture, tourism, international education, extractives) was legendary. The infrastructure sector was laid low by a series of stop-start-stop announcements, and any form of international investment was severely frowned upon.
The only bright light was the house-building industry, which had a good run, although largely as a result of decisions made by earlier Governments, notably around the more permissive Auckland unitary plan, and the land-release decisions of the Christchurch earthquakes. The much-vaunted Urban Development Act Labour passed is still yet to see many, if any, houses built.
These issues are all worth recounting, as we seem prone to both taking economic success for granted, and forgetting what is important in order to be successful.
This brings us to the current Government’s challenges and the actions it needs to take.
At one level it’s obvious. A singular focus on growth. Ministers can’t prime the pump itself as that money is largely gone, frittered away in an orgy of Government re-organisation and public sector bloat. Their only option involves encouraging the private sector to succeed and that requires an absolute focus on bread and butter stuff, which encourages businesses to grow and invest here.
An infrastructure pipeline, which is both affordable and funded for a start. That would involve kicking to touch any projects with multibillion-dollar price tags that clearly aren’t practical or affordable. It also involves getting a significant number of projects away quickly.
Opening up markets is another. The Government has talked a lot about India. Growing a much bigger trading relationship with what is now the world’s largest country is a laudable, although challenging, goal. A singular focus on India to match the Key Government’s focus on China would be a very good sign, if it’s achievable. Southeast Asia also beckons.
Becoming an attractive destination for foreign capital again is also crucial. That’s not just putting the welcome mat out and defenestrating the Overseas Investment Office, (although that would be a good start) but lowering the cost of operating in New Zealand. Energy markets anyone?
Fostering innovation is very important, but in case it’s being thought about, that doesn’t involve rearranging the deckchairs in Government-owned research centres. We’ve already done that in health and vocational education, and it’s just a waste of time and money.
A much more fruitful path would be opening up opportunities for innovative new businesses to establish and thrive here, through regulation that enables rather than restricts, and settings which encourage competition.
That’s actually the link between the seemingly disparate issues of economic growth, monopolistic behaviour, health reform and charter schools. There is a narrative going begging about shaking up and improving poorly performing sectors with a bit of competition and new ways of doing things.
Above all we need the Prime Minister to champion our productive industries and lead from the front. His team need to think carefully about the balance of announcements he’s involved with in the year ahead. This economic recovery is going to be an arduous grind, which requires a lot of Prime Ministerial focus and support. We are fast getting to the point where announcing gang patch bans is interesting, but not consequential.
