The Prime Minister has just released here 67 Briefings to Incoming Ministers (BIMs) prepared for the new government by responsible ministries and agencies.
The Treasury prepared three briefings which are available here. This post comments only on its briefing on the medium-term economic outlook, prepared before the general election of November 2011, which also contains the Treasury’s advice on the key policy changes necessary to increase trend economic growth.
Treasury’s medium term economic outlook briefing
Here are some of the main points in the executive summary:
- The BIM is upfront that New Zealand’s economic performance has been poor for some time. It also considers that the high net external debt is reducing the economy’s resilience.
- Its remedies for the resilience aspect have a savings focus. It considers that the most immediate and direct thing government should do is to return to fiscal surpluses. In addition, it considers that the government should aim to raise national savings relative to investment.
- To materially raise economic growth, Treasury recommends “a wide and ambitious programme of reform across education, welfare, tax, regulation, science and innovation, infrastructure and the management of natural resources”.
In the body of the briefing, there is a welcome concern about the problem of the squeeze on the traded goods sector that has become apparent since around 2004. This focus was missing from Treasury’s 2008 briefing.
Part 7 of the briefing addresses this competitiveness issue. It has two sections. The first looks at making the international business environment more competitive. It acknowledges the increased restrictiveness of the screening of overseas investment, but misses the desirability of eliminating remaining tariffs (which are effectively a tax on exports) and leaves the issues of tax and regulatory competitiveness to the second section. The second section, Policies to Improve the Domestic Business Environment, acknowledges the need to move tax rates down, but is not clear that this should be done by reducing the expenditure burden. It expresses worthy intentions about improvements in regulatory, science and innovation, infrastructure, and natural resource management policies, but does not indicate how incentives might be materially altered to achieve these improvements.
Here are some other initial reactions:
- It is good to see the acknowledgement that wide-ranging changes are necessary if a material step-up in economic growth is to be achieved; marginal changes will not suffice.
- The briefing is surprisingly silent on the likely gains from privatisation/losses from failure to privatise.
- The briefing ducks the important question of whether fiscal surpluses should be achieved by expenditure reductions or revenue increases.
- The need for a more flexible labour market, particularly when unemployment is running at 5-7 percent, is not stressed.
- The argument for lifting national savings explicitly in order to address the competitiveness/resilience problem is unconvincing.
With respect to the second point, it is disappointing that the briefing does not acknowledge or respond to the empirical point that the Business Roundtable has been stressing for many years – that it is almost unknown for countries to experience very high sustained rates of economic growth when government spending is over 40 percent of GDP on the OECD’s measure. Why would New Zealand expect to be an exception? Government spending is much lower in Australia, and it is doing much better.
With respect to the last point, the briefing does not acknowledge that the gap today between domestic investment (by residents and foreigners) and savings by residents is largely a legacy of the debt accumulated during the large balance of trade deficits that New Zealand ran between 1975 and 1986. The gap between investment and savings since 1988 has been driven by the need to finance the accumulated external debt. From 1988 to 2004 in particular, it was not a story of an excess of domestic spending over domestic production. To illustrate: between 1988 and 2004, the balance of payments current account deficit averaged 4.0 percent of GDP, despite exports exceeding imports on average by 1.3 percent of GDP. The balance of trade surpluses during this period establish that domestic spending was on average less than domestic production, despite an average national savings ratio of only 3.2 percent of GDP. In contrast, domestic spending exceeded domestic production on average between 1951 and 1971 when the national savings ratio averaged 16.1 percent of GDP. A more thorough and disaggregated analysis is needed.