A new Treasury paper published on Friday suggests productivity growth will likely be slow in the coming years and could lead to downgrades in long-term fiscal and economic forecasts.
It’s a headache the coalition Government is eager to fix, although so was the previous administration.
Shortly after securing the finance portfolio in 2017, Grant Robertson gave a TV interview in which he said one of the main things he wanted to be judged on was lifting productivity.
A lot has happened since then, but improved productivity growth hasn’t been one of them.
Productivity growth in advanced economies has been slowing since the turn of the century and New Zealand has been among the worst affected.
OECD countries grew their labour productivity by 2% per year in the 1990s but have slowed to 0.8% since the 2000s. NZ’s growth averaged 1.4% up to 2013 and has been just 0.2% since.
Dominick Stephens, Treasury’s chief economic advisor, said the productivity slowdown was a key factor behind the economic revisions provided alongside the Budget Policy Statement.
“This matters because sustainable improvements in our living standards depend upon productivity,” he said.
Finance Minister Nicola Willis also came under pressure to ditch the tax cuts after these fresh forecasts showed the Government could stay in deficit for years if they went ahead.
This fresh Treasury paper warned the trend that caused the downgrade was likely to continue and would be factored into the next Long-Term Fiscal Statement late next year.
If it takes the view that productivity will continue to lag, paying for expensive policies such as superannuation, infrastructure renewal, and better core services will get that much harder.
There are some reasons to think productivity could accelerate, such as the sudden arrival of artificial intelligence technologies, but many more reasons to think the opposite.
Treasury highlighted a bunch of possible drivers including weak innovation, a slowdown in global trade, poor education outcomes, and the possibility it has been measured wrong.
“On balance, looking across the drivers, the challenges seem to outweigh the opportunities,” the paper concluded.
What can be done
The Coalition Government has policies intended to tackle some of the productivity problems, such as education, directly.
The amount of New Zealanders with qualifications has been increasing, but businesses have been reporting a decline in the availability of skilled workers.
This could be due to a mismatch between the degrees Kiwis are getting and what employers are looking for — or possibly a fall in the quality of the qualifications being achieved.
A 2023 report found NZ was one of a group of OECD countries in which school kids' abilities in reading, science and mathematics had declined over the last 10 years.
While this wasn’t likely to be having an impact on productivity yet, as this cohort currently makes up only a small portion of the workforce, it was “concerning” for the future.
One of the first pre-announcements from Budget 2024 was the rollout of $67 million to retrain teachers to use a structured literacy approach to learning to read.
Erica Stanford, the Minister for Education, said evidence showed this method was the most effective way to equip children with reading skills that would improve their future.
The policy goes alongside a requirement to teach an hour of reading, writing and maths each day, as well as banning cellphones and rewriting parts of the curriculum.
Whether these policies will work is a question for education experts to answer but the National-led Government sees it as part of a suite of productivity policies.
Deglobalisation
While education challenges can be fixed domestically, other negative productivity drivers are outside of government control.
Deglobalisation has become a mega-trend reshaping economies and reducing efficiencies. Global productivity slowdowns have coincided with a trade plateau.
“While trade barriers were generally on a decreasing path throughout the 20th century, this trend has reversed over the past decade,” Treasury said.
These comments were echoed by Foreign Minister Winston Peters, in a speech on Wednesday, who said there had been a significant shift in the international order.
Rules were becoming less important than power and economic efficiency had been deprioritised behind security and resilience.
“Given the golden age of trade liberalisation has passed, the Coalition Government is committed to making incremental trade and economic gains and creating opportunities – large or small – everywhere,” he said.
Treasury said international trade and investment can support productivity through knowledge and technology sharing, economies of scale, and increased competition.
“This static or declining integration in the world economy is likely to be an important part of New Zealand’s productivity story,” it said.
Less globalisation will pull down global growth and increase production costs, which will particularly hurt small, trading economies such as NZ.
While the Coalition Government has promised to lift productivity and prosperity for New Zealand, this paper shows they may need to work hard just to avoid going backwards.
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