a health check on the economy: how does it measure up ? roderick deane background material for an...

A Health Check on the Economy: How Does it Measure UP ?

Roderick Deane

Background material for an address to the NZ Retailers Association at Sky City Auckland on 2 September 2009

Dr Roderick Deane is Chairman of Fletcher Building Ltd & the NZ Seed Fund, & a Director of Woolworths Ltd in Sydney. He is also on the Advisory Board of Pacific Road Corporate Finance and Patron of IHC & Chairman of the IHC Foundation. He was previously 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. At an earlier stage 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 & a Director of TransAlta Corporation in Canada 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, particularly Khoon Goh, and by Bryce Wilkinson and Roger Kerr.

2Sources: Statistics NZ; ANZ National Bank. Statistics NZ; ANZ National Bank.

NZ’s per capita GDP : a long-term historical perspective

0

5000

10000

15000

20000

25000

30000

35000

1866 1886 1906 1926 1946 1966 1986 2006

$ in 1995/96 prices (March years)

GDP per Capita (1866-2009)

3Sources: IMF; ANZ National Bank. IMF; ANZ National Bank.

As a commodity producer, NZ’s economic performance has been reliant on commodity prices

0

20

40

60

80

100

120

140

160

180

200

1900 1920 1940 1960 1980 2000

Long-term secular decline

Index

Real commodity prices (1900-2008)

4

From enjoying one of the highest living standards in the world to below average compared to others

The rise and fall of NZ’s relative place in the world: (1820-2007)

1

6

11

16

21

26

1820 1870 1913 1950 1973 1990 1998 2007

OECD rank on per capita basis

Sources: OECD (Luxembourg and Iceland are excluded due to lack of data).


Running external deficits is endemic for NZ

-15

-10

-5

0

5

1955 1965 1975 1985 1995 2005

% of GDP (March years)

NZ’s current account history (1955-2009)


Improved macroeconomic settings has resulted in less volatile growth from the early 1990s…

-6

-4

-2

0

2

4

6

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

Annual % change (March years)

GDP growth per Capita (1961-2009)


… tamed the persistent high inflation of the 1970s and 1980s…

-5

0

5

10

15

20

1966 1971 1976 1981 1986 1991 1996 2001 2006

Annual % change in CPI

Consumer price inflation (1966-2009)

8Sources: Treasury; ANZ National Bank. Treasury; ANZ National Bank.

… turned around decades of fiscal deficits…

-8

-6

-4

-2

0

2

4

6

1972 1977 1982 1987 1992 1997 2002 2007

% of GDP (fiscal years)

Fiscal balance (1972-2008)


… and made the labour market more flexible, lowering the double digit unemployment rates of the late 1980s and early 1990s

0

2

4

6

8

10

12

1966 1971 1976 1981 1986 1991 1996 2001 2006

% of labour force

Unemployment rate (1966-2009)


NZ’s terms of trade has lifted after decades of decline or stagnation

600

700

800

900

1000

1100

1200

1300

1400

1500

1966 1971 1976 1981 1986 1991 1996 2001 2006

Index

NZ’s terms of trade (1966-2009)


NZ’s productivity performance

-4

-3

-2

-1

0

1

2

3

4

1983 1986 1989 1992 1995 1998 2001 2004 2007

Capital

Labour

Multifactor

5-year compound annual growth rate (%), March years

Productivity in the measured sector (1983-2008)

12

After economic reforms, productivity growth accelerated then slowed post 2000Trend Average Annual Multifactor Growth Rate

0.6

1.9

2.4

0.6

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6

1978-1987

1988-2000

1992-2000

2000-2008

After the Employment Contracts Act and 1991 Budget

Ye

ars

en

de

d M

arc

h

Percent

Clark-Cullen

Pre-Reforms

During "The 'Failed' Policies of the past"

Sources: Statistics NZ; Capital Economics.

13

NZ moved from being a below average performer to an improved performer

0

0.9 1.1 1.2 1.3 1.5 1.6 1.7 1.8 1.9 2.0 2.2 2.3 2.4 2.5

NZ 1977-19860.8%

NZ 1998-20082.1%

De

nsi

ty e

stim

ate

GDP growth per capita (%)

NZ 1970-19761.9%

NZ 1987-19960.7%

Distribution of per capita growth rates for advanced countries, 1870-1998

Sources: Angus Maddison, The World Economy: a millennial perspective, OECD, 2001. Statistics NZ.

14

NZ’s growth rate improved after the reform period (GDP per capita; calendar years)

Source: Statistics NZ.

-6

-4

-2

0

2

4

6

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Percent

15

NZ thus benefited substantially from the mid-80’s to mid-90’s economic 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

16

The relative decline has been arrested

0

5,000

10,000

15,000

20,000

25,000

30,000

1970 1975 1980 1985 1990 1995 2000 2005

GDP per capita (US$)

OECD

NZ

1970-2007:OECD average growth = 2.1% per annumNZ average growth = 1.3% per annum

1993-2007:OECD average growth = 2.0% per annumNZ average growth = 2.2% per annum

Sources: OECD; ANZ National Bank.

GDP per capita

17

But closing the gap requires something a lot more

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025


OECD

NZFor NZ to catch up by 2025 requires:OECD average growth = 2.0% per annumNZ average growth = 2.8% per annum

For NZ to catch up by 2015 requiresNZ average growth of 3.7% per annum

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 2.8 percent to close

the gap by 2025


18

Catching up with Australia poses an even greater challenge

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025


OECD

NZ

For NZ to catch up to Australia by 2025 requires:Australia average growth = 2.4% per annumNZ average growth = 4.0% per annum

Australia

NZ’s per capita GDP was similar to Australia’s in the mid 1970’s. In 2007, NZ’s per capita GDP is around 24% below Australia’s. In order for NZ to

catch up to Australia by 2025, per capita GDP growth has to average 4% per annum, almost twice what has been achieved in the past decade.


19Sources: OECD; Capital Economics. OECD; Capital Economics.

NZ and Australia cumulative market and export volume growth

0

100

200

300

400

500

600

700

800

900

1000

1975 1980 1985 1990 1995 2000 2005 2010

NZ market growth NZ export growthAU market growth AU export growth

NZ export volume growth falls behindmarket growth after 1988

Australia's export growth roughlymatches market growth until 2000

NZ really fallingbehind

Index (1975=100)

20

We are here, but we need to be there…

0

0.9 1.1 1.2 1.3 1.5 1.6 1.7 1.8 1.9 2.0 2.2 2.3 2.4 2.5

NZ 1998-20082.1%

De

nsi

ty e

stim

ate

GDP growth per capita (%)

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.

21

Source: OECD OECD

Work harder or work smarter

0

10

20

30

40

50

60

70

10 12 14 16 18 20 22 24

Pro

duct

ivit

y (

GD

P/h

our

work

ed

$)

Population and Participation (Hours worked per capita per week)

GDP per capita level

United States

New Zealand

Luxembourg

IcelandSwitzerland

Japan

Canada

KoreaCzech

GreecePortugal

Spain

Italy

Belgium

France

Germany

Norway

IrelandNetherlands

Mexico

Slovak

Poland

Hungary

Australia

Sweden

UK

Austria

22

But we continue to rank lowly in the OECD stakes

OECD Nation Rankings

Richest nation: Luxembourg

High income: Norway, USA, Ireland, Iceland, Switzerland

Middle/high income: 13 nations including Australia, UK,Canada, France, Japan

Low/middle income: New Zealand, Spain, Greece, Korea, Czech

Lowest income: Mexico

Rankings based on purchasing power, taking into account the cost of3000 items, from a litre of milk to building a house

23Sources: Economic Freedom Annual Report 2008 (The Fraser Institute); The Heritage Foundation & Wall Street Journal; ANZ National Bank.; ANZ National Bank.

Are we starting to slide backwards on the competitiveness front?

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

1970 1975 1980 1985 1990 1995 2000 2005

75

76

77

78

79

80

81

82

83

Heritage Foundation (RHS)

Fraser Institute (LHS)

Score

Economic Freedom Index (1970-2009)

Index


Labour’s share of national income has been rising…

35

40

45

50

55

60

1972 1977 1982 1987 1992 1997 2002 2007

% of GDP (March years)

Compensation of employees as % of GDP (1972-2009)


… yet labour productivity growth has been heading lower

0.0

0.5

1.0

1.5

2.0

2.5

3.0

'80-'95 '85-'90 '90-'95 '95-'00 '00-'05 '05-'08

Compound annual growth rate (%)

Labour productivity growth


And so has multifactor productivity growth

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

'80-'95 '85-'90 '90-'95 '95-'00 '00-'05 '05-'08

Compound annual growth rate (%)

Multifactor productivity growth

27

Sources: OECD; Capital Economics. OECD; Capital Economics.

NZ’s competitiveness declining again

80

90

100

110

120

130

140

150

160

1991 1993 1995 1997 1999 2001 2003 2005 2007

Australia

New Zealand

32% increasebetween 1992and 1997

23% declinebetween 1997and 2000

68% increasebetween 2000and 2007

Index (1991=100)(increase indicates loss of competitiveness)

In terms of relative unit labour costs, NZ was 13th in world for Global Competitiveness in 1999. Since 2000, NZ has lost competitiveness, ranking 24th in world in 2008/09 according to the World Economic Forum.

28

Core public service employment growth : down then up

Source: SSC

Core Public Service staff (June years)

0

10000

20000

30000

40000

50000

60000

70000

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

FTEs

Core public service employment growth

-2.2

-3.4

4.4

2.3

2

2.5

-4 -3 -2 -1 0 1 2 3 4 5

1990-1995

1995-2000

2000-2008

Cal

enda

r ye

ars

PercentAll other sectorsGovt Admin & Defence

29

Sources: Statistics NZ; ANZ National Bank.

Growth vs other sectors of the economy

30

Real unit labour cost: public sector rise in excess of private sector

Sources: Statistics NZ; Capital Economics.

0.1 0.0

0.4

1.1 1.2

1.9

3.6

3.33.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2001 2002 2003 2004 2005 2006 2007 2008

Proportionate rise in public sector index since2001 over private sector expressed as a % gap

31

Sources: Statistics NZ; The Treasury; ANZ National Bank. Statistics NZ; The Treasury; ANZ National Bank.

Central government spending : down then up

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

72 75 78 81 84 87 90 93 96 99 02 05 08 11

Muldoon years

Lange's Labour

Bolger/Shipleygovt

Clarkgovt

Keygovt'sforecast

Real Core Crown Expenditure per capita (2009 dollars)

32

NZ’s fiscal position coming from a better starting point (2008)

Source: OECD

-80

-40

0

40

80

120

160

200Ir

ela

nd

Un

ited

Sta

tes

Un

ited

Kin

gd

om

Hu

ng

ary

Fra

nce

Gre

ece

Italy

To

tal O

EC

DP

ola

nd

Po

rtu

ga

lS

lova

k R

ep

ub

licC

zech

Re

pu

blic

Sp

ain

Jap

an

Eu

ro a

rea

Au

stria

Be

lgiu

mG

erm

an

yC

an

ad

aN

eth

erla

nd

sS

witz

erla

nd

Lu

xem

bo

urg

Au

stra

liaD

en

ma

rkN

ew

Ze

ala

nd

Sw

ed

en

Ice

lan

dF

inla

nd

Ko

rea

No

rwa

y

-10

-5

0

5

10

15

20

25% of GDP % of GDP

Gross financial liabilities (LHS)

Fiscal balance (RHS)

33

But NZ fiscal balance now deteriorating rapidly

Source: The Treasury

-12000

-10000

-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

-8

-6

-4

-2

0

2

4

6$ millions % of GDP

Underlying operating balance (LHS)

As % of GDP (RHS)

Budget2009forecasts

34

NZ public debt forecast to rise rapidly

Source: The Treasury

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

0

10

20

30

40

50

60

70

80$ millions % of GDP

Gross sovereign issueddebt ex-settlement cash (LHS)

As % of GDP (RHS)Budget2009forecasts

The Government sector is growing far too rapidly, squeezing out the private sector

Total Govt. gross debt forecast to increase from 18% to 41% of GDP from 2008 to 2013, or $37b. to $68b.

Investment in SOEs grew from 12% to 38% of GDP from 1999 to 2009, or $13b. to $68b.

Total crown property assets grew from 40% to 60% of GDP from 1999 to 2009, or $42b. to $106b.

Total Crown expenses forecast to be 46% of GDP by 2012/13

Source: NZ Treasury Fiscal Strategy Report 2009

35


Working less but wanting more. Less hours per worker.

37.0

37.5

38.0

38.5

39.0

39.5

40.0

40.5

41.0

1986 1989 1992 1995 1998 2001 2004 2007

Hours per week

Hours per full-time equivalent (1986-2009)

37

Increasing government spending

Source: Treasury

28

30

32

34

36

38

40

19971998199920002001200220032004200520062007200820092010201120122013

% of GDP, June years

Treasury forecast

Core Crown spending (1997-2012)

38Source: Ministry of Social Development. Ministry of Social Development.

Is the NZ population getting more ill by choice?

0

20

40

60

80

100

120

140

160

180

200

1980 1984 1988 1992 1996 2000 2004 2008

Unemployment

Invalids/sickness

Thousands, June years

Unemployment and invalids/sickness beneficiaries (1980-2009)


Borrowing more from offshore but are we investing it well?

-10

-8

-6

-4

-2

0

1980 1985 1990 1995 2000 2005

% of GDP

Current account balance (1980-2009)

40Source: RBNZ. RBNZ.

Households have been leveraging themselves up

0

20

40

60

80

100

120

140

160

180

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

0

2

4

6

8

10

12

14

16

Debt servicing (RHS)

Household debt (LHS)

% of disposable income

Household debt and servicing (1991-2009)

% of disposable income

41Sources: ANZ National Bank, REINZ, Statistics NZ. ANZ National Bank, REINZ, Statistics NZ.

Housing valuation got stretched but is correcting now

0

20

40

60

80

100

120

140

160

1992 1994 1996 1998 2000 2002 2004 2006 2008

0

10

20

30

40

50

60

70

Proportion of weekly wage requiredto service a mortgage (RHS)

House price to income adjustedfor changes to interest rates (LHS)

Index

Housing affordability (1992-2009)

%


Bank and non-bank lending to households

0

20

40

60

80

100

120

140

160

180

200

1998 2000 2002 2004 2006 2008

0

2

4

6

8

10

12

14

16

Non-banks(RHS)

Bank (LHS)

Total lending (LHS)

$ billions $ billions


NZ’s financial system is better placed than most. NZ banks are well capitalised…

0

2

4

6

8

10

12

14

1998 2000 2002 2004 2006 2008

Tier 2 capital ratio

Tier 1 capital ratio

Total capital ratio

% of risk weighted assets

44Sources: RBNZ, IMF. RBNZ, IMF.

… and not as highly leveraged…

0

100

200

300

400

500

600

700

800L

atA

mA

fric

aM

Ea

stU

SF

inla

nd

Po

rtu

gA

sia

Sw

ed

eW

orl

dG

ree

cA

ust

ria

Ita

lyJa

pa

nC

an

ad

NZ

Ge

rma

AU

Sp

ain

Eu

roN

eth

erl

Fra

nce

De

nm

aU

KB

elg

iuIr

ela

nd

Ice

lan

d

Bank assets as % of GDP


… banks have relatively low levels of credit losses…

0.0

0.5

1.0

1.5

2.0

2.5

1995 1997 1999 2001 2003 2005 2007 2009

Impaired assets as % of lending


… and our banks are still profitable

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1995 1997 1999 2001 2003 2005 2007

Net profit after tax and extraordinary as % of average assets

47

There have been huge worldwide financial institution losses and capital raised since credit crisis began

Source: Bloomberg

0 100 200 300 400 500 600 700 800 900 1000 1100

Am

eri

cas

Eu

rop

eA

sia

US$ billions

Losses and writeoffs

Capital raised

48

NZ deposit taking non-bank financial institutions

Source: RBNZ

-600

-400

-200

0

200

400

600

800

Mar05

Jun05

Sep05

Dec05

Mar06

Jun06

Sep06

Dec06

Mar07

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

$ millions Government guaranteeof deposits introduced

Change in total assets

49

NZ’s external current account deficit is unsustainable

-25

-20

-15

-10

-5

0

5

10

15

20

Ice

lan

dG

ree

ceP

ort

ug

al

Sp

ain

Ne

w Z

ea

lan

dT

urk

ey

Ire

lan

dH

un

ga

ryP

ola

nd

Au

stra

liaS

lova

k R

ep

ub

licU

nite

d S

tate

sB

elg

ium

Italy

Cze

ch R

ep

ub

licU

nite

d K

ing

do

mF

ran

ceT

ota

l OE

CD

Me

xico

Ko

rea

Eu

ro a

rea

C

an

ad

aD

en

ma

rkF

inla

nd

Au

stria

Jap

an

Ge

rma

ny

Sw

ed

en

Lu

xem

bo

urg

Ne

the

rlan

ds

Sw

itze

rlan

dN

orw

ay

% o

f GD

P

Source: OECD Economic Outlook, December 2008.

Current Account Balances of OECD nations

50Source: Statistics NZ, ANZ National Bank. Statistics NZ, ANZ National Bank.

NZ overseas borrowing is very high

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

50

100

150

200

250

300

Overseas debt (RHS)

Overseas debt as % of GDP (LHS)

% of GDP

Overseas debt

$ billions


NZ overseas borrowing very high

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

20

40

60

80

100

120

140

160

180

Overseas borrowing by banks (RHS)

Bank borrowing as % of total overseas debt (LHS)

%

NZ banking sector share of overseas debt

$ billions


NZ overseas borrowing very high

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Overseas borrowing by banks

Total overseas debt

$ billions

53Sources: RBNZ, IMF. RBNZ, IMF.

Comparison of gross foreign liabilities (2007)

0

200

400

600

800

1000

1200

1400Ja

pa

nK

ore

aC

an

ad

aU

SIt

aly

Au

stra

lia NZ

No

rwa

yG

erm

an

yG

ree

ceD

en

ma

rkS

we

de

nS

pa

inF

inla

nd

Po

rtu

ga

lF

ran

ceA

ust

ria

Be

lgiu

mN

eth

er.

UK

Sw

iss

Ice

lan

dIr

ela

nd

% of GDP


Poor tradeable sector value added performance

800

1000

1200

1400

1600

1800

2000

87 89 91 93 95 97 99 01 03 05 07 09

Non-tradable sector

Tradable sector

Index (June 1987=1000)

55Source: ANZ National Bank. ANZ National Bank.

NZ’s commodity price cycle is correcting down from unusually high levels

50

70

90

110

130

150

170

190

210

230

250

86 88 90 92 94 96 98 00 02 04 06 08

ANZ Commodity Price Index(in NZD terms)

ANZ Commodity Price Index(in world terms)

Index (July 1986=100)


2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Capital stock as % of GDP, March years

Infrastructure investment is a major worry zone

57Sources: Treasury; ANZ National Bank. Treasury; ANZ National Bank.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

92 94 96 98 00 02 04 06 08 10 12

Treasury forecasts

% of GDP, June years

Transport spending as % of GDP forecast to decline


1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

87 89 91 93 95 97 99 01 03 05 07 09

Utilities as % of GDP

Value add contribution from NZ’s utilities sector has been trending down over the past decade


Residential and commercial building consents

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Commercial

Residential

$ million (3 month total)

60

Uncertainty impacts negatively on investment

3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

0

10

20

30

40

50

60

70

K stock/GDP (left scale)Business uncertainty (inverse, right scale)

K stock to GDP Business uncertainty (gap between buisness confidence and firms own activity expectations)

Capital stock to GDP and business uncertainty

Sources: Statistics NZ; National Bank Business Outlook; ANZ National Bank.

More uncertain

Less uncertain

61Sources: RBNZ, ANZ National Bank. RBNZ, ANZ National Bank.

Consumers “putting it on the card” but slow to pay it off, because they are finding it harder to do so

65

67

69

71

73

75

77

01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09

Credit card interest bearing advances as % of total outstanding

%

62Sources: Statistics NZ, ANZ National Bank. Statistics NZ, ANZ National Bank.

Retail sales growth to recover once the recession eases, but unlikely to return to previous growth rates

0

1

2

3

4

5

6

7

8

9

97 98 99 00 01 02 03 04 05 06 07 08 09 10

Retail sales excluding automotive industries

Debt fuelled spend

The "new normal"?

Annual % change (3 month average)

63

High taxes & excessive regulation are major problems facing small business...

0 5 10 15 20

Lack of Skilled Employees

Regulation

Tax Burden

Competition

Turnover

Exchange Rates

Other

Cashflow

Interest Rates

Rate of Pay

Rent

Management

Supply Shortages

Access to Finance

Inflation

Percentage of respondents (300 respondents)

Biggest problem facing small business (2005)

Source: ANZ National Bank.

64

Main findings of Business New Zealand – KPMG Compliance Cost Survey: October 2008

• Tax is still the dominant cost priority with 70% of respondents seeing it as a priority for change.

• Smaller firms continue to be harder hit by compliance costs than larger ones.

• Compliance costs have risen in all areas: IRD, ACC, ERA, KiwiSaver, OSH, Holidays Act, RMA, local body consultation, building regulations, et al

… and businesses in general

65

NZ’s relative advantage on corporate tax rates has been severely eroded

Source: OECD

Corporate Tax Rate (%)

20

25

30

35

40

45

50

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

New Zealand

OECD average

66

And the same applies to personal tax rates

Top Marginal Personal Tax Rate (%)

Source: OECD

20

25

30

35

40

45

50

55

60

65

70

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

New Zealand

OECD average (central government only)

67

Number of Pages of New Primary Legislation by Decade1900s to 2000s

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

Regulatory creep has been an accumulating problem

Source: Parliamentary Library.

68

From 2000 to 2008 economic negatives and government interventions became prevalent

• 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

69

NZ has thin domestic capital markets

• Lack of depth & breadth (said RBNZ Governor and others)• This constrains economic growth• Raises vulnerability to crises• NZX small and declining in relative importance• Marked contrast to Australia• Private equity became more important• Pushes companies to offshore funding• Pushes companies to offshore expansion• Off market transactions predominate• Huge increase in regulation and compliance costs in NZ

capital markets• Many parties now agree regulation needs improvement• Major review now under way (Cameron task force)

70Sources: World Federation of Exchanges, Statistics NZ, ANZ National Bank. World Federation of Exchanges, Statistics NZ, ANZ National Bank.

Comparison of share market capitalisation

0

20

40

60

80

100

120

140

160

180

96 97 98 99 00 01 02 03 04 05 06 07 08 09

Australian Stock Exchange

New Zealand Stock Exchange

Domestic market capitalisation as % of GDP

71

Labour market regulations constrain adaptability

• 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 (review under way)• Days off in lieu at will• Discretionary payments double dipping• Workplace stress• Re-regulation of trading days• Inequality of power• Flexibility of labour markets eroded during 2000’s

72

Kyoto and All That

• Original estimate of carbon credits $300 million• 2006 estimate over $600 debits• Officials error $900 million • Treasury reported carbon tax would be ineffective• Carbon tax policy & NGA’s abandoned• 30 months of negotiations wasted • Another new Government policy announced Dec 2006• Emissions Trading Scheme (ETS) versus a carbon tax• Huge disagreement over scale of problem• Disagreement also over policy solutions• All this has raised costs and uncertainty for business

73

Banking regulation intrusive

• RBNZ requires “standalone capability”, particularly when under stress

• Major systems were relocated to New Zealand• Huge cost and inefficiency• All third party contracts were renegotiated/separated• All direct reports to CEO require RBNZ approval• No analysis that benefits of all this might exceed costs• Individual director attestations• RBNZ claims this is “light handed” regulation• Introduction of government guarantees for bank liabilities • Guarantee applies also to non-banks• Foreign funding is 42% of bank sector funding• Australian and NZ banks came through international crisis as

well as any banks and better than most

74

Telecommunications regulation destroys value

• Once the fastest growing industry in NZ• Regulator over-ruled by Government (unbundling in 2006)• 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• Mobile termination rates now following same course• No evidence of any gain to consumers from regulation • This is despite the huge costs and great uncertainties of regulation• Taxpayers now to invest $1.5b. in broadband network• Commercially odd joint venture, regional type model

75

Electricity regulation a mess

• Much regulation, numerous changes• Industry largely Government owned • Seriously conflicting numerous regulatory objectives• Conflicting regulators (Govt. & CC & EC)• Major transmission outages • Lack of security of supply• Uncertainty & underinvestment in some areas• A disaster waiting to happen ?• Review under way

76

Research Study on Regulation

• ANZ Bank study December 2006 showed poor regulation hinders economic performance

• Study found evidence of distortionary effects of regulation• Recommended need for five policy changes

1. Quantitative cost/benefit analysis2. Done by independent body3. Articulate goals better4. Ex post reviews essential5. Negative impact of uncertainty needs policymakers attention

77

Business adaptability has been severely 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• It ultimately impedes the competition it pretends to promote• Reduces attractiveness of New Zealand for foreign direct

investment

Government reviews now underway

78

• 2025 Taskforce – chair Don Brash• Regulatory Responsibility Taskforce – chair Graham Scott• School Choice Working Group – chair Heather Roy• Holidays Act Taskforce – chair Peter Kiely• RMA Technical Advisory Group – chair Alan Dormer• Land and Water Forum – chair Alister Bisley• Hospitals Taskforce – chair Murray Horn• Electricity Taskforce – chair Brent Layton• Taskforce on the Maori Economy – chair Pita Sharples• Capital Market Development Taskforce – chair Rob Cameron • National Infrastructure Advisory Board – chair Rod Carr• Tax Working Group – chair Bob Buckle• Defence Review – leader John Mckinnon

79

Scorecard for past decade

Positives

• Relatively stable monetary policy• Overall stance of fiscal policy (up until 2008)• Minimal foreign exchange intervention (so far)• 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 )• Shrinking domestic capital market • Overseas deficit and overseas debt• Prospective fiscal deficits and public debt increases• Now rising unemployment

80

In summary

• Decade of economic growth until 2007. This arose from:

• World expansion• Commodity prices• Domestic productivity

• Productivity growth was based on initiatives from 84-90’s

• 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

81

In summary (continued)

But, over recent years

• Increasing size of Government sector• Fiscal deficits again and growing public debt• Extensive regulatory interventions, some now under review• Poor Government sector management • Too many welfare benefits universal rather than needs based• Erodes incentives for personal and family responsibility• Who believes health, education, or welfare are well managed ?• Sharply slowing productivity growth• Rising unemployment (Treasury forecasts peak at 8%)• Huge external imbalance & offshore debt (93% of GDP 2008)• Bank offshore funding 67% of GDP in 2008• Government now addressing issues but takes time• So where do NZ’s comparative advantages now come from?

82

Some Solutions

• More secure property rights• Greater certainty in the application of the law • 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• Open and competitive markets• Review government guarantee on financial institutions deposits• Smaller government, reduce public service bureaucracy• Move benefit system to needs based rather than universality• Tighten up on government expenditure• Develop clearer price signals in public sector• Lower taxes• Ongoing stable monetary & fiscal policies

83Sources: Statistics NZ; RBNZ; ANZ National Bank. Statistics NZ; RBNZ; ANZ National Bank.

NZ recessions compared

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0 1 2 3 4 5 6 7 8

1976-78

2008/09 (incomplete cycle)

1966/67

1987/88

1989/901997/98

1982/83

1990/91

Cum

ula

tive o

utp

ut

loss

(%

)

Recession duration in quarters

84Source: IMF IMF

Business cycles in industrial countries compared

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

0 1 2 3 4 5 6 7 8

Recessions associated with financialcrisis that are highly synchronised

Recession driven byother factors

All recessions

Highly synchronised recessions

Recessions fromfinancial crisis

Cum

ula

tive o

utp

ut

loss

(%

)

Recession duration in quarters

a health check on the economy: how does it measure up ? roderick deane background material for an...

Documents

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