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26
MAR 12

Earning more and spending less




Last week marked the first major speeches since the election from the two biggest parties and there was the usual hype surrounding them. On the same day Statistics New Zealand’s productivity statistics were released showing a 0.1 percent drop in labour productivity. This managed to fly under the radar.

A couple of charts demonstrate the reasons for New Zealand’s poor productivity performance.



Source: Treasury

The traded sector generally runs at high productivity levels than the domestic economy as you would expect with greater competition driving efficiency. With a high exchange rate persisting since about 2004 we can see the traded sector decline and this of course has a flow on effect for productivity.



This second chart shows that capital allocation has also been a problem. Housing is effectively subsidised as an investment by lower tax rates and this of course reduces the capital available to the productive industries.

There were some helpful announcements from John Key and David Shearer last week with Key introducing cost saving measures through a Super Ministry and Shearer reaffirming Labour’s commitment to removing the Capital Gains Tax harbour. Much more is needed to create a step change that will deliver higher productivity and better growth.

A balanced current account should be the target of the Government; this requires lower spending and higher earnings. Without greater stability for the real economy higher earnings will not happen and spending cuts, of themselves, will not be sufficient.
 


tags: productivity, exchange rate, current account, capital gains tax
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