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SEP 14

Is our economy heading in the right direction?

When considering the policies being proposed this election, it is possible to shopping list the details then try to run a policy by policy analysis - then try to integrate the whole, picking the positives and balancing the negatives, driving a final choice. The problem is this approach takes time and many small trade-offs.

An alternative approach is to look at principles, or at the broad thrust of each policy set; and pick the set that is closest to your own world view. From an economic standpoint the question could be: Do I believe the economy is moving in the right direction to best improve the lives our people? Or do I believe it is necessary to make a deliberate shift in our economic approach to deliver better outcomes? For me this is really the defining question of the election.

My view is that there are policy changes that can be made to improve our economy, and in particular our traded goods sector. I take the view there is a significant difference in the nature of economic activity, that microchips and potato chips mean different things for the economy in the long run. Policies that support making complex things in New Zealand, adding value here, and growing technical complexity ultimately provides value that manifests itself in higher wages and substantive economic growth. What policies might support, or reject, such a view?

From a fiscal standpoint, we might aim for fiscal balance, as opposed to accelerating deficits, then we can look how that balance might be achieved. Putting aside the spending side for now, currently revenue is essentially the sum of income, corporate, excise, goods and services taxes. Almost unique in the OECD is our lack of a Capital Gains Tax (CGT), and this omission goes against the basic tax principles: equitable, low, broad and non-distortionary. It means that some investments have tax advantages while the others carry a disproportionate taxation load which distorts economic incentives.

An economy that has too great a reliance on speculation runs the risk of asset bubbles and crashes, underlying uncertainty and volatility, add to this a poor savings record and the stage is set for currency overvaluation and volatility – this all damages the tradable sector.

Monetary policy decisions affect all parts of our economy, and many Central Banks around the world in the wake of the global financial crisis are upgrading their approach to financial stability, inflation and jobs, and the interplay between interest rates and macroprudential regulation. Gone are the days of considering inflation targeting (interest rates) and financial stability (regulation) as completely separate. My experience is that our over reliance on interest rates in monetary policy overvalues the currency; the supporting of property speculation in fiscal policy and our poor national saving record all combine to underpin what ails us, and these things that need to change.

These generate a persistent overvaluation of the New Zealand dollar, making imports cheap, and exports expensive - this does not help build valuable exports. It is hard to see investment increasing in complex added value exports while these conditions persist. One set of numbers tells the story; our traded economy stopped growing in 2005, almost all our growth since then has come from the non-traded economy. That is not sustainable, and it is baffling how those who think business as usual is a realistic option can get past this simple problem.

There are many other competition based (other jurisdictions implement them) policies to support and improve conditions for manufacturers and exporters (tradable sector), such as explicit local preference in government procurement, accelerated depreciation on plant and equipment, and research and development tax credits which work much more effectively than a grant based systems - all can encourage investment in productive activity.

The success of the tradable sector matters to everyone in New Zealand, not only those working in the sector. A job in manufacturing is generally well paid and supports several jobs elsewhere in the economy. The shift to increasing trade exports importantly helps keep the external current account in surplus, it can encourage higher savings, support lower interest rates, and underpin a realistic exchange rate promoting sustainable living standards for New Zealand.

Higher value inevitably brings higher complexity, higher complexity demands more capital and higher skills, skills that can command higher wages and that all spreads through the economy. Over time, business as usual has seen the complexity of our economy fall and our external deficit increase for over a generation. I believe only a change in policy direction can deal with this problem, and the longer business as usual settings persist the harder it will be to fix things.

If you are happy with the way things are; vote the same way as your Dad, otherwise think hard what needs to change and vote for who has most of that on offer.

tags: complexity, exports, election, policy, tradable, economy, skills, manufacturing
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