MEDIA RELEASE
28 May 2009
As inadequate as a lone chopstick

2009 budget not enough to springboard New Zealand out of the recession Going into this Budget, New Zealand was not just facing a possible ratings downgrade due to the spectre of a government debt explosion. Even before being hit by the global economic crisis, New Zealand was chronically underperforming in growth: New Zealand’s growth trajectory has been backward relative to other countries, and in 2008, Australia’s GDP per capita was over 40 percent higher than New Zealand’s. The New Zealand Institute therefore called for the Government to use the Budget to do two things: get the public debt under control, and start to invest behind growth. But the Budget went only half way: primarily announcing across-the-board cost cutting without fundamentally altering its priorities to invest behind growth.

The Budget focused on austerity measures including the (welcome) indefinite postponement of individual income tax cuts that would have done little either to promote growth or deliver relief to families facing the most hardship. (Note however that the Budget claims considerable but questionable “cost savings” by promising to reduce operating spend increases in future years, but without providing detail as to how those savings will be achieved.) Overall, the Budget’s cost control measures will likely be enough to avoid an immediate downgrade to New Zealand’s credit rating.

But like just one chopstick without its mate, avoiding a ratings downgrade was necessary (and welcome) but insufficient. To fuel New Zealand’s economic growth and make it stronger coming out of the recession than before, the Budget also needed to take bold measures to address New Zealand’s poor growth performance. But disappointingly, the flagship new “investments” announced in the Budget – such as more money for roads and prisons, and the home insulation scheme – will do little to attract to New Zealand the mobile businesses and talent that will be seeking new engines of growth when the world economy starts to recover.

Why is the lack of a real growth strategy in this Budget so disappointing; why can’t the Government wait until after the recession to address New Zealand’s underlying growth problem?

There are four key reasons:

(1) Perhaps most importantly, the global recession is a small window of opportunity: bold steps now to improve New Zealand’s lackluster growth performance could be particularly effective. The recession is a disruption in the established growth paths of countries, and disruptions like this create opportunities for laggards. When the leaders in a cycle race fall and the pack piles up into the crash, one of the previously trailing cyclists may be first off the ground and able to speed ahead in the clear. It is vital that New Zealand takes advantage of the world economic crash by investing behind areas of growth and infrastructure, in order to come out of it ahead of other countries. New Zealand has just two years to make those investments in order to be a magnet for mobile talent and business opportunities when world economy is expected to be in recovery in 2011.

(2) Saying “later” to improving growth easily becomes “never”. Eighteen years ago, a New Zealand Trade and Development Report called for urgent action to lift New Zealand’s GDP per capita to tenth in the OECD by 2010 by growing exports and international engagement. With just one year left to meet that target, New Zealand is ranked 22nd and slipping backwards.

(3) Crises are not a good reason to procrastinate on improving growth. There will always be crises. And the longer New Zealand continues along a limp growth path, the more susceptible it will be to economic shocks, and the more frequent those shocks will become.

(4) Doing across-the-board public sector cost cutting in the absence of any long-term growth strategy could harm growth prospects. Costs must be contained, but without the Government providing and leading a long-term growth strategy, departments may cut investments that are essential to New Zealand’s future economic growth prospects instead of cutting costs that are not.

It is still possible for the Government to drive a growth strategy without waiting until the next budget. There is scope to use existing government resources more effectively to support key objectives, such as a more strategic approach to supporting the innovation and international engagement of New Zealand businesses. But these measures need to be signaled and implemented urgently, as the ability for New Zealand to use the global recession as a springboard to emerge stronger than before is quickly slipping away.

ENDS

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