Oram: John Key's big economic challenges

It's make-or-break for the Government of Prime Minister John Key this year.
It's make-or-break for the Government of Prime Minister John Key this year.

This will be the make or break year for the Key Government's economic strategy. If it fails to deliver reasonable growth to businesses and consumers the Government will have to defend a poor economic record in next year's election.

At first glance Treasury's forecasts look promising for the Government. GDP will grow by 2.3 per cent in the year to this March and by 2.9 per cent in the following year; and unemployment will fall from 7.3 per cent to 6.2 per cent by March 2014.

But the forecasts, released last month, were downgrades from the budget forecasts in May. GDP estimates were cut by about 0.5 percentage points a year for the four years to 2017; and government revenues will be almost $8 billion lower over four years.

Our dollar will remain high and our exports lacklustre so our current account deficit will increase from 4.5 per cent of GDP in the March 2012 year to 6.5 per cent in 2017; and New Zealand's net international investment position (ie, what we owe the rest of the world) worsens from 71.9 per cent of GDP to 83.6 per cent. We will remain one of the most indebted of developed countries.

This is our slowest recovery from a recession in more than 50 years. We share some common causes with other low growth countries: we are burdened by high debt, although ours belongs to households not the Government; cuts in government spending have reduced demand; and the Government tinkers with the economy rather than reforms it.

The Government is quick to blame our slow growth on turmoil in the global economy. But in fact demand from our main trading partners is holding up reasonably well. Moreover, the economies of the US and eurozone are showing some signs of progress even though their politics make reforms fraught and glacial.

The real reason for our poor performance lies at home. The economy is stuck in its long-standing dependence on low value commodities. Worse, the volume of commodities grows only slowly because of constraints on land, labour, capital and science.

Other major areas of the economy have their own strategic shortcomings too. For example, over the past six years tourism has lost a lot of its long-staying, high-spending visitors. It has only partially offset the decline with more short-stay, lower spending visitors from China and Australia.

High value sectors such as IT and specialised manufacturing continue to progress. But they are still struggling to develop the business models they need to enable high growth, large businesses to thrive here and prosper in the global economy.

The Government's answer to these deep and perplexing challenges is its Business Growth Agenda. This is designed to co-ordinate and deliver literally hundreds of government policies, investments and initiatives in six broad areas. This will be a very big year for all of them.

Export markets: The Government hopes to conclude negotiations this year on the Trans-Pacific Partnership trade agreement. But strenuous resistance is rising here and in other countries to a wide range of self-serving US proposals on the likes of intellectual property rights and dispute resolution mechanisms for foreign investors. Even if the exceedingly ambitious US-dictated deadline is met, our Government will face a backlash at home. Worse, any gains from the TPP will take years to accrue to our economy. Innovation: Callaghan Innovation, the Government's new advanced technology institute, will start up this year. The idea of bringing scientists and business people together is excellent. But progress will be slow because both communities will have to learn about each other; and the institute will offer nothing towards solving a bigger problem - very few NZ companies know how to turn their R&D investment into fast growing products, markets and profits.

Skilled and safe workplaces: The Government has done the easy bit with skills training for industry - tightening up on providers' sloppy spending and poor pass rates. This year policy making is supposed to get strategic. That would require some intelligent choices on skills we'll need in coming years. But this is a Government that doesn't think much about the future.

The Government also has a very tough year ahead on safe workplaces. It needs to respond convincingly to the recommendations of the Pike River Royal Commission; and to establish a credible regulatory regime for other high hazard industries, particularly offshore oil and gas exploration and production.

Capital markets: The Government's big goal is to partially float at least one SOE this year. To do so, it will have to overcome a raft of legal, political and market hurdles. Even if it succeeds with its front-runner, the weak economic outlook for the electricity sector will prevent Mighty River Power from becoming a market star.

Natural resources: This is the year the Government is promising to make it a lot easier to farm, mine, irrigate, explore for oil and gas and in other ways exploit our natural resources. To do so it will make sweeping changes to the Resource Management Act, water, mining and oil and gas legislation. The Government is facing two enormous challenges: This daunting workload will prove impossible to complete in the year; and a significant segment of voters will fight against the environmental degradation the strategy will cause.

Infrastructure: The Government will push on with lots of projects it wants such as some uneconomic roads financed in part by increases in fuel taxes. But it will drag its feet on projects large chunks of the public want such as the CBD rail loop in Auckland. Likewise the rebuild of Christchurch has high potential to cause the Government to lose support in local government elections this year and the general election next year.

Some common themes emerge from these six areas of economic development policy: The Government has taken far too long to get even this far with them; it co-ordinates, sells and executes these policies badly; there are merits in many of the policies but they are not bold enough to shift the economy to a higher growth track; and public resistance to many of the policies is rising.

If the Government thought the global financial crisis was hard, it will find its self-induced domestic stagnation crisis even worse.

Sunday Star Times