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Dismal Productivity Figures: We Could Do Better

Dismal Productivity Figures: We Could Do So Much Better

“The latest productivity figures for the measured sector of the economy released today by Statistics New Zealand paint a dismal picture”, Roger Kerr, executive director of the New Zealand Business Roundtable said today.

“Labour productivity grew by only 0.5 percent in the year ending March 2007 while capital productivity growth (-2.1 percent) and multifactor productivity growth (-0.6 percent) were negative for a second successive year. ,

“For the period covering the government’s term of office (2000-2007), annual labour productivity growth has averaged only 1.1 percent, much less than half the rate of labour productivity growth in the 1990s.

“Indeed the latest data indicate that, at 1.1 percent, labour productivity growth has fallen back to below the rate recorded in the last economic cycle in the Muldoon years (1.4 percent in 1982-1985).”

Mr Kerr said that productivity growth was the key to long-term increases in material standards of living. Low rates of labour productivity growth mean real wages can only grow slowly at best.

In his 2004 budget, finance minister Michael Cullen acknowledged that productivity growth was “a key factor placing a ceiling on our ability to grow faster”, but claimed “there are signs of longer term increases in labour productivity growth”.

The data confirm there is no basis for this claim, as the Business Roundtable has been pointing out. High levels of government spending, taxation and regulation have been stifling business productivity and the economy.

Multifactor productivity reflects factors such as improvements in knowledge, technology and innovation. The very weak growth in multifactor productivity in 2000-2007, just 0.4 percent per annum, indicates that the government’s policies for so-called “economic transformation” are not working.
On present trends there is no prospect that the government’s former ‘top priority’ goal of getting New Zealand back into the top half of the OECD income range will be achieved. Annual productivity growth rates of 3 percent or more on average would be needed for fast economic growth.

Besides its depressing impact on economic growth (the Reserve Bank is forecasting growth in real GDP of only 2 percent on average over the next three years), the weak productivity performance is contributing to inflationary pressures and the need for high interest rates.

Mr Kerr said that productivity is a measure of how efficiently inputs (such as capital and labour) are used within the economy to produce outputs. It is influenced by the performance of individual firms and work effort and skills, but more by the quality of institutions and policies that affect the overall economic environment, especially ones that restrict or enhance economic freedom. For example, a cut in high marginal tax rates in the forthcoming budget, rather than a tax package focused on further income redistribution, would help increase productivity. Research indicates that high taxes are an important reason for the sluggish productivity growth of European economies compared with the United States.

“The government’s more interventionist policies have reduced productivity growth”, Mr Kerr said. “It should be studying the reasons for the major jump in New Zealand’s productivity performance when the earlier economic reforms produced dividends in the early 1990s, and the causes of the subsequent decline.

“In last year’s federal election campaign, Labor leader Kevin Rudd made much of Australia’s productivity performance having slipped because of a lack of significant economic reform under the Howard government. Yet the outlook for Australia’s productivity growth over the next decade is far better than New Zealand’s (unlike in the 1990s when we matched Australia’s performance).

“Productivity should also be a major issue in this year’s election debate in New Zealand”, Mr Kerr concluded. “All parties should be putting forward credible policies to reverse New Zealand’s productivity growth decline. We can and should be doing much better.”

13 March 2008


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