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The New Zealand Investment Gap - Prebble

Monday 12th Jun 2000
Richard Prebble
Media Release -- Economy

By ACT leader Richard Prebble

How much investment is needed for the New Zealand economy to grow at four percent?

Work done for me by the Parliamentary Library indicates that for the economy to grow at four percent, the amount the Treasury claims the economy will grow, New Zealand would need between $21 and $27 billion investment a year.

Because it’s not an easy amount to quantify, governments have not been paying enough attention to these investment gaps.

The amount of investment the New Zealand economy needs is calculated by adding the amount needed to cover depreciation and the amount needed for additional growth.

$10 billion of investment is needed each year for depreciation, “wear and tear”. That’s just to have the economy stand still.

Growth in an economy is the result of growth in the working population and output per person. New Zealand’s working age population is falling by 217 a day as many of our most talented leave for overseas.

So to achieve growth, we are dependent on more or better quality capital.

The total capital stock in New Zealand is estimated to be $414 billion in 1998. Four percent of $414 billion is $17 billion, to which we must add $10 billion for “wear and tear” – a total of $27 billion of investment to grow at a rate of four percent.

If the government is able to increase the numbers in the workforce by the average increase since the labour force swing began, the country will still need $21 billion investment to achieve four percent growth.



New Zealand has never invested $21 billion in a year. The highest ever was $20.24 billion in 1997, as investment rose strongly through the 1990s.

The importance of sound government policies can be seen from the fact that it was the appointment of Mr Peters as Treasurer that appears to have been the turning point. Investment fell in 1998 to $19.821 billion and in 1999 to $18.984 billion.

The problem is compounded by New Zealand’s poor savings rate. Domestic saving last year was the lowest level in the 1990s at just $2.1 billion.

When we add in the “depreciation” (the consumption of fixed capital), it leaves an investment gap of $6.7 billion last year, which is fairly close to the current account deficit. Economic theory says the current account deficit is the difference between savings and investment. So while the figures are rough, and the methodology debatable, there clearly is a significant investment gap.

All of which says that given our domestic savings rate we need to attract overseas investment and persuade New Zealanders to invest here.

All the evidence is that overseas investors are withdrawing – the total percentage of shares held by foreigners has fallen.

There has been a huge flight of capital and companies from New Zealand, the latest being Lion Nathan.

The coalition’s response is totally inadequate. A $100 million industry fund, Jim Anderton's "job machine", is so small it’s not going to make a difference.

A tax-based superannuation fund is likely to reduce the quality of capital and widen the investment gap. (Dr Cullen's proposal is absurd: to take half the surplus and instead of repaying debt at 8%, to invest it in a politicised fund returning maybe 5%)

We need to examine why New Zealand was seen to be attractive for international and local investors in the mid-1990s. Investors liked the four pillars of the economy:

 The Fiscal Responsibility Act – to control government spending;  The Reserve Bank’s independence to control inflation;  The Employment Contracts Act – to give a flexible labour market; and  The open economy.

All four pillars are under attack – the Employment Relations Bill, the Alliance sponsored review of the Reserve Bank, a lolly scramble budget and the repeal of the Zero Tariff Act, and the rejection of the foreign bid for Sealord. The scathing criticism of the coalition’s policies in influential papers, like the Asian Wall Street Journal, show that overseas investors know about the government’s incompetence and do not like what they see.

So what to do? Drop the Employment Relations Bill. Scrap the pointless Reserve Bank review. Stop restricting investment and set a target of lowering government spending as a percentage of GDP.

This would involve Michael Cullen and Jim Anderton admitting that their policies just won’t work in a global economy where capital and labour are free to go. This seems unlikely so it appears the investment gap will grow, New Zealanders will continue to leave. There is no way four percent growth is sustainable until the government changes either its policy, or the government itself changes.

You may well ask, how can the Treasury predict four percent growth when the lack of investment is going to cause the economy to stall? The answer is that Treasury, in making its forecasts, has taken no notice of the effect of coalition policy changes. Only the Treasury believes the changes to the tax rate, the ACC re-nationalisation, and the employment relations bill are having no effect on economic growth.

Is it unrealistic to expect the government to do a U-turn?

The Social Democrats in Germany hit the same investment crisis and Chancellor Schroeder fired his Finance Minister, did a U-turn and has seen not just the economy turn up, but his poll rating as well.

If Helen Clark sought advice on her visit to Berlin, it would have been, “do a U-turn or the investment gap will strangle the economy”. I hope she was listening. Ends

For more information visit ACT online at http://www.act.org.nz or contact the ACT Parliamentary Office at act@parliament.govt.nz.


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