Low productivity is NZ’s economic elephant in the room. Election pledges mostly avoid it
Economic growth may have returned to NZ, but lifting living standards will require more than a cyclical recovery. What should voters be looking for in policies?
The Treasury’s recent Pre-Election Economic and Fiscal Update has given New Zealand’s political parties a clearer perspective on the economic landscape they could inherit after the upcoming November election. The near-term fiscal outlook is expected to improve, with the government projecting a smaller deficit for 2026-27 and higher tax revenue reducing borrowing by $15 billion over the next four years.
This provides political parties with a more solid foundation for funding their campaign promises and navigating an economic environment that has shown signs of recovery since the previous election.
However, despite the brighter economic picture, the recovery remains fragile, with annual inflation rising back to 4.1%. The Treasury also warns of the renewed risk that the global oil shock poses to both inflation and economic growth. As the main focus of the election campaign shifts towards addressing the cost of living, housing, tax, immigration, and the role of government, one issue continues to loom large and remains difficult to address: New Zealand’s persistent productivity problem.
Productivity, in essence, refers to how efficiently an economy can utilize its workforce, capital, technology, and resources to create value. Higher productivity allows for wage and living standard increases without requiring longer working hours, while also providing more resources for public services like healthcare, education, and infrastructure.
New Zealand has faced challenges in this area for years, with Treasury estimating productivity growth at around 1.4% per year between 1993 and 2013, but only 0.2% in the following decade. Additionally, OECD data reveals that New Zealand's output per person remains well below that of advanced economies and shows little indication of narrowing this gap.
The causes of this productivity lag are multifaceted, including long-standing weaknesses such as low wages, weak competition, declining educational performance, slow adoption of new technologies, shallow capital markets, high energy costs, and regulatory barriers. Furthermore, New Zealand's small economy and geographical isolation also contribute to these issues.
These interconnected challenges have led to an economy that has relied primarily on adding more workers to generate growth, while investment and productivity have lagged behind.
Addressing New Zealand's productivity problem requires a multifaceted approach, including increasing investment per worker, improving access to finance for firms, fostering greater competitive pressure, reducing barriers to infrastructure development, and enhancing educational outcomes and skills. However, such improvements often take years to show up in productivity figures, making them challenging to sustain politically.
This context is crucial to consider when evaluating the economic policies proposed during the election campaign, as some policies may address immediate concerns like the cost of living but may not necessarily contribute to long-term productivity growth.
Written by urgent.news from The Conversation AU's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
