NZ a 'highly unbalanced', 'third division' economy: PM

Wednesday 15th July 2009

The worst of the recession appears to have passed, but New Zealand has a long way to go to reverse five years of tradeables decline, says Prime Minister John Key.

Key used a business breakfast meeting in Wellington for a speech which appeared a calculated response to recent commentary that the Government's early enthusiasm for economic reforms has been waning.

"To be frank, New Zealand's economic performance over a number of years has been disappointing," Key said. "In the OECD's league of developed countries, New Zealand is now essentially a third-division economy, and our closest comparators are countries like Greece, Korea and the Czech Republic."

Recent economic growth, based on consumption and borrowing, had allowed the New Zealand economy to "flatter to deceive," and was now increasingly vulnerable to global economic shocks, with an unsustainably high current account deficit, he said.

"The sad fact is that the tradeable sector has effectively been in recession for the last five years. During that period, output in the tradeable sector has shurnk by around 10%, while the non-tradeable sector of the economy - which has lower productivity - has grown by 15%,” Key said.

"That constitutes highly unbalanced growth," with under-achievement as an exporter compared with peer countries and more than 90% of exports coming from just under 5% of exporters,” he said. “We need a business environment that enables firms to move resources to their best use."

Key ran through the government's six identified areas of focus for improved productivity - regulatory reform, infrastructure investment, better public services, education and skills, innovation and business assistance, and a world-class tax system.

However, it was only in the last two categories that he signalled policy action beyond those already announced.

On business assistance and innovation, Key signalled work to be done to improve the value added by universities and Crown Research Institutes to the productive sector.

Universities were "doing pretty well, but that's an area we're looking very closely at. I think there are some changes we can make in that space that can deliver better outcomes. There's a lot of money going in there. We've got to make sure that that research is really adding to our economic growth," he said.

"Some of it will be blue skies research or will not ultimately find a productive use, but we've got to make sure that the productive part of our economy is being fed with high quality research,” he said. "I'm not opposed to investing in that area, but we need to show we have the right approach."

The creation of a "seamless" system of assistance for New Zealand businesses operating offshore was also a major priority.

On the tax system, Key pointed to the importance of both the report of the government-appointed Tax Working Group, led by Victoria University's Bob Buckle, later this year, and also the Henry Review of Taxation occurring in Australia.

"A strategic review of the tax system is very timely at this stage, particularly in light of the challenges posed by the current economic and fiscal environment and by our medium term goal of a 30% top personal tax rate."

Key said it appeared that the recession was waning, but stopped short of predicting a return to growth in the three months of this year.

"I hope that's the case because I want New Zealand to be back on track and growing and employing people."

Businesswire.co.nz

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