Government and Fiscal Policy

Economic performance fails to impress voters

Thursday November 23, 2017 Mark Cox

General Elections are supposed to be won or lost because the economy has performed well or badly (hence the “it’s the economy, stupid” remark, often wrongly attributed to former US President Clinton).  


However, the recent General Election result in New Zealand seems to have defied that notion.  Compared to many other advanced economies, the New Zealand economy performed reasonably well under the three-term National administration, and National won a greater share of the vote than Labour, but the results revealed that there was considerable unease about a lack of progress in improving the wellbeing of many New Zealanders.


Few voters will actually have made the connection, but ongoing poor productivity growth is likely to have been at least part of the problem.


To quote the Productivity Commission “Productivity is about how well people combine resources to produce goods and services.  For countries, it is about creating more from available resources – such as raw materials, labour, skills, capital equipment, land, intellectual property, managerial capability and financial capital.  


Productivity matters because, generally speaking, the higher the productivity of a country, the higher the living standards that it can afford and the more options it has to choose from to improve wellbeing.  Wellbeing can be increased by things like quality healthcare and education; excellent roads and other infrastructure; safer communities; stronger support for people who need it; and improved environmental standards.”


As measured by employment growth relative to GDP growth, productivity in New Zealand has grown only very slowly in the past 10 years.  And, following the Productivity Commission’s reasoning, this has meant that there has been little scope to increase the wellbeing of the populace.


Productivity growth can be measured in simple terms by comparing growth in GDP with growth in employment. The greater the margin by which the GDP growth rate exceeds the employment growth rate, the greater will be the growth in productivity.


However, the table below indicates that recent productivity growth has been, at best, sluggish.  


mark article table


When compared to the GDP growth rate, the Household Labour Force Survey (HLFS) implies that productivity has actually fallen during the last five years.  The Quarterly Employment Survey (QES) implies some productivity growth, but it has hardly been impressive.  


The picture is slightly better over the last 10 years, but not by much.  During that period, GDP growth was slightly faster than employment growth, measured by both the HLFS and the QES.  


Having said all this, it should be noted that there are more sophisticated ways of measuring productivity growth, and there have been problems recently with the HLFS measure of employment growth.  But neither of these detract from the underlying message that productivity growth needs to improve, if improvements in the wellbeing of New Zealanders are to be affordable.


The new government has made it clear that it wants to achieve improvements in wellbeing, but time will tell if the coalition partners can do this while honouring their commitment to sound fiscal management.