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2  Economic growth

Economic growth matters for material well-being. Improved economic growth means higher incomes for New Zealanders but it also contributes to fiscal sustainability (e.g. through taxation). It can also create broader opportunities for individuals to raise living standards and live the lives they value.

New Zealand's GDP per capita is below the OECD average. The Treasury considers that improved economic growth would come from a more productive, adaptable, and resilient economy - through:

  • Stronger international connections
  • Improved investment and innovation
  • Greater competitive intensity
  • Greater export diversity and a more complex mix of exports
  • Collaborating for regional economic development
  • Benefiting from Auckland's economy and role as an international connector
  • Supporting Māori economic development.

Economic growth matters for the improved material well-being of New Zealanders. Economic growth provides individuals with more options for spending, saving, and investing. Beyond that, growth can also create broader opportunities for individuals, such as through work participation and learning on the job. A growing and prosperous economy also affects New Zealand's long-term public finances, and provides governments with options for spending, saving, and investment. Economic growth is driven by increases in population, labour participation, and productivity.

From the early 1970s to the early 1990s, New Zealand's GDP per capita (as a measure of average incomes) declined relative to other countries. Relative GDP per capita was broadly stable in the early 2000s, with modest convergence back towards the OECD average since then. This is despite New Zealand having what are regarded as comparatively good policy settings.

It is important to recognise that New Zealand is positioned in about the middle of a group of economies that are often larger (in terms of domestic market base) and/or geographically closer to current and potential trading partners. New Zealand's GDP per capita is around 8 percent below the OECD average.[6] This gap reflects higher than average labour utilisation (hours worked per capita) which is offset by below average labour productivity (output per hour worked). While there is no "best" set of comparator economies, Figure 2.1 compares New Zealand's labour productivity performance against a group of small advanced economies (of which it is a member).[7]

There has been a slowdown in aggregate labour productivity growth across the OECD that began prior to the onset of the Global Financial Crisis. Despite the slowdown, firms at the 'global frontier' are experiencing strong productivity growth, which suggests there is ongoing technological progress. However, there are questions about how this progress is being transferred (or diffused) more widely, as well as the extent to which resources are being reallocated from low to high productivity firms.[8] The New Zealand Productivity Commission (the Productivity Commission) has examined these issues in the New Zealand context (see below).[9]

Figure 2.1 – Labour productivity in small advanced economies
(output per hour worked, 2015 US dollars)
Figure 2.1 – Labour productivity in small advanced economies (output per hour worked, 2015 US dollars)   .
Source:  The Conference Board Total Economy Database™, http://www.conference-board.org/data/economydatabase/

Note: This data is constructed on an internationally comparable basis and so may not match other estimates used elsewhere in this Statement.

There will be a number of influences on New Zealand's future economic growth, including: demography; external shocks; changing patterns of technology and globalisation; skills; social inclusion; and public policy settings.

Looking out to 2060, this Statement projects real GDP growth to average around 2 percent per year. Taking into account the effects of an ageing population on labour force growth, labour productivity growth is projected to be the main contributor to increases in GDP per capita. For modelling purposes, the Treasury assumes that labour productivity growth will average 1.5 percent per year from the early 2020s, which is broadly in-line with historical averages.

Recent events, such as volatile dairy prices and global political and economic instability reinforce the importance of a resilient and adaptable economy. Geopolitical events (e.g. terrorist attacks, the inflow of refugees into Europe, the United Kingdom's decision to leave the European Union, and tensions in the Middle East) create new uncertainties about global interactions and trade. New Zealand also faces the relatively new global challenge of increasing protectionism and negative views towards global economic integration, along with wider concerns about the benefits and costs of globalisation not being equally distributed. New Zealand's economic prospects depend on an open global trading system, and it needs to be able to mitigate and manage the impacts of unexpected shocks and to ensure that the benefits are shared.

Notes

  • [6] This gap is for 2015 and is based on an average of all 35 OECD economies. Given data availability, comparisons of New Zealand's GDP per capita from the early 1970s are against a sub-set of OECD economies.
  • [7] The Small Advanced Economies Initiative (SAEI) is a collaboration between Denmark, Finland, Ireland, Israel, New Zealand, Singapore, and Switzerland. All of the countries are advanced economies by International Monetary Fund standards, and are of similar scale in terms of population with around 5 to 10 million inhabitants.
  • [8] OECD (2015) The future of productivity.
  • [9] Paul Conway (2016) Achieving New Zealand's productivity potential. New Zealand Productivity Commission Working Paper 2016/1.
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