Improved overall economic performance
Overview
The Government continues to place a high priority on policies designed to lift New Zealand’s economic performance and to improve living standards (Prime Minister’s 14 February 2006 Statement to Parliament). As the Government’s chief economic advisor, our role is to understand what drives growth in New Zealand’s real GDP per capita and advise the Government on how the wide range of policies it considers (including institutions, regulations, ownership, expenditure and revenue options) will affect economic growth.
In Growing an Innovative New Zealand 2002, the Government set out its economic objective to return New Zealand to the top half of the OECD in terms of real GDP per capita and maintain that standing. New Zealand’s current ranking is 20th out of the 30 OECD countries. An increase in economic growth since the early 1990s has arrested the earlier decline in real GDP per capita relative to the OECD. Growth in real GDP per capita increased to the point where it averaged 2.5% between 1993 and 2005. This growth rate exceeded the OECD average. To move into the top half of the OECD in terms of real GDP per capita will require sustained growth rates higher than the OECD average.
Growth in GDP per capita since the early 1990s came initially from growth in labour utilisation and more recently from labour productivity growth, which by the late 1990s had become the dominant source of growth in GDP per capita. The Treasury’s most recent forecasts, summarised in Table 1, incorporate the view that although labour productivity growth is expected to remain the dominant driver over the next five years, real GDP per capita growth is not expected to accelerate. The forecasts reflect a cyclical slowdown, although the Treasury view of trend real GDP growth remains at around 3% per annum.
Table 1 – New Zealand average annual economic growth rates: history and forecasts
| 1993 to 2005 | 2005 to 2010** | |
|---|---|---|
| GDP per capita growth* % | 2.5 | 1.7 |
| GDP growth* % | 3.7 | 2.6 |
| Labour productivity growth % – economy-wide | 1.3 | 1.4 |
| Labour utilisation growth % | 1.2 | 0.3 |
| Population growth % | 1.2 | 0.9 |
| Labour productivity growth % – measured sector*** | 2.4 | - |
Notes:
- * GDP per capita growth is the sum of the growth rates for labour productivity and labour utilisation (or GDP growth less population growth). GDP growth is the sum of the growth rates for labour productivity, labour utilisation and population.
- ** Average March year growth derived from the Treasury, 2006 Budget Economic and Fiscal Update (BEFU).
- *** A key difference between this and the economy-wide measure of labour productivity growth is that the “measured sector” excludes property and business services, Government administration and defence, education, health and community services, and personal and other services. The measured sector comprises around two-thirds of GDP.
Our outcome contribution
Improving economic performance has been the Treasury’s focus for a number of years. During 2005/06 our contributions to improving economic performance included:
- reporting on progress and critical issues for growth to help with setting strategic priorities
- developing a sound understanding of New Zealand firm productivity growth and the factors that influence firm productivity, including the role of taxation, product market regulation, firm finance and innovation
- advice on removing barriers to labour force participation, including improving education attainment, skills and labour mobility
- advice on improving regulations and institutions – particularly those related to property rights and resource management, infrastructure and external linkages.
In 2005/06, these contributions provided the basis for an agreed Treasury-wide game plan to prioritise and implement our growth policy work. Identifying and discussing with the Minister of Finance the critical issues for New Zealand growth is an important part of the prioritisation process. The growth programme involves collaborative work with other agencies, and we continue to keep internal and relevant external parties informed of the status of the various growth projects and to raise important issues.
