Outcome: Improved Economic Performance

What are we seeking to achieve?

Relative Levels of GDP Per Capita, 1975 to 2009 (OECD Average=100)

Source: OECD

New Zealand's average gross domestic product (GDP) per capita growth for the last six decades has been poorer than all other Organisation for Economic Co-operation and Development (OECD) countries. The Treasury looks to growth in GDP per capita as the primary indicator of our economic performance.New Zealand's GDP per capita ranked third among OECD countries in 1950 and 22nd in 2009 (of 34 OECD member countries). Closing the gap with Australia within 15 years will require average GDP per capita growth of above 4%, more than twice New Zealand's average rate over the last two decades. For a country of New Zealand's size, much of this growth will need to be driven by strong export performance. For this reason the Treasury also closely considers growth in tradable sector output compared to growth in the non-tradable sector to determine if we are rebalancing to a higher growth economy.

New Zealand's poor performance reflects its labour productivity, associated with relatively low levels of both capital intensity and multi-factor productivity. To reverse this decline requires policy change with the potential to lift productivity across the economy and support a substantial lift in export performance. This will require:

First, continued restraint in government spending to support a reversal of the trend of non-tradable output growth at the expense of tradable sector output. Second, the business environment must provide confidence and certainty to facilitate ongoing foreign and domestic investment, including in effectively utilising our natural capital. Third, tax and other settings must support capital deepening. And finally, to attain average growth rates above 4% requires policy settings that supportstrongincentives for entrepreneurship and innovation, where well-performing firms seek out and develop profitable opportunities and poor-performing firms exit.

Rapid growth in GDP per capita would expose challenges in skill development, which New Zealand will need to prepare to meet. While labour force participation is high in New Zealand, improvements here are still possible which could make a meaningful contribution to sustaining higher growth.

What will we do to achieve this outcome?

All of the Treasury's intermediate outcomes contribute to the improved Economic Performance outcome to varying degrees. Three key structural policy-related intermediate outcomes make important direct contributions to this outcome:

Intermediate outcome: Improved business environment

New Zealand's business environment needs to strongly outperform other countries to overcome the disadvantages of size and distance. The Treasury's work aims to influence the quality of New Zealand's tax, regulatory, infrastructure and other policy settings as demonstrated by international rankings of these. Overall there has been relative slippage in relevant policy settings over recent years reflecting some deterioration in New Zealand and improvements elsewhere.

On key policy settings that influence the business environment, the Treasury will provide advice, develop options for Government and support their leadership and decision-making on advice received from the public sector more broadly. The Treasury will particularly work with the Ministry of Economic Development (MED), with a focus on competition settings, and to develop a well-functioning innovation system, with Inland Revenue (IRD) to jointly develop tax policy advice, and with many others.

Non-residential Investment Per Worker (OECD=100)

Source: OECD

Treasury work focuses on regulatory and tax policy settings, because of their pervasive effects on incentives to compete, invest and take risks. As a key indicator the Treasury tracks whether business investment and business research and development (R&D) as a percentage of GDP are lifting to the OECD mean.

The Treasury will promote regulatory reform by providing policy advice on key regulatory sectors that matter for growth and advice on how to improve the regulatory management system. We will support Ministers to improve the flow of regulation through our role in assessing major Regulatory Impact Assessments, and building agency capability. We will also support agencies in their assessments of the stock of regulation based on principles of best practice regulation.

The Treasury's tax policy work will evaluate and present the case for further improvement to the capital taxation regime to address the impact on savings and investment decisions of current tax settings, as raised by the Savings Working Group.

We will also focus on returning economic growth to the Canterbury region. The Treasury will help Ministers frame the broad approach to economic recovery. Secondly, the Treasury will monitor and provide advice on the implications of recovery in Canterbury on the Government's fiscal position. Finally, as a Central Agency we have a role in ensuring that the necessary cross-government co-ordination is occurring, there are appropriate governance and institutional arrangements in place and in monitoring the capability of agencies to respond to this challenge.

We also work on infrastructure because of its contributions both to economic growth and to quality of life. Our work will give effect to the second edition of the National Infrastructure Plan, which aims to give businesses confidence that New Zealand's infrastructure environment is responsive and supports the productive and tradable sector.

We work on issues critical to natural resources because of the significant impact of primary production on the economy. The Treasury advice will assist government to provide certainty regarding constraints to primary production on topics such as water and will review the Resource Management Act 1991. We will also provide advice on New Zealand's international climate change negotiating position to achieve emissions reductions at least economic cost.

Refer to Measures section below to see how we assess the Treasury's contribution.

Intermediate outcome: New Zealand is more integrated and connected into the global economy

New Zealand's small population and extreme remoteness make it more difficult to realise the benefits of economies of scale, agglomeration and competition. In the absence of large internal markets, international integration and connection into the global economy allows New Zealand to access resources that facilitate high productivity, to specialise in areas of comparative advantage and benefit from economies of scale, to access international knowledge and adapt it to domestic circumstances, and to stimulate competition that spurs innovation and moves resources to areas of comparative advantage. As indicators,the Treasurytracks New Zealand's export share of world trade, and flows of foreign and overseas direct investment (FDI & ODI) as a percentage of GDP.

Owing to the growing importance of Asia-Pacific in the global economy, there are potentially large economic gains to be made from being part of economic integration that develops in the region. There are a number of possible vehicles for economic integration within the region - for example, the East Asian Summit, APEC and the Trans Pacific Partnership - though it is unclear which will eventually be successful. Domestic policy-making in New Zealand and by countries in the region has a pervasive impact on the flows of trade, investment, people and ideas. Similarly, policy making by international institutions - for example, the international financial institutions[1], the G20 and climate change fora - have a significant impact on the flows and New Zealand's policy choices. We will develop and maintain effective international relationships so that the Treasury and the Government can more widely influence policy-making by other countries and by international institutions so that regional integration and international fora effectively include our interests.

In the short term we will rely on an ongoing research programme to clarify how at-the-border and behind-the-border policy can improve the flow of trade, people, investment and ideas between New Zealand and the global economy. We also recognise that public attitudes - for example, toward free trade and foreign investment - have an impact on decision-making. Through our advice and external engagement we aim to encourage a debate with greater recognition of the benefits of openness and the costs of New Zealand's relatively limited connections to the global economy.

We will also continue to provide NZECO products and services to increase exports that otherwise would not have occurred owing to constrained access to trade finance or appropriate risk mitigation techniques.

In addition to the priorities identified above, we will also provide second-opinion policy advice on improving the effectiveness and efficiency of New Zealand's offshore presence.

Refer to Measures section below to see how we assess the Treasury's contribution.

Intermediate outcome: Enhanced human capital and labour supply

Skills influence productivity and growth directly, through their impact on labour productivity and labour utilisation; and indirectly, through their effect on other drivers of growth, such as innovation and international connectedness. Overall, New Zealand performs relatively well in terms of both the utilisation and skill level of its labour force; however, there are some areas of underperformance. Population ageing and the “skill-bias” of technological change, present increasing challenges, as would the demands of a strongly growing economy.

Government's agenda includes integration of the Youth Guarantee and Youth Pipeline, aimed at better identification of at-risk young people; better support and pathways into post-school education and training or career; and the provision of high-quality education and training programmes leading to meaningful qualifications. The Government's Tertiary Education Strategy, which has seven objectives, is also highly relevant. The integration of this Strategy with Youth Guarantee and Youth Pipeline can deliver asystem that provides the right incentives to transition to tertiary study, to complete that study quickly and to move to the labour force.

Government is pursuing a broad and interconnected reform agenda on a complex set of topics relevant to youth achievement, whichthe Treasury will focus on supporting. The Treasury can add to the advice of other agencies by helping senior Ministers and Cabinet to weigh fiscal, economic and social objectives of proposals and helping agencies themselves craft fit-for-purpose advice. Where a broad range of advice is produced by agencies, a coordinated and coherent approach is not guaranteed, and the Treasury can support Government to achieve this objective. The Treasury will work with the Ministries of Education and Social Development to ensure that proposals are consistent, coherent, evidence-based and cost-effective, consistent with the interests of the Minister of Finance. Our support can facilitate effective leadership and decision-making by Government and help it achieve its educational objectives.

To evaluate youth achievement in New Zealand, the Treasury tracks achievement of NCEA Level 2 by young people (which should be near-universal). Conversely, we track the number of young people not in education, training or employment. The Treasury also tracks the number of young people (aged under 25) achieving qualifications at Level 4 and above, particularly degrees.

Realising these and other priorities will require further refinement and reshaping of tertiary education funding and policy settings. Our advice in this area will have a particular emphasis on improving flexibility, performance, price and value for money. We will also undertake research into the reasons for New Zealand's relatively low private returns to tertiary education.

The Government also makes a significant fiscal contribution to this sector through education, and through welfare settings (which influence labour force participation, thus economic performance). These also contribute to a High-Performing State Sector that Supports International Competitiveness, discussed on page 20.

Refer to Measures section below to see how we assess the Treasury's contribution.