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Economic Growth: A Collaborative Challenge

Delivered by John Whitehead, Secretary to the Treasury, to the Economic Development Committee of Auckland City Council on 2 November 2005.

Speech

Good afternoon.

Firstly I’d like to pass on my appreciation to the Committee for the invitation to speak today. One of the reasons for that appreciation is it gives me the opportunity not only to talk to you, but to hear from you as well. So if you pick up on anything you’d like to raise, I hope you’ll feel free to discuss it at the end of the formal part of the talk.

Overview

My aim today is to give you some context for economic development from the Treasury’s perspective, including collaboration between central and local government, and our efforts to lift economic growth.

My focus on economic growth is, I hope, not a surprise to you. As the Government’s lead economic and financial advisor, it’s obviously a subject that the Treasury spends a great deal of time thinking about.

I’ll start off by talking very briefly about the Treasury’s role.

Then I will talk about New Zealand’s recent economic growth performance, and what this might mean for us going forward. I will also outline the results of recent research we have done specifically into Auckland’s economic performance.

Then I’d like to turn to one area which I think can have a significant impact on our efforts to lift Auckland’s economic performance, and that is collaboration between central and local government. There are many opportunities for collaboration, including urban growth strategies, infrastructure provision, environmental standards and so on. Today I intend to touch on two such opportunities of importance to Auckland – transport and regional economic development.

Finally, I will raise what I think are some important questions for Auckland City Council to think about in your efforts to lift Auckland’s economic growth.

The key thought I would like to leave with you is this: Realising the potential pay-off from central and local government collaboration will require us to be realistic about what collaboration is, when we use it and how we use it.

The Treasury’s Role

The Treasury is the government’s lead advisor on economic and financial policy. This has several dimensions.

At one level we manage the public purse, which means we not only prepare budgets and forecasts, but we give Ministers and Cabinet advice about how to get the most value for money from taxes and other revenue. At this level we are generally “second opinion advisors”, commenting on policy and spending proposals developed by a lead department.

Let me touch briefly on the Budget, which demands much of our time each year from around November through to Budget day in May or June. The challenge is always to bring together the government’s “top down” strategies and priorities, “bottom up” spending proposals from departments, and the government’s fiscal policy – basically its expenditure and debt tracks. Treasury’s role is not just to keep track of the numbers, but to make sure that Ministers can make well-informed decisions. A key element of this is that we don’t generally like spending proposals that arise outside the budget process – in principle every spending proposal should be tested against alternatives, and the budget is central government’s process for doing this.

At another level, we give Ministers and Cabinet strategic advice about the future shape and direction of the economy. This includes where we see the greatest opportunities for economic growth over the long term, and where we think there are risks. Auckland’s growth potential compared to that of, say, the primary sector falls into this category.

We also have a role, along with the State Services Commission and Department of Prime Minister and Cabinet, in seeing that the state sector broadly operates in an effective, efficient and innovative manner. This includes prompting departments to talk to each other when they need to, at both policy and service delivery levels.

Overall, then, our role is quite broad and takes us well beyond signing cheques or saying “no” (and occasionally “yes”) to spending proposals!

New Zealand’s Recent Growth Performance

As most of you are probably aware, the Treasury recently released its view of how we think the economy is going, and what’s likely to happen in future, in the Pre-election Economic and Fiscal Update.

And looking back over the past six years, it’s a pretty good picture.

Slide 1: GDP growth
Slide 1: GDP growth

The New Zealand economy really took off after the 1997 to 1998 recession. Since 1999, annual growth has averaged 3.9 per cent, well above the OECD average of 2.5 per cent. And in the year to December 2004 alone, the economy grew by 4.4 per cent. This strong performance has occurred despite some challenging international and domestic events, including the burst of the technology bubble in 2000, heightened geopolitical uncertainties following the events of September 11, dry weather conditions and the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003, and oil prices reaching record levels in nominal terms.

Our recent growth performance can be attributed to past structural reforms which have transformed the New Zealand economy into one that is more flexible and better able to absorb adverse shocks, as well as take advantage of favourable ones. For example, we have benefited from, and continue to benefit from, strong increases in world prices for our agricultural exports. Until recently we’ve had a very strong period of net migration which has helped push along some parts of the economy, most obviously the housing market. In addition, a strong labour market and increased wealth have underpinned increasing consumer confidence.

Slide 2: Labour Force Participation and Unemployment
Slide 2: Labour Force Participation and Unemployment

Our unemployment rate of 3.7 per cent is now amongst the lowest in the OECD. And labour force participation – that is, the number of people either in work or actively seeking work – has also seen a significant increase.

I don’t think anyone is complaining about our recent growth performance. But there are some challenges that we face when we go through a strong, sustained period of growth like the one we’ve seen.

What tends to happen is that we start running into what we at the Treasury like to call “supply-side constraints”, which simply means that economic growth creates further demand for workers and natural resources.

In the most recent Quarterly Survey of Business Opinion, for example, widespread difficulty finding skilled and unskilled labour remains, and capacity utilisation by manufacturers and builders is still at a high level historically. One fifth of respondents reported that labour shortages are the single factor most limiting their ability to increase turnover.

The impacts of this in Auckland are fairly obvious. They include soaring house prices, higher inflation and interest rates, worker and skill shortages and wage pressures, and increasing pressure on local infrastructure like roads and our electricity network.

These are all challenges that both national and local government has been grappling with at different levels and in different ways.

That’s the picture looking backward. While there are important lessons to be learned from it, it is more important to look forward. And we should probably separate the short-term outlook from the longer-term picture.

In the near future, we’re not predicting that this extremely strong growth will continue at current levels.

Slide 3: Forecast GDP growth
Slide 3: Forecast GDP growth

In fact, growth actually slowed towards the end of 2004 and we’re forecasting it will slow further to 2.2 per cent in the year to March 2006 and 2.6 per cent in March 2007. We then think it’s going to rebound to 3.5 per cent in the March 2008 year.

That projected slower growth is due to a number of factors, including higher interest and exchange rates, lower net migration to New Zealand, slower growth in many of our trading partners, and a forecast decline in our terms of trade. We are also forecasting that unemployment will rise slightly as the economy slows over the next few years.

While those projected growth rates are obviously nothing like what we’ve experienced recently, we should take heart from the fact that there was a time, not so long ago, when growth of 2.5 per cent would have been seen as a real achievement, especially near the bottom of the cycle.

Slide 4: OECD Per Capita Income
Slide 4: OECD Per Capita Income

And even at the bottom of the cycle, we should still be more or less matching the OECD average. That’s heartening when you think of our desire to get back into the top half of the OECD – and as this chart shows, we still have some way to go to achieve that goal.

Which brings me to the longer-term outlook.

Our strong economic performance in recent times has, to a large extent, been the product of increased labour force participation and employment. While there is still some potential to extract further economic growth in this way, in future there will be a number of pressures working against us such as changing demographics, the impact of technology on health spending and growing competition from overseas.

And long-term, if we want to continue moving New Zealand up the OECD growth ladder, we’ll need to perform better than the OECD average. How can we achieve this?

The answer is threefold – productivity, productivity and productivity.

Slide 5: Labour Productivity
Slide 5: Labour Productivity

This graph provides a comparison of how our productivity performance (highlighted in grey) rates against other members of the OECD. It is a pretty clear picture.

Productivity is about making better use of technology and the resources you currently have, and getting more out of them. The private sector clearly has a critical role to play in increasing labour productivity, but central and local government will need to contribute an Oscar-winning support performance as well.

So while some of the national and regional-level pressure we’ve seen may ease back slightly in the short-term, I think for the foreseeable future we’re still going to be in a world where we face the particular challenges brought about by a growing economy, at a time when we also need to maintain the social conditions that support growth.

Auckland’s Performance

So, how has Auckland been performing against this backdrop? You will all have heard reports over recent years that Auckland’s economic growth performance has been only average at best. Yet there is a substantial body of theory and international evidence which tells us that large cities are important sources of innovation and productivity growth. So what is happening in Auckland?

As you know, New Zealand currently has no official regional GDP statistics or measures of regional labour productivity. In the absence of this data, researchers have been forced to develop alternatives to measure economic performance at the regional level – all of which have acknowledged shortcomings.

Because of these shortcomings and the unexpected claim of Auckland’s below-par performance, the Treasury commissioned its own research using real wage and income trends, comparing Auckland to Wellington, Christchurch, a composite of medium-sized cities, and a composite of rural areas and small centres. The basic idea is that if real wages increase significantly over an extended period of time, it is likely that productivity will also have increased in order to pay those higher wages.

Our findings in contrast to those of other researchers suggest that productivity levels are generally higher in Auckland than elsewhere and have also been growing faster. For example, during 1997 to 2004, real wage growth for wage and salary workers was 13.1 per cent in Auckland, compared to 0.7 per cent in Wellington and 6.1 per cent in Christchurch.

We also looked at where in the wage distribution this growth was occurring – was it at the high income or low income end, or was it in the middle? We found that in Auckland, it is clearly wages at the top end of the distribution that have been growing fastest. For example, real wages of the top 10% of workers in Auckland increased by $3.45 to $5.72 an hour over the period, compared to the “median” worker at between zero and 98 cents per hour. This is what you would expect of a large city that fosters and uses skills to good advantage – that is, a city with above average labour productivity, not below.

I emphasise that real wage growth is an imperfect measure of labour productivity. Nevertheless, such a stark difference between Auckland and the rest of the country casts quite a lot of doubt over claims that Auckland is under-performing.

That aside, the important question is whether Auckland is performing as well as it can. The answer to this question is almost certainly “no”, because we can always do better. But how?

Looking Ahead: Two Pressure Points for Collaboration Between Central and Local Government

I would like to touch on just two areas where I think engagement between central and local government will become increasingly important over the next few years if we are to further improve economic performance. And the first of these areas is transport.

Slide 6: Land Transport Expenditure
Slide 6: Land Transport Expenditure

Transport

You will be aware that the government has made very large increases in land transport funding recently, both in Auckland and nationally. The challenge will be to allocate this increase so that it actually delivers better transport infrastructure and services, and not just increased prices for contractors. Looking forward, this means that any further expenditure increase in the short term is likely to be of little extra value.

Slide 7: Auckland Transport Funding
Slide 7: Auckland Transport Funding

Turning to Auckland specifically, the picture is similar. A ll parties – central government, the ARC and territorial authorities – have significantly increased their planned transport expenditure. We know that there is a longer-term question of “Is this enough?”, particularly regarding passenger rail. But my point is that in the short term, funding will not be the key issue – getting the best value from the funding available will be.

Doing this is not an exclusively regional challenge – central government also needs to engage effectively. Several things are happening to help with this, including the opening of the Government Economic and Urban Development Office in Auckland, and the establishment of a high-level Deputy Secretaries group in Wellington.

One example of where I think our engagement needs to be more effective is the sometimes difficult ‘overlap’ between local urban planning and national transport planning.

For central government, this engagement is a real challenge, with transport located in the Ministry of Transport and a number of Crown entities, a rail team located in the Treasury, and urban affairs located in the Ministry for the Environment. In Auckland, local players include the Regional Growth Forum, Regional Land Transport Committee, the Auckland Regional Transport Authority and all seven territorial authorities. Achieving an integrated transport system that supports urban plans (rather than undermines them) actually means going well beyond central and regional co-ordination. We need to actually collaborate: simply sharing information, or taking others’ plans into account, will not be sufficient.

Ultimately we must move our respective organisations and those we influence towards a more genuinely collaborative planning environment. This will require cultural change which, as we all know, doesn’t happen overnight. It will require leadership from all of us, including the Auckland City Council, if we are to succeed. In this context, I commend your recent efforts towards taking a more regional view of infrastructure through the Memorandum of Understanding you have signed with Waitakere City.

Regional Economic Development

The second area I would like to touch on, which obviously has direct relevance to the business of this Committee, is regional economic development.

If you think about the planning environment which supports regional economic development, it is complex to say the least.

First of all, thinking about active programmes, there is a very large number of sub-national economic development strategies. The 2003 survey by Deloittes suggested that around 70 per cent of all local and regional authorities have one.

Then there’s the Government’s Regional Partnerships Programme, overseen by the Ministry for Economic Development and administered by NZ Trade and Enterprise in 26 regions around the country.

Alongside these is a raft of other local plans: regional growth strategies, regional transport strategies, business location strategies, regional policy statements, district plans – you know these far better than I do.

And, of course, there is national regulation and policies. Collectively, the Growth and Innovation Framework, the New Zealand Transport Strategy, National Policy Statements and, not least of all, the Resource Management Act have a huge impact on economic development locally.

This begs an important question: Is all this planning and strategy-making worth it? Or do we just end up with strategy clutter, having wasted time, effort and ratepayer resources? Put another way: Are we best to focus simply on reducing regulatory and other barriers to individuals and firms undertaking economic activity? Or is there something more that we as central and local government can do to add value to the efforts firms are making?

While we still have some way to go, I think the general answer to the last question is a qualified “yes”. Recent OECD research suggests there is a robust trend internationally in the economic development field towards the establishment of “platforms” at the regional level to engage with a range of regional economic actors, including industry. A key task of such platforms is to design, and sometimes implement, strategies for sustainable economic development. So, internationally, we are seeing an emerging consensus that regional economic development strategies can add value.

But the “yes” does need to be qualified. Historically, OECD experience with regional development has been disappointing, and holds a number of lessons for us. First, the “think big” lesson – avoid heavy investment in large sunk assets. Second, directly emulating overseas policies often doesn’t work. Third, don’t get into long-term subsides that prevent adjustment to economic change. And finally, solutions imposed by central government have a high probability of failure – so we’re not about to tell you what projects you should be doing,

A key focus of the early part of the Government’s Regional Partnership Programme has been on establishing major regional initiatives. While in some cases this has contributed to building local capacity and partnerships, in other cases the funding has been the key goal at the expense of regional development. In my view, the focus needs to be firmly on assisting regions to develop regional-level institutions which contribute to economic development.

In Auckland, I think we are seeing the beginnings of this in the Auckland Regional Economic Development Strategy. The challenge as I see it is to get this strategy to a point where it actually makes a difference on the ground. This will require the engagement and support of a broad range of stakeholders. It will also require a common understanding about the roles and responsibilities that are appropriate at local, regional and national levels. And it will require sensible integration of the strategy with other regional plans such as the Growth Strategy, as well as councils’ Long Term Council Community Plans. Auckland City Council, as the biggest territorial authority in the region, clearly has an important role to play in all these areas.

But let’s come back to the theme of collaboration between central and local government. One of the lessons we as central government have learned over the last three years is that collaboration is a resource-hungry beast. It can pay off – the Joint Officials Group which worked on the Auckland transport package is an example – but it is extremely demanding of skills, time and often money. We simply cannot collaborate over everything.

So we need to carefully identify where collaboration can add real value and why. We also need to be quite clear about how central and local government can work together to define objectives, shape policies and develop joint services. In my view, economic development and transport are two areas where collaborative approaches may be worthwhile.

Challenges: Lifting the Bar

That leads me to some issues I think we need to keep in mind when we’re talking about collaboration between central and local government.

What is Collaboration?

The first issue is: What do we actually mean by collaboration? And how do we distinguish it from other things that might look a bit like collaboration but aren’t? Firstly, let me say what collaboration isn’t.

It isn’t a synonym for consultation – and by this I mean proper consultation, where views are genuinely sought from interested groups and genuinely taken into account in reaching decisions.

It also isn’t a synonym for communication – where we seek to inform each other about decisions made, their implications, their rationale, their aims and objectives, and so forth.

It also isn’t a negotiation – where each party is seeking some form of commitment from the other.

It isn’t even co-ordination – where we typically look at making sure that our respective services or policies don’t conflict with or duplicate each other, or for that matter have large gaps.

And finally, it isn’t advocacy – where one party is seeking to raise and highlight an issue or a solution with another who is at least thought to have the means to address it.

The danger is that we start to use “collaboration” loosely to mean any or all of these things, and arrive at the table with different expectations.

What I think the examples of transport and regional economic development illustrate is that “collaboration” in these contexts refers to joint strategic planning, generally leading to an alignment of policies or a coordinated delivery of services.

It is entered into with a commitment from both sides to “own” the outcome.

The focus is on agreeing what the problem is, what the objectives are, what the desired outcome is and so forth, based on an acceptance that all parties have an important stake in an issue, and are more or less equally well-placed to contribute to its solution.

Prioritising our Effort

My second issue relates to the fact that we simply can’t collaborate in all of the areas where we have interests in common. We will need to prioritise the areas in which central and local government collaborate.

The Local Government Act 2002 ushered in a fundamentally different role for local government. Now, not only can you be interested in outcomes in your communities across the areas of economic, social, environmental and cultural wellbeing. Under the Act, you must be interested in them.

It seems to me this opens up enormous potential for collaborative engagement between central and local government. So much so that there is a risk of us drowning in it, to the detriment of everything we do.

That means we need to prioritise our collaborative effort. And, to do this, we need to be very aware of where collaboration is most likely to add the most value.

In doing this, I think we also need to acknowledge that there are areas where, in practice, we exercise separate roles and responsibilities. I’m talking about areas where we need to focus our respective efforts differently to make sure they add the most value.

Keep Funding Separate

My final issue is how we avoid muddling collaboration with something quite different: requests for funding.

I know that you are on the receiving end of demands for funding, just as we are in central government. Of course, funding is necessarily an independent decision, rather than a joint one. Both central and local government have their respective accountabilities for the funds we are charged with administering.

How does this relate to collaboration? In central government, I think it’s fair to say that sometimes, a request to collaborate is really a request for funding, just dressed up in new clothes. As a result, I think we have both developed something of an aversion to engaging with others, to avoid the thorny question of funding. And we may be missing out or not focussing on the right questions because of this.

The solution, it seems to me, is to keep the discussion about who will commit to funding what separate from the collaborative project.

The Auckland transport package is a good example. It was preceded by genuinely collaborative work to define transport priorities and objectives, identify options and estimate what each option would cost. All well and good. This even included scenarios of how much the parties might contribute, how much debt would be incurred and what the shortfall might be. Still good.

But the discussion stopped short of a commitment to provide funding. It was clear at the outset that this was not within the scope of the work, and that decisions about funding would be taken separately once the collaborative work had given us a clear picture about priorities and options.

I’m not trying to pretend that funding doesn’t matter. It does. The reality is that many of the projects on which we collaborate will require funding if they are to proceed. My point is that in working collaboratively, we should recognise that reality, park it, go ahead and plan collaboratively, estimate costs collaboratively, and develop funding scenarios to ensure that projects are realistic – all in the full knowledge that actual decisions about funding will generally take place in some other forum.

If we don’t do so, we risk being suspicious, if not outright gun-shy, at the outset, which potentially will cloud our judgement about the value of collaborating. There are other pitfalls but this is one, I think, that we can quite easily knock on the head.

Conclusion

My aim today was to set out what I see as some of the opportunities and challenges around collaboration in the broader picture of a growing economy. And I’ve done that by focussing in particular on collaboration between central and local government as it relates to efforts to lift economic growth.

I haven’t attempted to discuss issues around collaboration between local authorities, which is actually a pre-requisite for collaboration with central government, or for that matter between central government agencies – both of which warrant at least another half-hour each.

Underlying these thoughts, my sense is that not only is the potential pay-off from collaboration between central and local government greater than many might suspect, it will become an essential part of business-as-usual in some areas.

With that comes a note of caution – that we use it sparingly for the right issues in the right contexts, being realistic about what it can, and cannot, achieve. In short, realising the potentially large pay-off from collaboration will require us to be realistic about what collaboration is, when we use it and how we use it.

I would like to close with an illustration which is particularly relevant to this committee – the question of what facilities Auckland would need in order to become a city of truly world-class standing. You will be aware of various ideas that are currently being promoted by different groups, including a national convention centre, a national sports stadium, an orchestra, major international events, and even an underground rail system. All have their merits, and all are wider than Auckland City Council’s interest. How is this to move forward?

The answer, it seems to me, lies in what we have been discussing.

First, how does this idea fit within the strategies that bear on economic development in the region, or is it in fact a new idea? If it is new, this may be a signal that the relevant strategy needs to be revisited. Or else it could indicate that it is not in fact a high priority for the region.

Secondly, if it is strategically important, is it essentially a local, regional or national matter, or is it genuinely a matter for collaborative effort?

Finally, if it is collaborative, who needs to be engaged – not as a funder, but as an “owner” of the issue and its solution – and why exactly? From the outside, several organisations appear to me to be prominent advocates in this area – the regional council, the Committee for Auckland, the Growth and Innovation Advisory Board and Auckland City Council itself. Is this the optimal way to advance the issue, or would a collaborative approach work better?

These are all open questions. My point is that Auckland City alone is unlikely to be in a position to answer them. It may be worth setting up a collaborative project in this area, and this Committee may wish to consider helping to bring together the right people around the table. In my view, such a commitment should not be made lightly, but should be based on a clear understanding of why a collaborative approach is needed in this case, and a realistic estimate of the pay-off compared to alternatives.

I wish you every success in the important work you are doing and would welcome any questions or comments.

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