Holding On & Letting Go

Opportunities and challenges for New Zealand's economic performance

Speech delivered to the New Zealand Infrastructure Forum by Deputy Secretary Growth and Public Services at the Treasury, Cath Atkins, on 31 March 2015.

Good morning. On behalf of the Treasury I'd like to welcome you to the New Zealand Infrastructure Forum 2015.

Today continues a conversation that started in 2010, when we asked you to help us put together the first National Infrastructure Plan.

My job is to set the scene, and to make sure we keep our ultimate customers – everyday New Zealanders – firmly in view from the beginning.

Infrastructure is an enabler. But what's the future we want to create?

Today I want to share an overview of the economy we call Holding On & Letting Go. It's a snapshot of how we see the economy today, the kind of future New Zealanders have told us they want, and some key strategies we can use to get there. Infrastructure plays an important role in improving our economic performance and living standards. I'll elaborate on these connections and pose some questions as we go along.

Starting with the citizen - what New Zealanders value

Let's start with big picture. 

The world is changing in ways that have big implications for all of us. The increasing importance of China and India can be seen in this graph, which shows the projected growth for their share of the world economy.

Asia's meteoric rise and major technological change are among the defining features of the early 21st century. The international environment matters more than ever as recent decades have seen greater global flows of people, capital, trade, and ideas.

The landscape is changing at home too. At a regional level, the latest data show that all of New Zealand's regional economies are growing, but populations and industry mixes are changing over time. Dairy farming and irrigation-intensive agriculture is increasing in places like Canterbury and Southland, putting pressure on water resources in particular, but in general more people, especially young people, are living in cities. At the other end of the country, Auckland is continuing to lead New Zealand's population growth, putting more pressure on urban infrastructure.

In Holding On & Letting Go we look beyond short-term issues and think about how to lift New Zealand's medium-term economic performance and living standards in this changing environment.
We called this overview Holding On & Letting Go because in preparing this work, the words of this Glenn Colquhoun poem resonated with us:

The art of walking upright here
Is the art of using both feet.
One is for holding on.
One is for letting go.

(From "The trick of standing upright here" by Glenn Colquhoun)

They capture the idea of making progress by 'holding on' to the things New Zealanders value and that are our strengths, while at the same time 'stepping forward' towards new ideas, insights and solutions.

To find out what's important to New Zealanders we held workshops with people from business, iwi, non-government organisations and social services, established a cross-government panel, held seminars with a diverse range of guest speakers, and met with stakeholders all over New Zealand to hear what is important to them. These discussions were complemented with broader research and analysis into New Zealand's economic performance.

Our conversations with New Zealanders reinforced to us that people care about more than just material wellbeing – they care about jobs, education, health, family, friends and being part of a community. This means that economic performance can't be measured only by economic growth. It also challenges us to think more broadly about what constitutes good service from our infrastructure.

We took all of this and boiled it down to three main performance dimensions: prosperity, sustainability, and inclusiveness.

Let's run through New Zealand's performance in these areas.

How prosperous, sustainable and inclusive is New Zealand?

Prosperity is about higher incomes and jobs for New Zealanders so they have the opportunity to lead the lives they want to. New Zealanders' incomes per person began to slip from among the highest in the world around the mid-1950s and fell quite dramatically in the latter half of the 1970s and in the 1980s. Although New Zealand's per capita GDP growth has kept pace with other countries since the early 1990s, it still remains around 15% below the GDP average. One of the key factors behind this has been a relatively low level of productivity growth compared to other advanced economies.

Of course economic performance is not just about prosperity today; it's also about New Zealand's ability to succeed in the future. We are interested in the sustainability of growth. Things we think about here include the management of our natural resources, the forces driving growth, and the resilience of our economy. We also look at the stability of the macroeconomic environment.

Here's one indicator we look at in this area:

While you can see New Zealand has low public debt, we have one of the largest net negative international investment positions (foreign assets less liabilities) in the OECD. Combined with our small size, this makes us vulnerable to changes in market perceptions of the risks associated with New Zealand.

When we talk about inclusiveness, we're talking about whether we're enabling all New Zealanders to participate to their full potential in the economy and society. We have high rates of employment and our education and health systems work well for most. 

However, some New Zealanders experience a range of barriers to participation. 

For example, some groups are still under-represented in employment and too many children fail to reach their full educational potential. 

Although more than half of New Zealand children spend some time in a household receiving a benefit, the group most at risk of poor long-term outcomes is the six percent who are spending their whole childhood in benefit-dependent households.

When a person struggles to get ahead, it affects not just the lives of individual people, but the wellbeing of families, communities and the country as a whole.

Three strategic priorities

So how do we lift our performance? We have identified three strategic priorities. On the surface of it, the contribution of infrastructure to each of these areas is pretty clear. But there are some less obvious questions too. Let me run you through them.

Priority one: Connecting internationally

Our first strategic priority is to improve New Zealand's international connections. We see this as essential to lift productivity, economic growth and incomes for New Zealanders.

Most small, high productivity economies rely on international connections – by that we mean the flows of people, capital, trade and ideas with other countries. Infrastructure clearly plays a key role in facilitating those flows.

Our size and distance make it difficult to connect internationally – and imperative that we do. New Zealand has an almost unique combination of a small home market and being geographically distant from international markets. Studies suggest that distance to market may explain about half our economic gap with the better performing OECD countries.

The economic emergence of Asia has improved our economic location but Auckland is not much closer to cities like Beijing and Shanghai than cities in Europe are.

And while we continue growing our agricultural exports, we need to capitalise on some of the major trends in international trade.

For instance, how can we take advantage of the international growth in services as exports? What are we experts at, and how can we package and export that expertise as value-adding services to other parts of the world?

Jade Software is a good example. About 17 years ago Jade worked with Port Otago to develop software to replace paper-based track and trace systems. This opened up a global niche market for Jade, servicing mixed-cargo ports like New Zealand's. The company's terminal management software business is growing quickly – last year Jade completed 29 deals in Europe, Africa and the Middle East.

Apart from providing an example of how we can build our service exports, Jade shows we can be world leaders in the management of our infrastructure.

In addition to growing our service exports, and marketing home-grown innovation to the world, we need to make sure we're tapping into fresh thinking from other parts of the globe. Foreign direct investment, offshore investment by New Zealand firms, and migration, can help us to lift productivity across the economy, by keeping us connected to other innovators.

Questions for Infrastructure:

In this context, we need to look at the development and performance of our infrastructure in an increasingly sophisticated way. How efficiently it moves goods to market is a starting point. But is our infrastructure set up in a way that will help us to progressively change the nature of our trade over time? Is it helping us to attract the global flows of capital and people, information and ideas we need to lift productivity, and develop more knowledge-intensive industries, especially a bigger service export industry?

One of the systemic challenges we have identified is a need to increase our understanding of levels of service and future drivers of demand for infrastructure, to provide direction for the investments that will make us more prosperous. As you'll see in the evidence base for the infrastructure plan, having a sense of how the service levels of our infrastructure compare to those of other countries might be part of the answer. Are we providing a similar, or better, level of service for international firms and skilled workers who might consider investing or living here? Are we thinking of these groups as customers? Do we know what they expect? And have we got the right regulatory settings to support investment and consistent delivery of world class service?

Priority two: Moving towards exports and investment

Our second strategic priority is to move the overall focus of the economy towards exports and investment. This will help to ensure success is sustainable over time. Our focus here is on where the balance of activity in the economy lies – what's driving growth?

The short-term outlook for the New Zealand economy is good. But our growth is often driven to a large extent by domestic demand. Currently that includes housing construction in Auckland, and the Canterbury rebuild.
This can put upward pressure on interest rates and the exchange rate, which may discourage exports and investment, and the associated productivity benefits. It also takes up capital and people who might otherwise be working in export-oriented businesses.

To put this into context, our last economic expansion from 1998 to 2007 was also driven by strong domestic demand. As a consequence, New Zealand saw strong growth in non-tradeable GDP, while tradable GDP was broadly flat.

However, as you can see here, a sub-group of industries within the tradable sector has enjoyed relatively strong growth. These “booming” or resource-based tradable industries have been buoyed by strong international demand, particularly for our dairy products. Meanwhile,  other trade-exposed parts of the economy, such as non-food processing manufacturing and exports of services, have seen little growth.

So how do we achieve the desired shift to greater export and investment-driven growth? How can we learn from the last period of strong economic growth and the global financial crisis?

Fiscal policy is one part of the answer. Governments can choose to spend less as domestic demand picks up, to moderate the pace of growth. Other options, such as higher capital adequacy standards for banks, or the lending restrictions introduced by the Reserve Bank, can also help to support financial stability and smooth cyclical fluctuations, by putting a handbrake on lending to households.

But over the longer-term, we need to improve productivity so that we can sustain higher levels of domestic demand. For example, improving the productivity performance of the construction sector through improvements to consenting processes or industry practices could reduce the extent to which an expansion in housing diverts resources from the tradable sector.

Again, infrastructure has an important role to play. High quality infrastructure clearly improves productivity. But as the quantity and quality of our infrastructure improves, the benefits of further investment become more incremental. This has been the case for New Zealand's roading investment. Reflecting past under-investment, new projects had fairly high benefit-cost ratios over the past five or so years. But the average return from new projects has declined over time as the Government has significantly increased investment in roads.

Questions for Infrastructure:

The government is responsible for more than $116 billion of social infrastructure assets and is spending $6 to $7 billion per year on additional property, plant and equipment – a larger amount than is spent on operating our primary and secondary education systems each year.While continuing investment will be important, from the Treasury's point of view we need to weigh up new investments in infrastructure alongside other opportunities, and consider what's going to get the best return in terms of better outcomes for taxpayers.

Part of this includes finding ways to improve the productivity of existing assets through stronger asset and demand management processes. Like shifting electricity loads into non-peak periods to ease pressure on line networks, or finding ways to better distribute traffic across our urban roads and other forms of transport.

Public Private Partnerships might have a role to play here - for example, under the PPP for Wiri Prison, the operator is incentivised to reduce reoffending. Conversely, payments can be cut if specified targets for the effectiveness of rehabilitation and reintegration programmes are not achieved. The main goal is to achieve better social outcomes, and if we're successful we will also be getting better results from an infrastructure perspective.

Other parts of the equation include getting consistent data standards in place, and focusing spending on infrastructure that is resilient and fit for purpose in the long term.

Priority three: Helping all New Zealanders play their part

For the third strategic priority, inclusiveness, we see education and employment as the key to enabling New Zealanders to participate to their full potential in the economy and society. Quality public services have long-lasting impacts in this area.
Education in particular is critical.

People with higher levels of education are at lower risk of unemployment, tend to have higher incomes, and do better on a range of health and other outcomes.

New Zealand's educational system performs well overall relative to other OECD countries but there remain challenges at all levels.

As you can see here, young children from lower socioeconomic backgrounds are less likely to take part in early childhood education:

While the school system works well for many New Zealanders, more than one in five young people have not achieved NCEA 2 by the time they are 18 years old. We need to do better for māori in particular. There is a wide range of factors that can contribute to student under-achievement, but there is strong evidence that the quality of teaching is key to unlocking student potential.

On the employment side, New Zealand has had a relatively low unemployment rate since the mid-1990s. But some groups are under-represented in employment. These include those with no or low qualifications, Maori, the disabled and single parents. New Zealand has an unusually high proportion of children in single parent households and low employment rates for single mothers. In many OECD countries single mothers have similar or higher employment rates than partnered mothers, but in New Zealand it's significantly lower.

These employment patterns matter because paid work is an important route out of poverty and low incomes.

The state sector has a key role to play in this area. Continued improvements in social services, like health and housing, matter for economic and social participation – and really matter for living standards.

But we also need to think about the relationships between what we might call “social” infrastructure, which is generally provided by the state – like houses, schools and hospitals – and what we tend to think of as “economic” infrastructure, like roads, energy, telecommunications and water networks.

The Auckland City Mission's recent Families 100 study provides a good example.

The report notes that one of the challenges for low-income families when looking for suitable housing is the rising cost of rent in areas convenient to work and public transport. This can force people to move into suburbs far from work or transport. For some, the restricted access to services and transport significantly contributes to social isolation. For others, it means they have to own a car, which comes at a great expense. For those who just can't afford a car, it imposes other costs. One participant in the Families 100 study reported that she has to walk 10 kilometres to the nearest train station just to get to work, returning home the same way every day, leaving her only an hour to spend with her family every night.

Questions for Infrastructure:

From an infrastructure perspective, issues like this highlight the importance of collaborative decision-making. Are we having the right discussions with communities when making investment decisions? Are we considering the social effects of infrastructure investment in a sophisticated way?

It's especially important that we discuss these questions at a regional level, recognising that different parts of the country have different challenges, interests and priorities. A good result in Gisborne looks different to a good result in Invercargill. How do we support effective collaboration at a regional level and connect this back to central government?  Having a better understanding of what stakeholders and communities want, and where the priorities lie, will also help to give purchasers of infrastructure confidence they are getting value for money, and that their investment will match the service aspirations of users.

Conclusion

So that was a quick summary of what the Treasury see as the key strategic issues for prosperous, sustainable and inclusive economic performance in New Zealand.

We recognise that these challenges are not necessarily new, and that they are not short term. We also recognise the considerable progress made, both past and present, to address these challenges.

Our infrastructure underpins a prosperous and inclusive New Zealand with high quality state services and a healthy and sustainable natural environment.  But there are significant challenges ahead for delivering the right mix of infrastructure and we need to be more innovative in how we tackle those challenges. 

To recap some of the questions I've raised:

In what ways is infrastructure important to different people?
Do we understand what good performance means for different types of customers?
Are we focusing enough on finding new ways to get productivity gains from existing infrastructure through better asset management?
How do we collaborate in new ways across the public and private sector to make better decisions and drive real change?
And perhaps most importantly, are we proactively developing and managing our infrastructure in a way that supports the shifts we think need to take place in the economy?

We have some ideas, but we don't have all of the answers. That's why we're here today. We're looking forward to discussing the future of infrastructure in New Zealand over the next two days.