Flashing Lights on the Dashboard

The Haps

The Iran conflict rolls on with not much good news. The regime is as entrenched as ever and has managed to salt away enough missiles and drones to create havoc for the foreseeable future. That leaves New Zealanders trying to keep supply up, so it is not necessary for Government to step in and ration supply down.

For now supply numbers are staying up, the market is working, even if the prices are brutal. The crunch will come in late April, when the last crude to escape the Arabian Gulf has filtered through Asian refineries to New Zealand.

At that point we will be hustling in a world without the twenty per cent of world crude that comes through the Strait, including their heavy sour crude so good for making diesel. The Government is preparing for that possibility in the hope none of its plans will be needed. Much better to have a plan you never use than jump to the podium with no plan at all.

Flashing Lights on the Dashboard

We don’t want to start the week on a down note, but nor do we want to ignore events of the past fortnight that point where our future is going. In the past two weeks:

• Fitch Ratings, one of New York’s big three ratings agencies, downgraded New Zealand’s credit rating outlook from stable to negative. The rating itself has not changed from AA+, but nor have we seen an outlook downgrade for sixteen years. Fitch cited New Zealand’s lack of ‘fiscal consolidation’ (Government keeps spending too much money) as the reason, worrying about the New Zealand Government’s ability to repay its debt. If New Zealand is seen as a risk, interest rates go up for everyone here.

• Paul Conway, the Reserve Bank’s Chief Economist, gave a speech about productivity on Wednesday. The gist was that the Reserve Bank can fight inflation, but that doesn’t solve the cost of living. If they hold prices (roughly) steady, then wages still have to grow before people can afford more stuff. He points out that wages are driven by productivity, which has been almost flat since 2010. Other than houses changing hands, almost nobody has actually made any money. None of this is complicated or controversial, but how often is it pointed out?

• Struan Little, an economist at the Treasury, made a similar argument to Conway, but about the Government’s budget balance. Basically, the Government is running about a $9 billion underlying deficit, when it needs to save $4 billion a year for earthquakes, pandemics, financial crises, and perhaps fuel shortages that come along at least once a decade. He also says the situation will get worse. Government spending will rise to 45 per cent of the economy by mid-century, taxes won’t keep up with that (we hope!), but Government debt will rise to 200 per cent of GDP. That will not happen, but what choices will we make to avoid it?

We know, they’re financiers and bureaucrats, the kind of people who got us into this mess, but they’re not always wrong. We don’t think they’re wrong this time. David Seymour’s State of the Nation speech said productivity growth and fiscal deficits were two warning lights flashing on the country’s dashboard.

We are going into one of those periods when milk and honey (and diesel, for now) are in short supply. Instead, New Zealand needs a metaphor like, it’s time to fish or cut bait. We’ve tried easy popular solutions, flag changes, kindness, and recreating the 1960s, we now face one of those challenges where the solutions are not so easy.

The first thing to do in any tight spot is put a name on the problems. Make a list and work through them. Then the overwhelming looks doable. The three documents above do some of this.

The Government is spending too much, because it is too big and too complex. If we want to avoid losing our credit rating and paying higher interest rates, then we’ve got to get on top of spending. It can’t be possible that New Zealand needs more departments and Ministers than any similar-sized country. Until the Government has a smaller group of Ministers, each responsible for getting measurable results from their budgets, costs will keep mushrooming while results wither.

There isn’t enough productivity because too much time is spent on bureaucracy. We (the Western world) have created endless stupid rules, rules that work against the goals they’re supposed to support.

For one example, complicated employment law hasn’t improved workers’ conditions, but they have made sure a bad relationship can be drawn out at great cost while surrounding colleagues throw up their hands. Meanwhile few people have the authority to actually make a decision, and when it all goes wrong the answer is for a committee to make more rules.

Those are two things that should be on our to-do list. A smaller, more efficient Government set up with greater accountability for results, and fewer rules replaced by more authority of individuals to act. If we put a name on those two problems, and deal to them, we can prosper. If we get distracted by the politics of the past fifteen years when productivity growth has been flat, the warning lights will flash brighter until they blind us and we drive off the road.

Have a great week.