BUDGET 2013 PREVIEW: Building a more productive and competitive economy

For the last 40 years, the productivity and competitive elements of successive budgets have been conservative at best.

Chances are, this year’s Budget will be no different as it would require a bold government to launch the fundamental changes needed to create a more productive and competitive economy.

New Zealand’s competitive decline is strikingly evident.

Forty years ago our GDP per capita was 20% above the OCED average and it’s now approximately 20% below this average. The difference in GPD between New Zealand and Australia is now $13,000 per person, equating to a total gap of $50 billion.

Simple maths tells us that something needs to change and unless New Zealand businesses become more productive and competitive, there will be no way of paying for more jobs at higher rates.

In the 2012 Budget the government established four strategic priorities:

• Responsibly managing the government’s finances.
• Rebuilding Christchurch.
• Delivering better public services.
• Creating a more productive and competitive economy.

While it’s positive that productivity was given a focus so far, it’s been treated as a poor cousin to the other three.

If the government doesn’t face up to the productivity challenges in this year’s Budget and generate additional fiscal capacity it’s likely that the other priorities will also struggle to be achieved.

While the maths is obvious, the government’s response so far has been conservative.

The agencies and departments directly responsible for a step change in productivity make up less than 4% of total government allocations. And until recently, these have been constrained by inconsistent focus, agency complexity, capability gaps and the failure to innovate.

The challenges of addressing these issues include the constraints of the overall global economic environment, the residential housing drag, the drought and our savings record.

Far outweighed

However, these challenges are far outweighed by the opportunities.

New Zealand has fared comparatively well since the global financial crisis and is well positioned geographically to benefit from the global shift of economic power away from North America and Europe to Asia, the Middle East and Africa.

And it’s been well documented in multiple studies and reviews that New Zealand is a very competitive place to do business (the only problem is that we don’t do enough business).

There is a compelling argument that now is the time for action. We have the fundamental building blocks to put forward a Budget that will reposition the economy to be more productive and competitive. All that is needed is for the government to step up.

Minister of Finance Bill English will have a clear understanding of the fine line between pushing the productivity agenda hard and protecting the government’s fiscal position in a difficult global environment.

However, this is a potential tipping point for both the government and the medium-term competiveness of New Zealand.

The process of transforming the agencies responsible for productivity and developing a far more coherent framework for the delivery of outcomes has already begun.

The government's Business Growth Agenda has established a focus on six inputs to business and these must be clarified, aligned and co-ordinated.

In 2013 the expectation is that the transformation of the agencies and their capabilities will be increased so the programme is delivered with increased pace, discipline and focus on measured value.

There must also be a continuation of the release and reprioritisation of resources so more funding will be available to drive productivity and competiveness.

Overall, it is expected that the direct spend of the key agencies of $3 billion (3.7% of government allocations) will be prioritised, optimised and increased to specifically drive productivity outcomes.

The direction of the Business Growth Agenda is fundamentally sound. However, if the 10-point plan below was initiated immediately, we would soon start to see results.

Six key priorities are needed to enhance productivity:

Innovation 1. Prioritise and become more proactive in encouraging business innovation.
2. Strengthen and simplify the institutional framework for research and innovation.

Export markets 3. Maintain the pace of improving access to markets and align New Zealand’s offshore footprint and business internationalisation actions by delivering tangible results.

Skilled and safe workforce 4. Fund tertiary and vocational training that delivers skills to business and use the funding of education and training to increase the level of innovation in the sector and drive change.

Infrastructure 5. Focus investment to enhance the end-to-end supply chain infrastructure (road/rail/sea).

Resources 6. Have a holistic focus on Maori resources.
7. Increase focus and leverage freshwater and marine resource.
8. Make more use of energy and mineral resource – faster.

Capital markets 9. Eliminate the residential housing bias.
10. Leverage the Crown's resources (SOE, Future Investment Fund, ACC, SuperFund) to enable investment in productive assets.

To progress the country’s productivity and competiveness it is critical the Budget does not undermine progress elsewhere.

The foundations of managing government finances and delivering better public services need to be protected so New Zealand remains a superior country to do business in. The government’s role is to create the right framework and environment, and it should avoid direct interventions in specific industries.

It is equally important that New Zealand businesses step up. Too few are contributing to productivity and competiveness.

This is most dramatically seen in the investment in R&D and science and technology (less than a third of the global average). The investment in technology, capital assets, plants, people and their capabilities that drive productivity and competiveness at an enterprise level are also all incredibly low.

Potentially, this is the government's blind spot and greatest risk. This issue must be addressed if government initiatives are going to make a difference.

So the question remains: will the government have the courage to take the action needed in this year’s Budget to lift our economy?

Or will the upcoming election pressure halter any potential investment in this area?

As the late Margret Thatcher said: “If you just set out to be liked, you would be prepared to compromise on anything at any time, and you would achieve nothing.”

Let’s hope for some effective leadership this May 16 that will enhance this country’s productivity and competiveness.

Simon Hunter is business transformation partner at Grant Thornton New Zealand, chartered accountants and business advisers. Email: simon.hunter@nz.gt.com