Budget 2015: rock star economy approaching twilight zone – time for action

We all know the fate of aging rock stars – sometimes they rapidly descend into the twilight zone of drug dependency and depression. But what about the immediate future of our own rock star economy?  

Well, it may already be happening, not so much the rock stars themselves (the big cities) but among the roadies and the groupies (the smaller towns).

Although Auckland and Christchurch are the two cities that stand out for their so-called economic rock star status, up on stage in full glare of the spotlight, lurking in the shadows are the smaller regional players – Northland, Hawke's Bay, Gisborne, Manawatu, Buller and North Otago.

Even the brighter lights of the regional economy such as Waikato, Taranaki, Mid Canterbury and Southland are facing a combination of factors that are looking to drag them down – falling dairy and oil prices, doubts over the aluminium smelter and a stubbornly strong dollar especially against our key trading partner, Australia.

The past can’t always help predict the future – just ask any investor in the Australian mining industry over the past five years or a shareholder in our own share market darling, Xero. The New Zealand economy is not immune to a cycle of peaks and troughs. The government, via its fiscal management and budget setting, can have some influence on the cyclical nature of the domestic economic environment we all operate in.

Most importantly, the government can consider how its fiscal policy setting can have a material economic impact on the regions outside the rock star cities.

There are enough early economic warning signs to indicate we are coming off the “rock star” peak as a nation. The impacts are being felt both socially and economically in the regional areas in both islands. Without the roadies and the groupies, the rock stars cannot play to their full potential.

What have we actually achieved in recent years in terms of creating a step-change in our economic activity and growth? Very little. The Organisation for Economic Co-operation and Development (OECD) research has found that New Zealand’s policy settings should generate GDP per capita 20% above the OECD average. Instead, New Zealand‘s GDP is currently about 30% below the OECD average.

We have had a few good years, through sound fiscal management of the government books post global financial crisis and an economic environment bolstered by the Auckland housing boom and post-earthquake injection of insurance funds into the Canterbury region. However, little has changed in the way we approach and do business.

We need to get the economy into surplus as quickly as possible, so we can build some economic headroom for the potentially tougher times ahead.

New Zealand’s economy, based on our size and geographic location, is highly dependent on international trade, with Australia our biggest importer. Our most developed industries are tourism and exports of agricultural products. These are our main source of growth. Yet, to keep current expansion rates, New Zealand needs to address persistent current account deficits fuelled by heavy household debts and low domestic investments.

Therefore, the two easiest targets to address in Budget 2015 could indeed be tourism and agriculture. 

Both of these industries exist outside the main centres and, well managed, can create jobs and opportunities within the regions.

Irrigation is a significant factor to increasing our exports of agricultural products, so further investment in this area will result in handsome returns. A dollar invested in irrigation is reported to have a three-fold return. 

Agriculture will be a major part of our economic prosperity in the future and this government has invested in irrigation infrastructure in the South Island. The continued investment by the Crown in irrigation will spill over into more R&D in the sector, more jobs in the provinces and will reduce the dominance of Auckland and Christchurch. 

After the rebuild of Christchurch and the slowdown of insurance flows, the city will revert to its previous role of being the service town to the South Island’s agriculture industry and West Coast’s mining sector.

And then there is tourism, whose fingers reach right into the remotest parts of the New Zealand economy – not just the big cities. New Zealand is a hot destination, so the budget should consider additional investment being channelled into the lucrative and exciting inbound tourism markets of India and China, targeting an increase in the number of airlines that come to New Zealand and ensuring our infrastructure is capable of accommodating this potential increase in passenger numbers.

The government needs to focus on the various economic levers it can adjust and tweak in the regional economies to encourage, attract and promote enterprise. Developing a suite of incentives for major national and international corporates will encourage them to anchor their operations into the regions. Promoting the employment of local people, subsidisation of labour costs, tax breaks for investment in technology or major capital plant will all support a revitalisation of the industry required to bring the regions back to better days.

If it was good enough to deliver incentives to the major US production houses to help the New Zealand film industry, then the same philosophy must be focused on the West Coast, Northland and Hawke's Bay.

But we should not be restricted to agriculture and tourism. They have been the cornerstones of our country for a long time but there is now a ‘young turk’ that also needs some attention – the technology sector, which is not bound by geographical handcuffs like many of our industries.

Take for example the government’s involvement in an exciting project in Christchurch via Crown agency Callaghan Innovation and Vodafone. 

Vodafone is the first anchor tenant in Christchurch’s new Innovation Precinct, which will feature a unique innovation incubator – the xone – with a mandate to accelerate commercialisation of innovation by companies in New Zealand and foster an innovation culture. Such private partnerships with the Crown could be a blueprint for the future.  

Auckland and Christchurch will always be important but unless the government looks at ways of making the provinces more attractive for investors, our skilled workers and our university graduates, then there is an increasing danger that the aptly named ‘zombie’ regions will become more prevalent in New Zealand’s map.

Tim Keenan is a partner and national director, privately held business at Grant Thornton New Zealand