What if do we do start to act soon?
The Prime Minister has recently reiterated that his vision is to catch Australia by 2025. We respect that strong commitment.
Serious reform on the scale recommended in this report is the work of many years, but there is no reason why substantial steps should not have been taken by next year's Budget. The six months to the Budget provides time for a full road-map to be sorted out, but we would hope that in the forthcoming Budget Policy Statement the Government will be providing some direction on how it intends to use next year’s Budget to accelerate the reform process, putting New Zealand on a path for the 2025 goal. Throughout the report we have also highlighted a number of measures that could be taken almost immediately. Strong early actions will help to convince individuals and firms, here and abroad, that change really is coming.
Over time, as a programme along these lines was implemented, we would expect to see the beginnings of a marked reorientation of the economy. A new readiness by firms to put projects in place would be apparent, and a degree of energy around new opportunities would be evident. Households might be more focused on saving, to position themselves for their own future and to capture some share for themselves of the profits that a fast-growing economy would be beginning to generate. There would be a new ability to get business projects underway expeditiously, with local authorities looking to facilitate landowners' plans to use their own properties. Houses would be getting cheaper, and businesses would be realizing that the real opportunities lie in developing products and markets, not lobbying government for this intervention or that form of support. Government would be clearly focused on contracting to ensure that excellent public services were being delivered, and on ensuring that robust transparent cost-benefit analysis shaped its own spending and regulatory decisions.
Of course, economic transformations on the scale required to achieve the 2025 target are not always smooth. Dynamic change often isn't. Resources are shifting into new industries, new opportunities are appearing, and the optimism can become contagious, among potential borrowers and potential lenders. Greater risk-taking and enterprise are integral elements of the path to prosperity and the financial system has a vital part to play in that. Change and risk mean many ventures will pay off handsomely. Others will fail, sometimes spectacularly. As part of any accelerated reform programme, the Government must ensure that the system of banking regulation is fit for purpose, in particular that disciplines are in place to ensure that the risks fall on shareholders and creditors, best placed to assess and manage them, and not on the Crown.
The large current account deficits New Zealand has run fairly consistently since the 1970s have attracted considerable comment and analysis over the years. A successful programme that puts New Zealand on a path towards the 2025 goal is, of course, likely to see the current deficit widen for many years, not narrow. Whether or not private savings rates rise much, this report has highlighted that materially higher levels of investment are likely to occur as firms respond to the better opportunities. Current account deficits, in isolation, are neither good nor bad. Singapore, for example, ran very large current account deficits as it financed its rapid growth. As we catch Australia, current account deficits could well be as large as, or larger than, they have been in recent decades, but such deficits would be likely to rest on better foundations, supporting a market-driven acceleration in investment spending, not a debt-fuelled consumption binge.
