The Treasury's Pre-Election Economic and Fiscal Update has provided New Zealand’s political parties a clearer view of the economy they may confront after the November election. The outlook has improved, with Treasury forecasting a $6.8 billion deficit for 2026-27, a reduction from the earlier predicted $11.4 billion deficit. Increased tax revenue is expected to decrease government borrowing by $15 billion over the next four years, creating a more favorable environment for campaign promises compared to the last election.
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In 2023, New Zealand was grappling with weak growth and high inflation, but since then, inflation has decreased significantly, and the economy has seen a return to growth. GDP increased by 0.2% in the June quarter, following a 0.9% rise in March, leading to an annual growth rate of 1.7%.
However, the recovery remains tenuous, as annual inflation rose to 4.1%, and officials warn that volatility in global oil markets could pose new risks to economic stability and growth. A critical issue highlighted in the update is New Zealand's persistent productivity problem, which is not easily resolved through economic recovery or changes in government.
Productivity is essential as it determines how much value the economy can generate through its workforce, capital, technology, and resources. Higher productivity is necessary for increasing wages and living standards without necessitating longer working hours. It also enhances the availability of resources for essential services like health, education, and infrastructure.
Historically, New Zealand has struggled with productivity. Treasury estimates indicate that productivity growth averaged around 1.4% annually from 1993 to 2013, but fell to just 0.2% in the subsequent decade. OECD data shows that New Zealand's output per person is considerably lower than that of the most advanced economies, with little indication of improvement.
The upcoming election presents significant decisions on issues ranging from cost of living and healthcare to climate change and the Treaty of Waitangi, but the productivity issue underlies many of these challenges. Several interlinked factors contribute to low productivity, including low wages, weak competition, diminishing educational performance, sluggish adoption of new technologies, and regulatory barriers.
New Zealand's small domestic market and geographic isolation further complicate the situation. These issues create a cycle where limited market size impedes firm growth, while weak competition diminishes innovation incentives. Additionally, restricted access to capital can hinder investment in technology, and planning challenges complicate development efforts.
To address productivity, New Zealand requires a multifaceted approach involving increased investment per worker, improved access to finance for innovative firms, and stronger competition to encourage technological adoption. Removing barriers in housing, energy, and infrastructure could lower investment costs.
Enhancing educational outcomes and aligning training with industry needs can elevate productivity, but these improvements often take years to materialize politically. As parties propose policies to tackle immediate concerns like cost of living, housing, and taxation, the long-term aim of boosting productivity should not be overlooked.
Election platforms may require scrutiny regarding their potential impact on productivity. While policies might enhance household incomes, they must also be evaluated on their ability to address underlying structural productivity issues.
New Zealand has shown progress in stabilizing its economy since 2023, but improving long-term productivity remains a significant challenge. After years of stagnation, comprehensive reforms are essential across various sectors including investment, competition, technology, and regulation to foster sustainable growth. As political parties campaign, their proposals should be assessed based on their capacity to contribute to long-term productivity enhancement, which in turn influences future living standards and the government's ability to provide essential services.