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Phil O'Reilly

A week is a long time in politics

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The recent Budget raised the question: What should we be doing to grow the economy?

The initial response by many commentators was that the 2011 Budget was safe and headed in the right direction.

Its focus on reducing government debt and spending was positive, most said, and essential for getting our finances on a firmer footing to head off future problems with overseas creditors and consequential interest rate rises.

But beyond that, many felt it did not contain much direction for strategic change.

The only example of strategic change was one already previously signalled – the proposal to extend the mixed ownership model to four large state owned energy companies: Mighty River Power, Meridian, Genesis and Solid Energy. This is still a very positive development. It will provide a useful investment option for many New Zealanders and a boost for NZX, while over time helping to reduce the dominance of the state sector over the private sector.

Meanwhile, Budget moves to reduce government spending on Working for Families and interest free student loans were certainly a move in the right direction, but did not tackle the really hard questions.

The problem with Working for Families is the fact that it entangles even high earners into a beneficiary trap and creates disincentives for all its beneficiaries to work or produce beyond the level where the system abates their benefit. Just cutting back the higher levels of the scheme does not get rid of that disincentive problem and a fundamental review of the scheme is required.

Similarly, the Budget made some changes to interest free student loans, imposing a number of restrictions on borrowers here and overseas, but these did not amount to systemic change. Reversing the interest free status of student loans would have brought a much larger shift to financial health and would have helped bring better incentives in study choices and completion rates.

Much post-Budget commentary has therefore reflected the view that the Government was failing to take opportunities to take the big steps needed to advance the economy in a significant way.

But a week is a long time in politics. In the days since the Budget, the Government has now signalled some indications for significant change.

The first is the proposal to allow choice in the ACC work account.

This is a welcome move – more choice will allow insurance and rehabilitation packages to better meet the needs of workplaces and their employees.

The ability for the private sector to take part in the workplace accident insurance market will help bring more resources and innovation to the sector.

It will however be important to ensure there is a level playing field between ACC and private sector insurers, and ACC premiums will need to be set in a transparent manner without political interference.

Consumers may be reassured that the principles underlying the scheme will be unchanged and 24-hour no-fault coverage will remain.

The move underlines the fact that the government does not have to be a monopoly service provider to meet its social and economic objectives.

The second big smoke signal was the proposed investigation into reducing the number of government agencies. Following on from the Budget requirement for the state sector to take out $330 million in costs over the next three years, the Government has now signalled the consolidation of agencies operating in health, education, employment, justice and the arts.

And the third big announcement since the Budget has been on social welfare. Reforms to the welfare sector are to become a campaign item for this year’s general election.

Given years of prevarication on this issue, this is political bravery.

It’s not yet clear which of the recommendations of Paula Rebstock’s Welfare Working Group will be promoted.

But many of the group’s recommendations were sound and if implemented would significantly reduce dependency and move New Zealand further along the path towards a high-skill, high-wage economy.

Setting expectations that all able working age people should support themselves and providing assistance focused on job-seeking rather than welfare would build a good foundation for change, as would the adoption of quantified, time-bound targets for reducing recipient numbers and an actuarial approach to managing future liability.

In keeping with the Government’s softly-softly approach, the working group’s recommendations are focused on the long term and would have no current adverse impact on those currently receiving benefits.

So, politically astute as well as brave.

The reform in ACC, in the state sector generally and in the welfare system are useful foundational stepping stones towards growing the economy.

But what else is needed to grow the economy?

Two likely candidates are high-tech manufacturing and extractive industries.

At the sectoral level, there is a great need for high-tech manufacturing to take on a greater role in the economy.

This is a sector that contains a great deal of promise for boosting high value exports.

With much its value deriving from software and other forms of relatively weightless intellectual property, it is a logical area for New Zealand to advance. Our distance from major overseas markets makes it imperative that the goods we export are relatively high-value and low-bulk.

Moreover, high tech manufacturing is where innovation is king.

It’s through innovation that we can compete, win new markets and solve some of our current problems including reducing carbon emissions, water use and waste.

Of course, for this sector to succeed we require serious improvement in our education and training system.

It’s not possible to achieve innovation in any sector without people who are highly trained in relevant skills.

More focus on the STEM skills is needed: science, technology, engineering and maths.

At the other end of the scale, more work is required to improve basic literacy and numeracy among school-leavers.

And work is required to improve the all-important pipeline between school and further education and work, so that young people can more easily access pathways to productive careers.

The extractive industry also represents a huge opportunity for the New Zealand economy and is also an area where innovation thrives.

With significant mineral wealth both on- and off-shore, the ability to increase our national prosperity is there for us, as long as we can overcome the backward-looking opposition of pressure groups.

Prosperity will derive not only from the mineral wealth itself, but also from the boost that will come from training and skills development of those within the industry.

Recent announcements for policy change affecting the New Zealand economic environment are encouraging.

We need to build on these and forge ahead on many fronts, including more efficiencies in the public sector, more investment and innovation in the private sector, more support for reducing the regulatory burden on the productive sector, and a stronger focus on education and skills.