Listener 12 Feb 2000

Keywords Growth & Innovation; Macroeconomics & Money; Social Policy

Once upon a time Treasury’s briefing to the incoming government was notorious for thick volumes which set down economic prescriptions for the government with an arrogance offset by errors. However its 1999 briefing, Towards Higher Standards for New Zealanders, is more modest. Early on it states that economists’ “understanding of what generates (economic) growth is far from complete.”

It defines higher living standards as including: “goods, services and intangibles (such as a greater sense of security) … This bundle may include our enjoyment of our physical environment, pride in New Zealand’s stance on a foreign policy issue or pride in New Zealand culture and achievements. And it may also include a degree of altruism – we may value making provision for other groups of New Zealanders, or for future generations, that we will not directly share in.”

But “higher” need not be “greater”. The government seems to be seeking better quality of output as well as more quantity. It is changing the balance between public and private provision, getting more involved in managing the environment, and placing quotas on broadcasting content. That the prime minister has taken the arts, culture and heritage portfolio is a strong signal the government believes it can change the mix of outputs to give a better outcome than just leaving things to the market. Is Treasury is grappling with these thorny issues?

The briefing gives six key messages for better economic performance:

1. Openness and International Linkages

A high standard of living in a small economy depends upon exporting, because of its demand for imports. The research suggests that the motor of a small open economy is the tradeable sector which exports and competes against imports.

2. Macroeconomic Stability

The message emphasizes the successes in the last decade of bringing down inflation and lowering public debt levels, to which should be added fiscal control. But there is little discussion about how macroeconomic policy relates to the tradeable sector – how this second message connects with the first. The biggest macroeconomic challenge we face remains how to run a macroeconomic policy which powers the open economy.

3. A Competitive Private Sector

This message is that the government has to provide an environment which gives firms the freedom and the incentive to seek productivity increases and customers. It acknowledges there may be a need for regulation for other purposes (greenhouse gas emissions is its example), but insists interventions need to be stable, consistent, appropriate and flexible. (Sometimes the Treasury – like this columnist – ends up with platitudinous adjectives to summarize complicated notions).

4. Increasing Skills and Participation

The importance of a skilled adaptable labour force is almost universally accepted, but economists are generally not sure how to generate one.

5. Social Cohesion and Inclusion

In the early 1990s Jim Bolger, realising that the policies of Roger Douglas and Ruth Richardson were socially destructive, asked for the development of a social framework for policy. Treasury drew on notions of social cohesion and social capital. Unfortunately the intellectual leadership came from economists who had an investment in the previous economic policies. The bias is evident in: “Not only is [social cohesion] valuable in its own right – something that helps define our identity and can enhance our living standards – but social cohesion is also a part of the oil that facilitates the smooth functioning of relationships and transactions. In this way, it links to a country’s economic performance and to the ability of Governments to win popular consent for, and successfully implement, their policies. People are, for example, far more likely to invest, to pay their taxes, to perform jury service, to vote or to meet work testing requirements when they feel they can trust the framework or the institutions governing those activities, and when they feel those frameworks are working well and treating people fairly.”

The cart is before the horse. While social cohesion (or whatever) may contribute to economic performance, but the real issue is whether the economy is contributing to social performance. In many ways the current economics approach is anti-social. Almost certainly this government will try to do better, especially given its number four is Steve Maharey is professional sociologist. The danger is that having over-emphasised the economic concerns in the past, we will lurch to the other extreme, denying the relevance of economics.

6. Effective and Innovative Public Sector

Well yes, but for what? While accepting there is room for improvement, the Treasury (and the State Service Commission) seem broadly satisfied with the changes made in the late 1980s. Hardly anyone else is, including the outgoing government which was battered through 1999 by one failure after another. The briefings of other departments often show considerable doubts about the success of the reforms. The system is due for a major overhaul. The challenge facing Treasury will be how to retain fiscal control, without loss of efficiency and flexibility, while the rest of us get a more responsive and competent public service.

So while the Treasury briefing still carries much of the baggage from the past, it also shows a willingness to grapple with some of the issues which concern the public.

Keywords: Growth & Innovation; Macroeconomics and Money; Social Policy