Fiscal policy kneecaps export target
The wildly flailing arms of Government
How many times have you heard, in weary frustration, that “one arm of Government doesn’t know what the other arm is up to”? Well, here’s another addition to that litany.
The Government has a stated goal to double the value of exports over the next 10 years. This goal is, presumably, being looked after by a suite of agencies including NZTE, MFAT, TPK, and MBIE1. But there is also an arm of Government that looks after the Government’s books – aka fiscal policy – called The Treasury. Unfortunately, the current stringent fiscal policy approach is set to kneecap the efforts of those other arms of Government.
Simply put, fiscal policy directed to reducing Government spending – in order to hit some arbitrary financial debt and deficit targets – is effectively acting against the efforts required to make a start towards reaching the export goal.
To put in context, 2013 to 2023 saw export returns grow by an average 4% per annum. The 10 years before that averaged 4.2% per annum, with the 1993 to 2003 period recording a 5.3% per annum surge. Overall, the past 30 years has seen export returns average 4.5% per annum growth – well short of the 7.2% rate required for a 10-year doubling to be achieved.
Further, given the current – and accumulating – turmoil in global trading relationships, we will probably look back on those days as being the glory days of international trade. New Zealand products and services were welcomed around globe and Free Trade Agreements were regularly being signed and/or refreshed alongside increasingly favourable terms of trade. But, even during those glory days, a 10-year doubling was well out of reach.
In a friendly global trade environment, more of the same would seem highly unlikely to deliver a doubling of export value. Such a ‘more of the same’ outlook has seen a continued reliance on volume-driven commodity growth and mainly low-value exports. Given the likelihood of a more unfriendly global trade environment, a refreshed, re-oriented, innovative and entrepreneurial export sector would be required to get near that doubling target.
Of course, this will be familiar to many who have lived through the consistent and persistent theme from many economic and business policy advisors. The need to move beyond the nation’s commodity export base is not a new policy prescription. More recently this was implicitly echoed in Sir Paul Callaghan’s Wool to Weta: Transforming New Zealand’s Culture and Economy 2009 publication, and before that the 2001 Knowledge Wave conference.
More generically, many advisors and commentators (since well before the turn of the millennium) have stressed the need to shift from “volume to value”. However, this message remains apparently unheard, as the 4.5% average annual growth in export revenues over the past 30 years has been driven by 2.9% average annual growth in volumes (or quantities).
Further, larger export categories have similarly enjoyed growth in revenues driven primarily by volume growth over the last 30 years.
Forestry and tourism have both experienced annual volume growth more than their respective growth in revenue, with revenue growth in machinery exports almost totally accounted for by volume growth. While dairy and education have recorded large revenue growth, they too are predominantly driven by volume growth.
Bluntly, significant structural shifts are required (in both composition and scale) in our export sector – and the businesses supporting that sector – for the returns from exports to be doubled over the coming 10-year horizon.
However, without Government investment in key infrastructure, resilience building, business capacity and capability, human capital, and entrepreneurial endeavour, the necessary structural shifts are increasingly unlikely to occur. Alongside such investment efforts, ongoing operating spending on core services is also required. These include improvements in the education and health services being delivered, workforce skills and development programmes, science, research and development activities, and regional economic development and appropriate transition arrangements for potentially dislocated workers and communities.
The current fiscal policy settings – focussing on spending targets, annual operating deficits, and unnecessarily hasty reductions in Government debt – undermine efforts to facilitate the structural shifts required in the nation’s export sector.
If there was an arm of Government looking after our critical strategic economic constraints and challenges, then the fixation on fiscal deficits would be replaced by oversight of the nation’s external deficit.
Thus, a goal directly targeting net exports (i.e. exports minus imports) would place value on export as well as import competing activities. This, in turn, would provide a sound economic rationale for cohesive policies to guide future economic development. However, with the export goal in undeniable jeopardy, the question is just what are reduced fiscal deficits and debt aiming to leave us?
Without economic rationale, and alongside the lack of cohesive economic direction, it is sadly disheartening that we risk the legacy of an economy unfit for the challenges facing future generations.
New Zealand Trade and Enterprise; Ministry of Foreign Affairs and Trade; Te Puni Kōkiri; Ministry of Business, Innovation & Employment.