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NZX: Swan Dive Or Belly Flop? Update On Feedback And Next Steps

Date 17/10/2008

From David Skilling, CEO, New Zealand Institute and Mark Weldon, CEO, NZX

1.  The economic risk to New Zealand has grown

This time last week we released our draft economic strategy “Swan Dive or Belly Flop?” because of our concern regarding the substantial gap between the gravity of the situation facing New Zealand and the nature of the policy response to it. The gap between what is required, and what has been announced to date, remains substantial.

In the past week, the extent of the global challenge has become clearer:

  • Iceland, Hungary and the Ukraine are in financial trouble as nations.
  • "Business Week", listed New Zealand as one of the countries most at risk by the economic and financial crisis.
  • New Zealand followed other countries in announcing a bank deposit insurance guarantee scheme.
  • Major leading indicators for the global real economy have become increasingly negative.  For example, the Philadelphia General Business Activity Index released today is at its lowest level in 18 years, indicating the US economy will likely go into prolonged recession, while the Baltic Dry Index of Shipping Rates has fallen over 80% in past six months, indicating that global demand for commodities is slowing dramatically.
  • Major stock indices continue to trend down on concern about global recession.
  • It has also become clearer that Treasury deficit forecasts in the recently-released PREFU are light.

 
The issue is simple. Despite a decade of strong fiscal prudence and surpluses, the financial situation of New Zealand as a country has turned on a dime. Instead of discussing the government’s deficit projections, we need to recognise that this reflects the essential fragility of our economy and its productive sector.

2. Policy response still largely weak

The need for a brave policy response since we released our draft paper has only grown. Calls for business as usual, are not appropriate. Instead, speed is of the essence to minimise the impact on New Zealand’s real economy. Delays in decisive action will only increase the stress on the economy, with a consequent loss of incomes and jobs. There has been an increasing focus on the economic issues, but, with the exception of National’s bold policy to require meaningful investment out of taxpayer savings into New Zealand, which aligns strongly with one of the policies in our paper, it is mostly incremental.

3.  Response to the draft strategy to date

People have responded with insight and enthusiasm, both to the call to strengthen New Zealand's position for an eventual economic recovery, and to the specific proposals in our draft. A substantial number of emails and blog posts have been received from both locals and Kiwi’s living offshore.

The feedback can be broken down into five areas:

First, some of the proposals in the draft strategy need refinement for execution.  Particular areas that have benefited from such feedback include depreciation for capital investment, provisional tax, tax breaks for new firms, and the R&D credit.

Second, some ideas have been strongly supported, but with rationale and perspectives that we did not identify in our original paper. Areas that have benefited here include the “super Super Fund” with its unashamedly New Zealand focus, a KiwiCo holding company for SOEs and, perhaps surprisingly, compulsory KiwiSaver contributions.

Interestingly, addressing the policy skew toward investment property has been widely supported as an idea. Contributors believe it’s important to refocus the economy and household’s investment choices, nobody seems to believe that any politician will be brave enough to take such a step, despite the clear need.

Third, some suggestions have been robustly challenged.  In particular the idea around attracting overseas Kiwis back to New Zealand.  While motivation and outcome from this idea have been widely supported, pthe mechanism we proposed has met with general disagreement. 

Fourth, some new ideas and issues have been raised.  Some of these are critical to the execution of a strategy.  There is a very strong sense that there is no cohesion amongst our politicians, the public service, and the business sector.  They do not, and are not, working as a team.  There is also an issue of culture - and there have been some strong submissions on how to address it. Sam Morgan, for example, on the blog identified the lack of practical business knowledge amongst policy makers.  The public and private sectors need to find ways of developing stronger relationships and incorporating broader perspective and knowledge into decision-making.  

Fifth, we’ve received a host of questions and suggestions as to what we should do next.

4.  What happens next

We plan to incorporate the feedback and suggestions into a second draft of “Swan Dive or Belly Flop?”, to be released in the next week or so. We hope that this will make a further constructive contribution to the public debate on how New Zealand ought to respond to the financial and economic crisis.

We have been very encouraged by the response and the amount of quality feedback that we have received.   As a consequence, we have decided to extend and upgrade the blog over the next few days, with the help and advice of the community to improve and broaden the reach of the blog. Two bloggers, Kirsten Rudd and Jason Kemp in particular, have given significant input and have offered to help upgrade the blog and create new community features and feedback features.

In the meantime, we encourage you to air your views, and have them considered by us and the public more broadly, at the critical time when we need to reshape our economic future.  As we stated when we released our first draft, what we care about is the quality of the ideas, not their authorship, nor who may end up owning them. 

5. Playing your part

You can download and respond to “Swan Dive or Belly Flop?” by visiting www.blog.nzx.com