Social benefit vs Productivity

An aphorism coined by Paul Krugman has become a truism: "productivity isn't everything, but in the long run it's almost everything"(1)

I remember working as a public servant many decades ago, for the NZ Forest service as an Accounts clerk one year out of school. Dad always told me that a government department would be ideal as they can’t fire me. I lasted a year and moved on to the private sector, surprised and confused, never wanting to look back or try to understand what I had experienced.

I was only 18 when I questioned my boss at the Forest Service why it was that I saw paperwork come across my desk for the order of dozens of boxes of printing paper, pens, ink and other stationary items at the end of the year. Our stationery cupboard was already full with these same items and we had to find space in the office where we would store all of this stationery which we clearly didn’t need.

My boss explained, rather sheepishly, that we had to put in all these orders to spend as much money as possible, otherwise if we spent less than last year, our allocation of funds from the budget will be less this coming year. In other words, if we spend less, we get less. It is like lining up before budget time with your hand out and Daddy (the govt) handing out pocket money, the quantum of which would depend on your needs. All the children (govt departments) pleaded poverty and needy so they could get as higher allocation in the budget as possible. The more money they spent, the more money they would need going forward.

After a little bit of research I found that this was the thinking of almost all the government departments and ws in fact a world-wide problem. The Auditor General audits government departments annually, however I guess the Auditor checked this year's expenses against last year's and the year before, and if the ratio of expense to income was similar, the ‘OK’ box got ticked for the same allocation this year. This systemic operational failure has been going on for decades.  It is interesting how people operate when they don’t need to succeed to survive.

Forty years have gone by since that conversation with my boss and I still don’t understand it. How can the management of the country's assets be efficiently run with the incentive to spend as much as possible with seemingly no obligation to tender a return or even non-financial benefit?   

Privatisation of the public sector was the obvious answer back then (1980 – 2000) where the government would sell a ‘chunk’ of the business to private investors whom would demand a return.

Air NZ was one of the first to go in 1988, however when they went bust in 2001, the government deemed the company too big to fail and bought it back again. The government was on a roll in the 90’s, the BNZ was sold to the Ausi’s (which didn’t work) followed by the privatisation of Telecom, Auckland Airport, Tranzpower, Contact Energy and Trustpower.(2)

Regardless of the sudden influx of millions of dollars, some may argue that it is not all about the money. People will lose their jobs and cuts will be made to funds where it is badly needed. However, in my opinion, this is a short term view. If the government assets are managed more efficiently, the income will increase and the capitalised value of this income will increase our country’s net worth. Not only will this help to reduce public debt so we can reduce taxes, but it will put NZ in a better position to borrow more in the future if we need to.

The PSA (Public Service Association) would disagree with me, stating that selling public assets is a short-term sugar fix and they would bring up the failed public asset sales and the consequential buy-backs in the 1990’s. They would no doubt talk of the detrimental long term effects of asset sales where the essential services part of the operations are minimised because they don’t return a profit (3).

Fast forward to 2025, we have a coalition where the PM is saying that we would consider asset sales in the next term, Winston Peters is saying there is no way we will sell any more public assets and David Seymour is whispering ‘Privatisation’ in the background. There was clearly no agreement on this matter when they signed the coalition agreement.(4)

So where does all the above leave us? Asset sales/Privatisation has been placed on the sidelines in favour of stripping down the money allocation to government departments. It will be interesting to see if this works ie when you have people that are not incentivised for growth and then they see their fellow workers sacked, what will be the outcome?

If, for example, there were too many people allocated to a task and two out of the four people were given the heave-ho, that might leave one person to do a job where two people were doing it before.  Will these workers find incentives to turn off the lights and heater when they are not needed, to bring back the company pen which they mistakenly took home the day before? Have they been given a carrot to improve the financial returns while balancing the public needs and to do both of these efficiently? Or were they given the stick and told to pull up their socks or else they will suffer the fate of their colleagues?

This will remain to be seen. In the meantime, after making all these cuts, the government’s next phase of economic recovery is about to play out, which will all be about growth.

The Hon Nicola Willis has made a few comments concerning the upcoming budget in 2025 (5):

“The Government intends to introduce several legislative and regulatory measures at the Budget focused on removing barriers that hold back job and wealth creation for New Zealanders.”

and

“Budget 2025 will be squarely focused on ensuring New Zealanders can earn more in the years ahead by growing our economy.”

These comments suggest that new policies may emerge that are similar to an equally right wing government in the West which is also pushing productivity. Some of the mumblings that President Trump has uttered seem great on the surface but most likely has been given as much thought  as when you wake up and wonder what you are going to wear today. Some of these include:

• No tax for any overtime hours that you do. Presumably, this will incentivise people to work beyond their 40 hours per week, thereby increasing productivity.
• Tariffs on and off with Mexico & Canada (although this may have been the plan)
• Reducing international Aid unless America gets something out of it.

The movements of NZ politics eerily mirrors the politics of the west, both of them following a failed left wing government where the failures can be partly blamed on covid. During this time, hoards of cash was given out to the public, whether they needed it or not.

Conversely, as the political pendulum was artificially pushed to the extreme left in a democratic environment, it was always going to swing equally as far to the right when the government changed hands in that direction.

Now, productivity is everything and an Oligarchy environment seems to be taking place, at least this seems so in America. The age-old problem still exists and the world is still looking for a solution. Where should the dollar go, to the person who works hard or to the person who can't find a job due to ailment, age or laziness?

If productivity is prioritised above all else and benefits are reduced, then the following is likely to happen: crime will increase, police costs will increase, insurance premiums will increase, tourism will decrease. In the end, not a winning formula.

If the left wing policies are prioritised, benefits will increase, taxes will have to be increased to pay for the beneficiaries, businesses will move overseas to reduce the tax burden, overseas loans will increase which means taxes will further increase to pay back these loans, our credit rating will decline because we are riddled with debt and then it all falls apart as we become a third world country.

Covid has caused these large pendulum swings and it may take a decade for everything to get back to normal.  Not that normal was working, but at least everything was stable.

If we could find a way to give government employees a purpose, an incentive to work towards a common goal, everything would then fall into place. Excess workers would find a way to become productive thereby securing their jobs and the capitalised value of the department would increase the country’s financial rating. The balance of providing the benefit to those in need with making a profit may then finally fix itself.

On the other side of the coin NZ’s growth plan is following John Key’s (ex Prime Minister) example and opening the gates to let in foreign wealth.(6).

What used to be called the Active Investor Plus program where one had to invest $15M into NZ to gain residency status, has now been split into high and medium risk options which I have outlined below:

The new ‘Golden Visa’ program will have two separate categories. The first one will require a minimum investment of NZ$5 million over three years either directly into businesses or into managed funds. The applicants for these visa’s must spend at least 21 days in the country.

The second option requires a minimum of NZ$10 million invested over five years into bonds, stocks, and new property development including residential, or existing commercial and industrial property. Holders must spend at least 105 days in the country but can reduce the period by investing above the minimum.(7)

Golden Visa’s are in a decline worldwide, Spain, UK, Ireland, Malta, Greece and the Netherlands are all letting their Golden Visa options lapse (6), so investors looking for a Plan B to invest and live will see the light from the open gate down under.

If this works, NZ should gain significant investment and the new demand may be the catalyst, along with dropping interest rates, to kick start property growth in 2025!

References

1. https://www.abc.net.au/news/2025-01-20/donald-trump-dark-side-productivity-and-growth/104830730
2. chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.treasury.govt.nz/sites/default/files/2017-11/mom-shppnz-wilson-dec10.pdf
3. https://www.psa.org.nz/our-voice/privatisation-and-asset-sales-puts-profits-ahead-of-peoples-needs/
4. https://www.stuff.co.nz/politics/360562338/asset-sales-are-agenda-so-what-could-be-sold
5. https://www.beehive.govt.nz/release/budget-will-be-delivered-22-may
6. https://www.afr.com/world/pacific/new-zealand-changes-golden-visa-to-lure-wealthy-migrants-20250209-p5lapd
7. https://www.1news.co.nz/2025/02/09/government-announces-plan-to-adjust-migrant-investor-visa-settings/