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With new leadership comes a fresh agenda

The change to a Labour-led coalition government will bring new ideas and energy to a wide range of New Zealand’s economic challenges. The top three are: creating a high value economy, driving a step-change in quality and quantity of housing and infrastructure, and transitioning to a low emissions economy.

On all these, and more, the departing National-led government was typical of long serving administrations. It was tired, and defensive about its entrenched policies. Some were failing. Productivity is falling not rising, emissions are rising not falling, and construction has at best plateaued, as this recent column describes.

The business community clearly signaled it wanted changes in policies. In the NZ Herald’s Mood of the Boardroom survey before the election it said its top five priorities were: infrastructure; housing; productivity; education; and inequality.

This was a remarkable shift from its top five priorities at the 2014 election: budget surplus; economic growth; international trade; strengthening of Chinese relationship; and our place in the world.

Even more telling, its bottom five were: tackling housing; mental health (including suicide); poverty and homelessness, environment and water quality, and the wealth gap.

These days some business leaders are pushing hard on many of those issues ignored three years ago.

But our politics is tribal, with deeply-held loyalties. So it was highly unlikely many business leaders switched their vote from National to Labour. Instead, they were hoping National would return for a fourth term chastened at the polls and more willing to act on the new business agenda.

This presents the new Labour-led government with a big challenge. It needs to quickly show decisiveness, competence and a willingness to work with business.

Even that might not be enough to get business onside. The Clark government showed all of that in its first term 1999-2002. But business indulged in a “winter of discontent” barely six months after the election. Prime Minister Helen Clark and Finance Minister Michael Cullen had to call a summit to try to bring business into the tent.

Thankfully the chances of repeat performance are much lower. The main agitator in 2000 was Roger Kerr, chief executive of the neoliberal Business Roundtable. Business leader since have become a lot less ideological. Many now espouse a fairer economy and some are starting to advocate for it such as Don Braid, chief executive of Mainfreight.

Prime Minister Jacinda Ardern will take office with more allies in business than Prime Minster Clark did.

However, Ardern will have to move fast to articulate a coherent policy programme that reconciles conflicting campaign promises by Labour, NZ First and the Greens. These include on some elements of taxation, environmental and social policy.

The new government must also show competence, which is never easy for parties that have been long out of government or, in the case of the Greens, are first-timers.

It needs to build its team quickly on the foundations of some old ministerial hands such as Winston Peters and David Parker, and others such as Ardern and Grant Robertson, likely the next Finance Minister, who are veterans of the Department of Prime Minister and Cabinet; as well as promising new talent such as James Shaw, leader of the Greens.

An even bigger task awaits the new government: New Zealand’s transition to a low emissions and cleaner economy.

As for policy, business is most anxious about the varying cuts in immigration promised by the three coalition parties. Ardern said yesterday the cut would be some 20,000 to 30,000 a year, which is much less draconian than Peter's push to reduce the intake to 10,000 a year.

Clearly, the new government will focus those cuts on international students and low wage jobs. This will hit hard $4 billion a year international education sector, the $35b a year tourism sector, the $40b a year primary sector and large areas of the service sector such as the low-wage end of hospitality, aged care and retailing.

Business has essentially only two ways to respond: it can shrink by cutting costs and activity; or it can grow by raising its productivity and value creation. The latter’s far harder than the former. But it is the only way to build an economy that’s driven by value not volume. Skilled immigrants will play crucial roles in that, and all three coalition parties have strongly affirmed their support for them.

The new government must bring an intense focus to raising productivity. A wealth of knowledge exists in the likes of the Productivity Commission and the best of our businesses. All it needs is a government and business community eager to learn, share and apply it. That, though, is a very, very big “all”.

That theme has massive importance in construction and infrastructure. Those sectors are deeply constrained. The departing-government forecast that the number of new homes completed will peak next year and barely above the previous peak in the mid-2000s.

Yet Auckland is short of at least 40,000 homes – some three years’ of current supply – and the new government intends to build 10,000 affordable homes a year.

The departing government was planning to spend $30b a year on infrastructure and housing between 2017 and 2022. But the construction sector is struggling deeply on quantity and quality terms to deliver.

Thankfully, the leaders in the sector have formed a new Construction Strategy Group, chaired by Geoff Hunt, a former chief executive of Hawkins, which is eager to work with government on raising the sector’s productivity. The previous industry-government effort, which was beginning to make progress, was parked by Nick Smith when he was National’s Building Minister.

An even bigger task awaits the new government: New Zealand’s transition to a low emissions and cleaner economy.

The latest government report on greenhouse gas emissions, released yesterday, makes very sober reading. Our gross emissions have increased by 24 percent since 1990. Road transport emissions are out of control rising 78 percent over the same timeframe. Agricultural emissions are also rising.

But far worse, net emissions have risen 64 percent, a function of a decline in planting of new forests. Yet this is the one policy on which the departing-government had pinned its slender climate policies. Likewise, the government had rendered the Emissions Trading Scheme as a driver of behavior and investment change.

The absolute policy priority for turning this around is an independent parliamentary committee to set long term emissions reductions goals and five-year carbon budgets to achieve them; and to review government policies and their effectiveness in meeting the budgets.

This mechanism, pioneered in the UK in 2008 by a near-unanimous vote in parliament, and now adopted by some 20 national and regional jurisdictions, is strongly supported by the three parties forming the next government.

The most challenging version of this for New Zealand is the Zero Carbon Act proposed by Generation Zero. It would serve as a good starting point for legislation.

The departing government had initiated three sector working groups on the likes of biological emissions, and that work will come to fruition next year too.

However, the mechanism will only work over the many decades it is required if it is supported by all parties in the next and subsequent parliament. A substantial number of National MPs, and indeed the Young Nats too, support the mechanism. But current senior party members such as Steven Joyce, Gerry Brownlee and Bill English are opposed. Hopefully, their colleagues will persuade them to see the benefits of it.

The new government will have substantial help on devising policies on this transition to a low emissions, cleaner economy from work underway at the Productivity Commission. It is planning to produce a draft report next March and a final report by June 30.

Meanwhile, the departing government had initiated three sector working groups on the likes of biological emissions, and that work will come to fruition next year too.

Agriculture must be in the ETS, and it must receive must more help to capitalise on the emission reduction pathways it has, say the three parties forming the new government. This is a position too of the retiring Parliamentary Commission for the Environment, as well as the OECD in its latest report on our environmental performance, among other authorities.

Getting Federated Farmers on board will be the greatest challenge of all for the government, not just on climate issues but water ones too. Greater ambition on improving freshwater quality, and on beginning a shift to water pricing, was a strong pledge from the coalition parties at the election. There is massive and very difficult policy work to do on this.

There are pockets of good thinking in the civil service on some of these big changes coming in agriculture. For example, MBIE has articulated a comprehensive view on what it calls “Future Foods NZ’ but it has run into heavy non-co-operation from the Ministry for Primary Industries which maintains a very conventional view on agriculture, one which is under increasing pressure because of its adverse environmental impacts and from competing new technology such as plant-based proteins and cellular agriculture.

There are plenty of other big issues in play, not the least of which is tax. It will be subject to a working party with major decisions put to voters at the next election. It seems some support is building from some business leaders for some form of capital gains tax. But other changes are needed too to drive economic transformation.

Other areas of worry for business are how the new government will change policy on the Reserve Bank, foreign investment and trade. But all the signs are these will be useful not disruptive changes.

The new Labour-led government would be well-advised, though, to build on the big shift to social investment pioneered by Bill English. While a good deal of knowledge, design and experience has been generated its applications are still in pilot projects.

Some other governments around the world are taking a keen interest in these leading innovations here. Our society and economy would benefit greatly from the new government committing strongly to expanding this work.

So, there’s much to do to fast-forward New Zealand’s progress. All the signs show the new government and business are up for the task.

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