Comment

Analysis: Side-stepping the elephant in the room

Prime Minister Jacinda Ardern's big economic speech was supposed to address the business confidence slump. Instead, she side-stepped it with a nod and a wave, Bernard Hickey writes.

Comment: Jacinda Ardern called it the Government's "elephant in the room" just before she went on maternity leave. Upon her return, she said would address it directly in a major speech aimed at turning it around.

Business confidence slumped during the autumn and winter to its lowest levels since the Global Financial Crisis, despite what appeared to be solid employment growth, strong house building and plenty of population growth. It was the Government's biggest bad news during Ardern's absence and was leapt on by the Opposition as a sign the Government was failing economically.

Tuesday's speech was supposed to deal with it head-on and convince business leaders that the Government understood the problem, had listened, and was changing its plans to help.

Instead, those business leaders got a pep talk and an explanation of an existing plan, which they already knew. The key problems remain of an infrastructure deficit caused by a population shock, uncertainty over migration settings, the minimum wage surge and the ban on new oil and gas.

Ardern's announcement of a business advisory group and a limit to the number of fair pay agreements did little to address those concerns.

She again rejected calls to loosen the Government's net debt target to rectify an infrastructure deficit caused by a 10 percent population rise in the last five years. In my view, the speech failed to properly address both the "elephant in the room" and the reasons for it being there.

'It's a flashing neon sign'

Ardern started by addressing what she had previously called the "elephant in the room" - the weakest business confidence in almost a decade.

She said she had changed her mind: "not on our economic agenda - I remain more convinced than ever that it is required - but on the issue of business confidence".

"It is not the elephant in the room, it’s a flashing great neon sign with giant lights and fireworks going off behind it. We are all talking about it, and there is nothing wrong with that.

"That is why this speech was the first thing I announced the day I returned to work."

Ardern described a "business confidence paradox" where "when you line up business confidence with key economic performance measures over the last two governments there appears to be an inverse relationship between business confidence and the actual performance of the economy".

"For instance, average business confidence scores under the Clark/Cullen government were much lower than the Key/English government, despite Clark and Cullen delivering higher average growth, lower unemployment, lower debt, larger surpluses and stronger wage growth than their successors," she said.

"We appear to have inherited a similar conundrum, we’ve run a strong surplus, have the best net international investment position ever recorded, stable and low interest rates forecast for some time which ought to spur investment and the lowest unemployment rate in a decade."

Ardern failed to distinguish between the wider business confidence figure, which is politically biased and economically irrelevant, and the own activity measures of confidence, which are also down sharply and much more closely aligned with GDP growth. The Government rightly dismissed the slump in headline business confidence as a politically-biased measure of business leaders' disappointment at the change of Government.

But the slide in own activity confidence through the June quarter could not be as easily dismissed, and Ardern failed in the speech to acknowledge that.

'It's about certainty'

Instead, she chose to frame the own activity fall as a judgment about certainty, rather than confidence.

"From a business perspective, I understand the desire for certainty in order to make decisions big and small, ranging from the risk of taking on an extra hire through to multi-million dollar investment decisions, and you need to understand that the climate you operate in today will be broadly the same tomorrow.

"But certainty shouldn’t be confused for stasis and complacency, which are the enemy of progress, and for that matter the enemy of innovation."

She didn't address the business community's shock over the coalition's immediate and irrevocable decision to lift the minimum wage by more than a third in three years and its shock over the ban on new oil and gas drilling permits offshore.

Again side-stepping responsibility, Ardern said the economy faced a number of challenges which were global in nature.

"Skills shortages, lack of investment in the productive economy, a shallow national pool of capital, an infrastructure deficit, low productivity, building sustainable business practices in the wake of environmental degradation, and the challenges of what can broadly be called the future of work," she said.

"Our choice when faced with these challenges is to do nothing, maintain the status quo and hope it resolves itself, or prepare now to enhance our prosperity for future generations. Not adapting early has caught out our economy before.

"The jarring way in which we came out from under the cloak of protectionism in the early 80s saw over a hundred thousand workers lose their jobs and the genesis of many of the social challenges we are now working to fix decades later. This must not be repeated. And for that, we need a plan."

However, the speech had no more detail on dealing with the infrastructure deficit and low productivity, which are core concerns for businesses screaming out for workers able to live affordably near their workplaces, particularly in Auckland. The rail lines and houses needed to deal with congestion and housing affordability are at least a decade away, with no decisions yet on those rail lines because of a self-imposed preference for low debt over infrastructure spending.

'We're re-tooling the economy' Really?

Ardern then focused on the 'transformation' theme.

"It is time to retool our economy to make it work within the limits of our environment, shape it to deliver on the hopes and aspirations of all our people, and for our economic purpose to be bigger than just profit.

"From reform of the Reserve Bank where we are including maximum sustainable employment as an objective, to getting active in the housing market, building modern transport infrastructure and setting ambitious emission reduction targets - we are renovating the existing legislative and policy architecture to bring it up to the new code our economy needs.

However, that transformation narrative is worth challenging.

The changes to taxing capital and wealth are yet to be proposed or agreed to by voters. The modern transport infrastructure she referred is subject to the legislative timetables for the Urban Development Authority, infrastructure bonds and the infrastructure funding whims of the Auckland Council. Much of it remains uncertain and distant.

The addition of the vaguely phrased "contributing to supporting maximum sustainable employment" line in the Reserve Bank's Policy Targets Agreement has changed nothing. The inflation target remains much more specific and is clearly primal in the eyes of the Reserve Bank, which argued earlier this month the economy was running as fast it could, even though unemployment is above the Government's own 4 percent target and the under-utilisation rate is well above where it was the last time the economy was at full speed in 2007.

Swapping Partnership for Growth

She then announced the launch of a Business Partnership Agenda with the overall objective of building a "productive, sustainable and inclusive economy".

The previous government's centrepiece was the Business Growth Agenda.

"We need to transition from growth dominated by population increase and housing speculation, to build an economy, that as I said, is genuinely productive, sustainable and inclusive," Ardern said.

The Government wanted to reduce the gap between the highest and lowest income and wealth deciles, to grow real per capital incomes and to grow the diversity of exports and home ownership, she said.

To become more productive and sustainable, the workforce would have to become better educated, trained and paid. The Government has actually loosened migration settings since its election, despite its campaign rhetoric, and the only extra incentive for investment in businesses is the reintroduction of the R&D tax credit.

Nothing much as changed to alter the attraction of leveraged rental property investment. In fact, lending to rental property investors rose 25 percent in July from a year ago after the Reserve Bank slightly eased restrictions just before the arrival of the new Government and a new Governor.

'We're sticking to the rules'

Ardern then again rejected calls for the Government to use its balance sheet to address the infrastructure crisis.

"We will also meet our Budget Responsibility Rules. These rules are not a 'nice to have'. They are a firm guide as to how we want to manage the economy," she said.

"Some people have called for us to relax our borrowing rules or simply spend more. We won’t. The rules are an important part of ensuring long term fiscal sustainability."

Ardern stuck with the Government's slower-than-necessary investment plans because of the 20 percent net debt target. She and Finance Minister Grant Robertson may well be able to find some wriggle room in the Government's debt track to signal more investment in the half yearly fiscal update in December, and in next year's Budget, but she chose not to use this speech to do it.

She then reiterated the Government's plans for a path to a net-zero emissions future and defended plans to lift wages.

She previewed the Government's plans "in the coming months" to bring in a regional skills shortage list and addressed the issue of Fair Pay Agreements, which have been controversial with bigger business groups who fear the reintroduction of national awards style agreements.

"They have become the source of a bit of discussion. I understand why – they are common place in Australia, but are not something we have seen on our shores. That’s why we have taken a cautious and considered approach," she said, noting a working group would report back in November.

"But taking a considered collaborative approach, has meant that there has been room left for a bit of speculation around what fair pay agreements might do, and whom they might effect. It’s time we drew a line around that speculation," she said.

'Just one or two Fair Pay Agreements'

Ardern said fair pay agreements were intended as 'win-win' agreements to create a level playing field and wage stability.

"But I can also tell you what they are not here to do. They are not here to fundamentally disrupt our employment relations landscape, and they will not for instance be accompanied by the ability to take strike action," she said.

"But I can say all of that – and the truth is of course, that going slowly on their design to make sure we get it right, has left a bit of a vacuum. I acknowledge that. And I want to do something about it.

"That’s why I am confirming today that there will be no more than one or two fair pay agreements concluded during this term. They will be in industries and sectors that have low pay and in which the workers are vulnerable and regularly exploited."

Ardern said the vast bulk of the business leaders at the speech would be unaffected by these agreements, but "you will have a chance to see how they work, the benefits that they bring, and I hope, that some of the speculation around them is unfounded".

'And here's the Business Council'

Ardern then announced the creation of the Prime Minister's Business Advisory Council with Air New Zealand CEO Christopher Luxon as its inaugural chair.

"Christopher and I will be putting together over the coming weeks a team of business leaders, committed to building a new economy, to advise on matters relating to the economy, our strategy and agenda," she said.

"But this is not just a group that will provide thought leadership. Members of the group will be tasked with working alongside us to assist with addressing some of the big challenges we face. I want the council to report to me on the issues and opportunities they see and identify emerging challenges like skills, training and migration and the challenge of scaling New Zealand businesses up and growing our export led wealth."

Ardern said she wanted advice from business leaders taking a helicopter view of the economy and who were long-term strategic thinkers.

"The Council will supplement the work that business is already doing on initiatives like the tripartite forum on the future of work, but it is fair to say that there is no formal advice stream such as this, and it’s time that changed."

"This is about ensuring business has a voice at the table, but also are actively involved in leading us in our new direction."

Ardern concluded that New Zealand had a positive future despite the 'giant flashing sign with fireworks' of low business confidence.

"We are promoting change because without change our businesses and our economy are at risk. But change does not need to breed uncertainty, not when instead it can breed opportunity," she said.

"I have confidence that our relationship will thrive, that our agenda will successfully tackle the challenges we face, and that our shared achievements for the country will leave a lasting legacy future generations will thank us for.

"Now let’s get on with it."

Her concluding comments showed she believed business leaders needed simply to listen more closely to the Government, get more involved and 'buck their ideas up' about the positives in the economy.

A pep talk, and uncertainty remains

It was more of a pep talk than a new plan or an acknowledgement that business owners had legitimate concerns.

I doubt it will calm the horses much, given the long-awaiting temporary work visa changes are still a 'month or two away', the minimum wage hikes are still planned and Auckland massive infrastructure deficit remains unaddressed. The Government is still legislating for its Urban Development Authority, its infrastructure investment bonds and still hunting for other sources of capital to build two crucial rail lines in Auckland. Certainty on those projects and that spending is unlikely before 2020.

The next reading will be from the ANZ's Business Outlook survey for August. It is due for release on Thursday, but almost all of the confidence readings will be from before the speech.

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