Roger Douglas releases report identifying New Zealand's 'unpalatable truth'

Former Finance Minister Roger Douglas has co-authored a report critical of New Zealand's "institutional inefficiencies", "poor policy-making" and "mounting economic problems".

The March Towards Poverty paper was authored by Douglas, the former Labour Finance Minister behind Rogernomics who ended up founding the Act Party, as well as business Professor Robert MacCulloch and Hugh McCaffrey. It has been released ahead of Thursday's Budget, which the authors say could be the most important in New Zealand's history.

"In the aftermath of the economic fall-out caused by the COVID-19 outbreak, the Labour Government must not only seek to help those who have been most affected by the recent lockdown, but also introduce the framework for radical new policies; policies which address the systemic weaknesses that have undermined our economy and society for so long, and which threaten our very future."

It presents what it calls an "unpalatable truth", arguing that New Zealand is lagging behind OECD countries with "institutional inefficiencies, poor policy-making and the almost willful refusal of successive governments to admit to (let alone confront) mounting economic problems" pushing the country towards a "deep and lasting economic downturn". 

The authors present key areas where they say New Zealand is falling behind - the "three pillars of social wellbeing" (education, health and social welfare), housing, tax, productivity, and debt. Without bold action, the report says we are on the "road towards poverty".

Education, health, social welfare

The three pillars of social wellbeing - Education, health and social welfare - have seen increased spending in real terms by each successive government, the report says, taking annual spending in these sectors from $4500 per person in 1972 to more than $12,000 today.

But despite this, the authors say outcomes haven't significantly improved. They point to a number of reports and statistics as showing declining results. 

For example, in education, they reference the Progress in International Reading Literacy Study from 2017 which found reading ability had fallen, with New Zealand ranked below many OECD countries. However, the OECD's Programme for International Student Assessment report of 2018 found students in New Zealand scored higher than the OECD average in reading, mathematics and science. Though that also confirmed a steady trend downwards in those three areas since at least 2000.

On health, Douglas and his co-authors say we spend about two times as much in real terms on healthcare than in 2001, but the number of consultations taken in New Zealand per head was dropping, something confirmed in a 2017 OECD report. Aotearoa was near the bottom of the pack in this area.

"When we add our ageing population into the mix, and the enormous extra burden that will be imposed on our healthcare system in the decades to come, it is hard to disagree with the Ministry of Health’s own finding, in its 2016 strategy report, that the current services provided by the government are unsustainable in the long run and that 'it is essential we find new and sustainable ways to deliver services.'"

Finally with social welfare, which New Zealand spent $34 billion on last year - nearly more than health and education combined - the report considers the sector broken, citing the Welfare Expert Advisory Group's report last year and recent child poverty data showing that 13.4 percent of children live in households reporting material hardship. It said the rising costs of benefits as well as superannuation made current models unsustainable.  

The current Government has attempted to support families and reduce child poverty via its Family Incomes Package, which included introducing the Winter Energy Payment, increases to Working for Families tax credits and changes to accommodation supplements. Many of these initiatives were boosted by the Government recently in response to the COVID-19 pandemic. 

Tax and debt

The report suggests that successive governments have responded to crises by increasing tax, something it says is no longer an option. It notes that the "economic devastation" caused by COVID-19 means people simply won't be able to afford higher taxes and that New Zealand has an overall tax burden higher than most other countries.

"History tells us that when governments create a high tax environment, they unwittingly provide an incentive for those who can afford it to hire smart accountants to find innovative ways to lower their tax. In other words, high taxes will often result in a reduction in tax revenues."

The authors say that taxes are just being "poorly used".

On debt, the report says New Zealand has a real issue due to the economic downturn COVID-19 has brought about, coupled with the "additional debt burden" relating to New Zealand's ageing population and the strain that will have on superannuation and the health system.

"Taking both New Zealand Superannuation and healthcare costs together, we had an undiscounted accrued liability in 2019 of over $1.2 trillion," the report says.

"Unfortunately for New Zealanders, we are not able to see the true costs of our current policies because the Government deems that such liability does not ‘accrue’ until you apply for such an entitlement. 

"Just because you can pretend it is not a liability for the purposes of accounting, does not alter reality. New Zealand’s current scheme is racking up significant unfunded liabilities with no thought as to how they will be met in the future."

The authors say this shows the costly path we are on. It calls on politicians to acknowledge the issue of future liabilities already accrued. 

"The Government needs to find the courage to face this crisis (which begins by admitting it exists), instead of indulging in the empty politicking that comes with pretending that everything is okay, leaving it to future governments, and our younger generations, to deal with the mess."

Finance Minister Grant Robertson said last week that in the wake of COVID-19, the Government would be running deficits for an extended period of time with debt levels meant to reach record highs. Robertson has previously said New Zealand has a good platform to rebuild due to low unemployment, rising wages and surpluses.


Over the last 20 years, the authors say, Kiwis' ability to buy a house has become increasingly more difficult, with low housing stocks, higher prices, a complex policy environment, land banking, and the "intransigence of privileged landowners". 

To summarise the difficulties for Kiwis to own a home, the report points to a survey by Demographia International which finds a "median multiple" measuring house prices divided by median household incomes. If the median multiple is less than 3, house prices are considered affordable, while those over 5.1 are severely unaffordable. New Zealand scored 8.6, only below China at 20.8. Of the countries surveyed, the United States was the lowest at 3.9.

"When house prices increase, it has a disproportionate impact on low income New Zealanders, not simply because they have no hope of purchasing their own home, but because rent prices increase too," the report says.

"If we want to find a reason why 13 percent of our children live in poverty or near poverty, then rent and mortgage costs are a good place to start."

The shortage of homes is "an artificial one" due to limits imposed by councils and Government. The Government is currently looking at reforming the Resource Management Act and has already put limits on foreigners not intending to live in Aotearoa buying up existing New Zealand homes. 


Finally, to lift Kiwis' general living standards, we need to lift productivity, the report argues. It cites findings by economist Michael Reddell that ranks New Zealand fourth to last in terms of labour productivity growth and last in terms of multi-factor productivity growth.

"Moreover, for the most recent 5 year period measured, New Zealand averages about 65 percent of the GDP per hour worked of the median country for which the OECD as data," the report says. "Given that GDP per hour is a fairly reliable indicator of the prospects of a country in the long term, we are quite clearly running a long way behind our competitors, and losing ground fast."

"Whilst there are a number of reasons for this, including the high off-the-shelf costs of capital goods in New Zealand, the small size of our domestic market, and our low investment in knowledge-based capital, productivity within government sectors is also to blame."

Again, the authors say we need to put the issue of productivity "out in the open" and promise possible ideas for reforms to be presented in an upcoming paper.