New Zealand's productivity challenge looms despite brighter economic outlook

New Zealand's Pre-Election Economic and Fiscal Update has revealed a brighter fiscal outlook than previously expected. Treasury now forecasts a $6.8 billion deficit in 2026-27, down from the $11.4 billion predicted in May. Higher tax revenue is expected to reduce government borrowing by $15 billion over the next four years, providing political parties with a clearer picture of the economy ahead of the November election.

The economy has shown signs of recovery, with GDP increasing 0.2% in the June quarter and 1.7% higher than a year earlier. However, the recovery remains fragile, with annual inflation climbing back to 4.1% and global oil shocks posing renewed risks to both inflation and growth.

The update also highlighted New Zealand's long-standing productivity problem, which neither economic recovery nor a change of government can quickly fix. Productivity growth averaged around 1.4% annually between 1993 and 2013 but dropped to just 0.2% over the following decade. The country's output per person remains well below that of the most advanced economies.

Several factors contribute to this issue, including low wages, weak competition, declining educational performance, slow technology uptake, shallow capital markets, high energy costs, and regulatory barriers. Addressing these problems requires a combination of policy reforms, such as increasing investment per worker, improving access to finance, fostering competition, and removing barriers to development.