NZ's low productivity problem: Red tape has us tied in knots

Paul Kane
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Improving a country’s productivity has enormous benefits: it increases wages and raises the standard of living for everyone. Unfortunately, New Zealand’s productivity has been lacklustre since the turn of the millennium.

We work longer hours, but achieve less output when compared to the OECD average. We’re floundering at 16th in the OECD productivity rankings and our output per person rate been overtaken by countries like Ireland, South Korea and Canada.

As Treasury itself admits, productivity is our biggest economic challenge and needs sustained effort “on a number of fronts”. 

The solution for low productivity is well-known: innovation and technology. Kiwis are not only hard workers, but we can be highly innovative and adopt technology rapidly. So, what is holding us back? According to the most recent report by the Productivity Commission, one explanation is barriers resulting from “institutional arrangements”. One of the biggest roadblocks cited is red tape. It has ensnared nearly every industry over the past few years and it’s a major challenge for business innovation and better productivity. 

Stifling innovation in the construction industry

Consider the construction industry; burned by the leaky homes issue, red tape is now a considerable hurdle for even the simplest of builds. And if you’re trying to do something new, get ready to wade through a sea of it. 

One of my clients is building an innovative zero carbon house and went through a considerable amount of red tape to get the optimised design signed off by council and engineers. But, as he explained in a recent article, that wasn’t nearly enough for two separate building inspectors, who weren’t happy with the carefully engineered construction methods. 

“If it takes years to get alternative solutions consented,” he wrote, “and if parts of a hard-won consent can be summarily ignored by inspectors, then why would anyone bother trying to be innovative with materials or methods?” 

It’s no coincidence that the Commission reported a 2.8% drop in construction industry productivity between 2019 and 2020, putting it among the lowest-performing sectors. 

Infrastructure red tape is clogging up our roads 

The lowest productivity improvements in construction are seen on the biggest projects, according to New Zealand Infrastructure Commission. Its 2022 Economic Performance report found that labour productivity in New Zealand grew by 30% between 2000 and 2020, but only by 5% in civil construction. It estimated that if civil construction had matched the 23% growth rate seen in building construction, we would see:

  • 10% lower infrastructure construction prices
  • 11% less workers would be required
  • 5% more infrastructure construction

This lack of infrastructure holds back productivity across nearly every other industry, slowing us down both literally and figuratively. Slow commuting, snarled-up roads, and endless roadworks are sucking some of the productive life force out of our economy. 

The report highlighted several factors that needed exploring, including singling out systems for consents and approvals: “Internationally, countries with more inefficient construction permitting systems tend to experience slower construction productivity growth.

Does our system reduce productivity growth, for instance by limiting innovation in infrastructure design or construction methods?” As I sit in gridlocked Auckland traffic on my way home, I suspect the answer is a resounding ‘yes’. 

It’s particularly concerning that transport links within the country are hampering our productivity. Northland, for example, is very rich in mineral resources and job opportunities are always welcome in the region. But it remains largely untapped – and anyone who’s ever tried to drive to Northland on a Friday afternoon can point to one major reason why. Add to that the lack of planning around our ports, and it paints a bleak picture for future productivity growth. 

Overregulated immigration exacerbates our labour shortage 

Waiting for regulation means New Zealand has been too slow to react to the serious skills shortage that arose post-pandemic. It took until April 2023 before 32 badly-needed healthcare roles were added to the Straight to Residence immigration pathway. Meanwhile, struggling with a serious shortage, remaining nurses were so overworked that many are leaving for better pay in Australia and Canada.

When other nations have simpler, more streamlined pathways to citizenship, they’re going to be more attractive – and when you combine that with higher pay, we’re going to be well down the list of favoured destinations. Without the skilled workforce we need, it’s yet another barrier to boosting our productivity.

Funding for R&D: Often not worth the bother

There is Government funding available for a wide range of research and development (R&D), but is the juice worth the squeeze? 

Being approved for any type of innovation or R&D funding often requires jumping through hoops that are both high and numerous. When you’re already struggling with a stretched workforce, allocating people to an onerous administrative task to secure limited funding can seem like a waste of resources. That’s particularly true when you secure the funding, and it takes a concerted ongoing effort to keep measuring, monitoring and complying with whatever rules have been put in place. 

I’ve often heard clients say that the funding is only just above breakeven once it’s balanced out against the amount of work required to secure and retain it. ‘I wouldn’t bother next time’, is not an uncommon sentiment. 

In contrast, the R&D tax incentive is a simpler and more streamlined way to support innovative research. As of mid-2022 there were over 1,500 businesses enrolled, which illustrates how less red tape can create a system that attracts far more engagement. 

Just-enough regulation will boost productivity   

It’s imperative for New Zealand to improve its productivity, because it boosts quality of life for everyone. But overregulation is holding us back across many industries, and it doesn’t seem to be slowing down. 

We need a more streamlined country – both physically and economically. By removing red tape and making it easier to innovate, we can start to improve productivity and realise enormous benefits for every New Zealander.