The ageing productivity conundrum

The 2015 Budget projects a modest average GDP growth of 2.8% over the next four years. Although a core component of GDP growth is maintenance and improvement  of productive capability, the Budget only included a modest range of measures to indirectly influence productivity gains, primarily in skills improvement and increasing workforce participation for beneficiaries.

However, the government has yet to address the productivity dilemma the aging population of New Zealand will present. While the ageing population debate to date has focussed on the affordability of universal superannuation and the ballooning financial burden on the health sector, an aging population has a direct impact on  productive capability both of those who look to retire, and the significant  number of businesses owned by baby boomers. Unless this impact is acknowledged and addressed there is a real risk of a significant drop in productive capability in New Zealand, with a corresponding direct impact on GDP.

The Treasury forecast that a ratio of working age people to retirement age people of 5:1 in 2006 will shift to 4:1 by 2020 and rapidly accelerate to only 2:1 by 2050.   

Structural Ageing in New Zealand 2006 – 2050          
New Zealand Treasury. (2013b). Future Costs of retirement income policy, and ways of addressing them. Wellington New Zealand Treasury.           

Productivity is a combination of the input of labour (how many people are available to work and the hours they are available to work) and capital leverage (working capital, buildings, machines, computers), and the efficiency at which they are leveraged. With the projected reduction in the available workforce, the focus needs to be on greater use of technology, and a marked increase in efficiency.

There are several measures included in the Budget which have a potential productivity impact.

There is increased funding for childcare assistance for low income families, to facilitate greater participation in the workforce. There is also a change to the requirement for thoseon a benefit to be available for part time work when the youngest child turns 3 years of age. Previously this occurred when the youngest child turned 5.

Education receives a boost, with a targeted $113m funding increase as the government seeks to improve knowledge and skills. There is also an $80m boost  to R&D grants, which support innovative businesses by the government contributing 20% of the companies’ R&D costs.

These changes are relatively minor and do little to address the significant reduction in productive labour that will continue to grow as the baby boomers move into retirement. 

In addition, the business environment itself is changing at a fast pace. The succession issue that faces exiting baby boomers is becoming more critical, given the volume of businesses they collectively own (and with it productive capability) which will inevitably require transition arrangements. It’s not just the removal of the owner from a  baby boomer’s business, but whether there is someone suitable to take it over and hopefully grow it and keep it viable going forward. There is a risk that this will have a direct impact on future productivity in New Zealand.

The ageing productivity conundrum presents a potential significant fiscal deficit creep.Without immediate change to capital investment and efficiency, a productive capability decline will take considerable time to address and reverse. The time to start addressing this through policy change is now.

Further enquiries, please contact:

Tim Downes
National Managing Partner
Grant Thornton New Zealand
T: +64 9 308 2989
M: +64 21 909442