Infrastructure and Growth

372. The government’s medium and long-term strategy for achieving economic growth is to provide the conditions that maximise innovation and productivity in the economy while meeting other welfare objectives. In the longer term, increases in productivity are needed, with a focus on international competitiveness, to permanently raise New Zealanders’ living standards. The government has identified six policy drivers that will form the core of its economic programme for the next three to five years:

• Reviewing regulation and red tape;
• Delivering better, smarter public services;
• Improving education and skills;
• Offering innovation and business assistance;
• Reviewing the tax system; and
• Investing in productive infrastructure.

373. A National Infrastructure Plan needs to be based on a clear understanding of the role that infrastructure plays in enabling economic growth. According to the World Economic Forum’s latest Executive Opinion Survey, inadequate infrastructure is a more serious barrier to doing business in New Zealand than inadequate institutions, macroeconomic stability or health and primary education.[98]

374. In its latest New Zealand country survey, the OECD states that:

When public expenditures were restrained during the reforms of the mid-1980s to the early 1990s, infrastructure investments were particularly affected because delayed impacts made them attractive targets for cuts. Deferred maintenance has since accumulated, and infrastructure bottlenecks are starting to show up, particularly in electricity transmission and roads in and around Auckland. Public expenditures on infrastructure have risen significantly in recent years, but it will take some years before the impact is visible.

Infrastructure … is an important focus of public policy for two main reasons. … The second is a strong presumption from economic theory that infrastructure investments can have positive effects on growth that go beyond normal additions to the capital stock. This is because investments in network industry infrastructure are thought to yield positive externalities on other sectors. For instance, better communications infrastructure can facilitate collaboration among workers and raise their productivity. This last characteristic makes achieving optimal levels of infrastructure in network industries especially important. Empirically, however, the link between infrastructure investment and growth has traditionally been difficult to pin down. The direction of causality is hard to determine convincingly and appears to depend on the country, sector and existing level of provision. Recent cross-country studies have used sophisticated econometric techniques to untangle these effects and have confirmed that greater provision of broad measures of infrastructure is associated with higher subsequent growth rates …. Recent OECD work also finds that the contributions of infrastructure to long-run output levels and growth go beyond normal additions to the capital stock (ie, they generate positive externalities) and that they are not homogenous across countries…In New Zealand's case, this work indicates that past investments in road infrastructure have yielded the greatest growth benefits.[99]

375. The recent OECD work referred to above[100] is based on econometric analyses. However, it is consistent with a microeconomic analysis and, in particular, the conclusion in the last sentence is consistent with the observation that during the 1990s, new road projects needed to have a benefit cost ratio of at least 4:1, to achieve funding which is equivalent to an internal rate of return of over 50 per cent.

376. More generally, microeconomic considerations suggest that infrastructure projects contribute to economic welfare if their benefit cost ratio exceeds 1:1, where “benefit” and “cost” are interpreted widely to include all social, economic and environmental benefits and costs, including positive and negative externalities.

377. Over the period of the plan, real GDP is projected to increase by over 60 per cent from approximately $133 billion in 2008/09 to $213 billion in 2028/29.[101] While this is a significant increase over 20 years, on an annual basis it equates to an increase in the two to three per cent range.

378. However, the government has set a goal for New Zealand’s wage levels and standard of living to reach those of Australia by 2025. To achieve this, New Zealand's GDP will have to grow at a faster rate than it has over the last decade. Rather than growing at 2-3 per cent per annum (as assumed), it is estimated that GDP will have to grow at around 5 per cent a year until 2025 to catch Australia.

379. The 2025 Taskforce's brief is to provide recommendations on ways to improve productivity and close the income gap with Australia by 2025. The Taskforce will provide an initial report in October 2009, identifying changes that will deliver the productivity growth necessary.

380. It is not yet clear to what extent the Taskforce will focus specifically on infrastructure or on the extent to which its thinking will be sufficiently developed in its October report for it to be taken into account in the first National Infrastructure Plan. While the Plan will pick up relevant Taskforce recommendations, we encourage submitters to also focus on this area. In particular, we invite submitters to suggest areas of additional investment that would help NZ to increase its rate of economic growth and describe why this additional investment should be a priority for the allocation of funds.