Jul 13, 2022 • 35M

NZ Inc stumbling towards another investment-lite influx of guest workers

Opposition, employers, SMEs, hospitals, farmers & schools make crisis pleas for opening of migration taps, but without discussing whether (or how) to 'build it before they come' (rather than never)

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TLDR: The intensity of calls to wrench open the migration tap are building to a tipping point, either before or after the election.

But we can’t only pull the migration lever again. There should to be a bi-partisan agreement on how populated and productive we want Aotearoa-NZ to be, and who should pay for the $200b of infrastructure needed to grow much more productively, along with housing everyone affordably and cleanly.

Just pulling one lever would only embed and worsen the high-population-growth, low-productivity-growth, low-wage, low-investment and high-house-price model NZ Inc has become. Given the current state of the political economy, this sort of societal and economic Groundhog Day appears the most likely result. But I suggest some options for what that bi-partisan set of truces and deals to make it happen could look like.

Employers want much easier access to lower-wage and usually temporary migrant workers, although they’d also love to bring in as many higher skilled workers as possible with the carrot of an easier path to residency. Photo: Lynn Grieveson / The Kākā

A howel of demands for more migrants

It’s now a crescendo that is reaching fever pitch and it’s only a matter of time before the Government relents, or the Government changes, and it happens anyway.

Deep in a winter of discontent, employers of all shapes and sizes, the Opposition and even many in public services such as hospitals and schools are now pleading for the Government to pull the migration lever. They want much easier access to lower-wage and usually temporary workers, although they’d also love to bring in as many higher skilled workers as possible with the carrot of an easier path to residency.

So far, the Government has held the line on its tighter ‘rebalanced’ system of only allowing accredited employers to import a restricted set and number of workers, and (mostly) only then at pay rates 31% above the minimum wage. But the pressure is building to breaking point, powered by signs everywhere of usually reliable essential services breaking down (suspended elective surgeries, school holiday flight cancellations, shortened shop and cafe hours, construction delays and building materials shortages, an age care sector near collapse), and growing fears of a wage-price spiral that worsens the inflationary cost-of-living crisis.

The trouble is this collective walk-run-stumble to looser migration settings is happening without any of the hard decisions on whether and how to fund $200b worth of infrastructure investment needed in tandem with this fresh surge. The end result of only pulling the one (migration) lever without pulling both levers (migration and infrastructure) will be the same intense pressure on capacity and prices of both the existing infrastructure and the new housing they are supposed to enable.

‘We’ve got to open the place up’

Ahead in the polls and with an anti-inflationary bellow at his back, Opposition leader Christopher Luxon said this week Aotearoa-NZ should pull the immigration lever urgently.

“We’ve got massive skills gaps everywhere, we’ve got to open the place up. And the accompanying piece to that is making sure we’ve got the infrastructure to support it as well because we’ve done a poor job of syncing those two bits together ... but yeah, we’re very pro-immigration.” National Leader Christopher Luxon telling the Sydney Morning Herald’s Latika Bourke in an interview in London that he urgently wanted more temporary and permanent migrants to boost productivity and alleviate inflation, including extending the eligibility for working holiday visas from 30 to 35 and allowing repeat visits.

Luxon understands the risk of only pulling one lever, but hasn’t developed any of the policy or political support for policies that would make a differnce any time remotely fast enough to cope with another 500,000 people in five years or so. Spending the $200b over 30 years, as suggested by the Infrastructure Commission, would require either massive amount of new debt issuance and/or some form of new or higher regular tax on everyone to both keep the debt at a reasonable level and service it at higher interest rates.

Neither have permission to borrow, tax and build. Yet.

Finance Minister Grant Robertson has already ruled out that sort of level of investment by the state, which would effectively double Aotearoa-NZ’s overall investment level to 30% of GDP per year. He has airily suggested options for ‘demand management’, which essentially means water and congestion charges. He does not have the political license for either. Three Waters is actually just a sophisticated way to bring in water charges and lift water borrowing without having to ask for ratepayer permission. It appears doomed. Labour can only hope voters don’t notice the lack of either credible progress or a plan before the next election, or that they continue believing the magical thinking of some that the infrastructure can be done without big debt, taxes or congestion and water charges.

The daily drumbeat of non-delivery and the attempts to distract with the smoke-screens of funding reviews and business case development will eventually erode the magic from that thinking and turn into a Government-rejection voting machine.

Luxon has yet to propose a way to match anything like a $200b infastructure funding plan to match his “very pro-immigration” stance. He has already ruled out Three Waters and has yet to commit to congestion charging. His spokespeople have ruled out Let’s Get Wellington Moving and Auckland Light Rail, although they do want to build more motorways. Luxon is also nowhere near a comprehensive and credible plan that produces affordable housing, transport, health and education at the same time as high population growth. That would require hospital, school and busways on a whole new level.

So what’s the problem right now?

On the face of it, there’s everything to love about a migration surge over the next couple of years. It would rev up an economy slowing towards at least a mild recession next year and take some pressure off some of the wage inflation building in the system. It would also deliver a huge morale boost to those in essential services such as hospitals, schools, transport operators and the food and grocery logistics system that help was coming. So many people are just plain exhausted after two and a half years of dislocations to work life, home life, school life and the intense pressure of constantly trying to deliver 100% of the 2019 level services with just 85% of the staff.

It could also be argued that a fresh surge of construction workers would re-energise the infrastructure build that is already underway, helping to fill some of the infrastructure deficit. And there’s plenty of people suggesting that the migration surge will only replace the exodus of Kiwis going overseas with their recently learned skills to earn higher wages, especially with the prospect of a path to citizenship in Australia and extra time on OE in Britain (an extra year to three years and a wider age window of 18 to 35 instead of 18 to 30.)

The ready, fire, aim problem

The bigger problem is that pulling in an extra 500,000 people in five years would amplify the congestion, the housing unaffordability, the emissions reductions shortfall and all the other shortages in hospitals and schools.

It would also amplify the tax-free and leveraged capital gains on housing once Luxon reversed the interest deductibility and brightline tax changes for property investors. That may not be the stated reason for only pulling the one lever (migration), but it sure is handy as ‘collateral (non) damage’ when trying to flip median-voting homeowners in the suburbs, which is the core task for Luxon.

There are other ways

So how could it be different? What truces would need to be declared and deals done to shift the consensus to pulling both levers in a more strategic way that planned to match the population growth with the infrastructure investment with a credibility and longevity that convinced private sector investors and home owners alike? Expectations management, as the Reserve Bank has found, is almost as important as matching those expectations and delivering.

We know the scale of the work needed for the existing (relatively low) forecasts for population growth (that’s the $200b), but we have yet to work out and agree what level of actual population growth both parties want. We have also yet to work out how to pay for the infrastructure, and more importantly, who should pay. These are all difficult conversations with supporters and the public. Centrist ‘low-target’ politicians avoid them like the plague, all the while hoping their opponents do walk into these minefields. Everyone has detonators at the ready.

To have these discussions sensibly and credibly, they require the sorts of bipartisan truces and deals that have been declared in the past 30 years around inflation targeting, consumption taxes, NZ Superannuation, urban densification and various middle-class welfare spending such as interest-free student fees, Working for Families and the Accommodation Supplement.

So what truces and deals are needed?

How could we build and pay for over $200b of infrastructure and public services over 30 years? What types of agreements would give voters and businesses the surety that the immigration would be matched with infrastructure?

In my view, those deals would have to include:

  • a new settlement of the financial relationship between central Government and Councils that ensures they are helped with debt and given new and reliable revenue streams (possibly GST or shares of any new wealth, capital and/or land tax/levies) that are able to leveraged up into multi-decade investments because the incentives are aligned in way that squashes regular ratepayer revolts;

  • both major political parties would have to agree to go forward with congestion and water charges, which are in effect an agreement to increase taxes to both pay for new infrastructure and manage demand in a way to minimises the scale and need for new concrete, steel and drilling of road and rail tunnels;

  • both parties would have to agree to reduce or give up the mega-project plans ($7.4b for Let’s Get Wellington Moving $14.6b for Auckland CBD to Airport Rail) and focus instead on much-more-immediate mode shift from cars to buses, bikes, scooters and walking; and,

  • both parties would have to agree on the scale and speed of the population growth they want over the next 30 years, and what they want to see achieved in housing affordability and emissions reductions over that time.

We’re closer than you might think

The key is removing the mega-plans in tandem with agreeing on congestion-charging funded mode shift. That massively reduces the scale of the problem of convincing voters to accept higher taxes, and it in-effect forces Labour-Green and National-ACT to give up a couple of their core demands in equal measure. It also means emissions reduction and the ‘just’ part of the ‘just transition’ might actually happen.

In effect:

  • the Labour-Green side would have to give up on their big train tunnels in Auckland and Wellington’s tunnels and light rail;

  • the National-ACT side would have to give up on their motorway plans and convince their own supporters of the benefits for motorists and taxpayers of a fast mode shift that frees up a few existing road and motorway lanes for (electric) Ferraris, (electric) double-cab utes, (electric) delivery vans, (electric) buses and (hopefully hydrogen-powered) trucks;

  • in return, Labour-Green would get the fast and just transition to subsidised bus-led, walking and (electric) cycling-driven big cities that encourage much more (affordable, safe and warm) new medium density housing;

  • Labour-Green would also get the sort of just transition they have talked about but not been able to win support for across the divide, along with air cover to fight off the political bombing runs of Groundswell-ish types protesting against ‘ute taxes’ and ‘toy train sets’;

  • in return, National-ACT would get to keep relatively low income tax rates and (possibly) low or even no wealth, capital or land taxes; and,

  • National would win electric vehicle-buying subsidies that help (their core supporters) farmers, suburban and provincial families and tradies into electric vehicles they can drive on clear roads (albeit with congestion charges).

All this may seem pipe-dreamish on my part, but there are signs there in recent years a deal could be done. Both National and Labour have flirted nervously with the idea of congestion charging for years, and both would like political air cover to do both congestion charging and subsidise electric vehicles. Labour and the Greens would also like the political air cover to ramp up public subsidies for cheaper, closer and more frequent bus and (existing) train use, along with subsidies for bikes and fast (partial) conversions of roads to cycleways and walkways.

National-ACT definitely don’t want to have to convince their suburban, rural and provincial supporters they should pay higher taxes for big railway and motorway tunnels in Auckland and Wellington. They’d also like to avoid land and capital taxes if they could.

A new deal for Councils is the key

The key to the whole package of deals is around council finances. Anything decided in and around the Beehive is now hostage to a myriad of ratepayer-revolts quashing investment, borrowing and rates rises. This is quite likely after this October’s elections.

The pathways are being built for this ‘new deal’ for councils. Not that anyone would know it because of the Three Waters and other noise, but there is actually a full-scale review going on right now around these issues of shared funding of infrastructure and new revenue tools for councils. It could be the vehicle to suggest and agree a deal.

The Productivity Commission and Infrastructure Commission have also both just produced major reports that scope out the potential risks and scale of rapid population growth without enough accompanying infrastructure spending. Ideas for congestion charges as demand management tools and the suggestions about avoiding big, expensive tunnels and rail lines are already out there in safe spaces.

The Productivity Commission has also recommended a Government Policy Statement that addresses the population planning issue and connects it directly to infrastructure planning in a way that means the economy and society have ‘absorbtive capacity’ for more migration.

The Climate Commission has also prepared the political ground for the types of electric vehicle subsidies and mode shift plans that both sides will need to call on when the time comes to convince their ‘tribes’.

Really? You’re joking right?

My base case is that none of these deals get done and the short term drivers will mean Opposition parties take the immediate opportunities in front of them to score political points (ute tax, ‘anti-car’ policies and ‘multi-billion-dollar toy train sets’) and for the Government to adopt a defensive crouch and ‘low target’ set of policies (no congestion charges, no mention of higher debts or any new taxes to fund them).

Back to the (crowded and expensive) future

The migration lever will then be pulled, either in desperation before the election by Labour, or by National once in power. The same infrastructure-lite approach will be taken by the Government that starts inflating house prices again and leads us back to where we were just before the pandemic.

Back then, we had the fastest population growth in the developed world, the highest rents relative to income in the developed world, the best performing housing market in the world for owners and the fourth highest proportion of residents living overseas in the OECD. We also had among the most expensive public transport fares in the world and were well under our targets for emissions reductions.

Now, our population isn’t growing nearly as fast, but would again once the migration lever is pulled. We still have the most expensive rents and houses in the developed world, and a new generation of residents are looking to move permanently overseas because wages are too low and living costs (mostly housing and food) are too high.

Readers may doubt it, but I remain hopeful and very keen to suggest options and solutions that I can’t be held responsible for delivering, but would be more than happy to hold those responsible accountable.

Again, this is a piece of public interest, I feel, so here’s the usual question and I await your response. Should we open it up for all immediately?


Elsewhere in the news here and overseas this morning:

  • Data overnight showed US CPI inflation rose 9.1% in June from a year ago, which was above forecasts for a rise of around 8.8% and the highest rate since November 1981, although stock markets were not rattled and longer bond yields actually fell on the belief likely Fed rate hikes would deepen a recession later this year and/or next year;

  • The Bank of Canada surprised everyone by hiking its cash rate by a full 100 basis points to 2.5% overnight, while the Korean central bank hiked by an expected 50 basis points to 2.25%;

  • ANZ Group in Australia confirmed it was looking to buy MYOB; and,

  • Later today, the Government is expected to announce free and/or cheaper access to masks and rapid antigen tests.

Chart of the day

How the Kiwi diaspora in Australia was built

Number of the day

50 basis points - The Reserve Bank raised the OCR as expected by 50 basis points to 2.5%. There was not much reaction. Most economists still think the OCR will peak at 3.5% later this year and the Reserve Bank won’t get to lift it in line with its last forecast in May of a 3.95% peak. Some see the Reserve Bank cutting again, or at least forecasting cuts, by later next year.

Some fun things

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