Why Productivity Matters

Small to medium-sized businesses make a significant contribution to New Zealand’s economy, but many face the challenge of how to achieve greater productivity – and this doesn’t mean working longer hours.

Improving New Zealand’s productivity has proved elusive for decades and unfortunately we now rank amongst the bottom 25 per cent of OECD countries. But what is productivity, and why does it matter?

Most people think productivity means working longer hours, but I want to dispel this notion. Productivity is a measure of how efficiently a business uses capital and labour to produce goods and services with a higher value. A business with a higher rate of productivity is one that produces more goods and/or services at a higher value using less capital and/or labour. Less inputs, more outputs.

New Zealand used to be one of the most productive countries in the world, ranking alongside the UK, US and Australia, but over time we have fallen further and further behind. Why? Because working more hours and putting more people into work has been New Zealand’s answer to economic growth, whereas other countries have figured out how to produce more at a greater value for each hour worked.

Why does productivity matter? How productive we are as a nation affects how much we get paid and how much goods and services cost. It impacts significantly on our overall living standards.

A new report released in May by the New Zealand Productivity Commission says that New Zealanders work longer hours than people in other OECD countries, and we produce less per hour. We’re pretty poor as a nation when it comes to productivity – and poor productivity results in higher prices for everyday items.

So how do we improve productivity? Through working smarter, not harder, to generate value. The answer lies in innovation. Through better use of technology, plant and equipment, and adopting new and better ways of working, businesses large and small can improve their productivity.

This step-change is already underway. As a result of Covid-19 and the various lockdowns, businesses have found themselves in unusual and unprecedented situations, grappling with decisions on a daily basis that directly impact how they operate.

Businesses have been forced to create new strategies and practices to survive. Many have accelerated the adoption of digital technologies by several years, such as moving their business systems into the cloud, using software-based accounting and point-of-sale systems, and adopting remote working.

The importance of knowledge and technology cannot be understated, especially if we want to accelerate innovation and improve productivity. Education will play an important role in making this change. The way Kiwis are educated will be vital to accelerating our recovery over the long term.

But young New Zealanders are falling behind their international counterparts in terms of their preparedness to enter a complex technology-oriented and dynamic world that demands a much higher level of critical thinking skills. We need to grow our domestic intellectual capital organically through investment in our education sector. In addition, there is a strong argument for importing more intellectual capital through a change in our immigration settings.

New Zealand already has many exciting technology-driven areas with proven expertise, including agritech, fintech, medtech and cleantech. The question is, how do we turbo-charge commercial opportunities for small and medium-sized businesses in these sectors?

Alongside fundamental changes to our education system, we need a greater focus from the Government, including stronger incentives for research and development, and encouraging greater capital intensity within businesses. We need businesses to get on board with automation and mechanisation, underpinned by good digital networks.

One option is to use tax rules to incentivise businesses to invest in productivity-enhancing plant and equipment. During the last election, we said that we would allow new plant and equipment up to a value of $150,000 to be written off in one year, rather than depreciated over eight to 12 years, as is allowed under current tax rules. This would have the potential to enhance manufacturing capability and increase productivity and process efficiency.

We should also be encouraging larger New Zealand companies to better support smaller, strategically-aligned start-ups that generate new innovative businesses and technologies.

Improving our productivity would mean that we could produce more satisfying and higher-paying jobs, which would help provide a better standard of living for all New Zealanders.

While the reality is there is no ‘quick fix’ in terms of reversing the decline in our productivity, it is probably the greatest long-term impediment to our economic aspirations. If we want to be a competitive country in the future, we need our small to medium-sized businesses to thrive.

We need to make changes across a broad range of areas – and we need to make them now.