RIP NZ Productivity Commission 2011–23🍋

Why NZ needs a Productivity Commission, but couldn’t sustain one

New Zealand’s Productivity Commission (NZPC) was created in 2011, delivering on a commitment in the 2008 coalition agreement between the National and ACT parties. Then it was disestablished by the 2023 coalition agreement between those same two parties. How ironic is that?

It’s not the case that the NZPC’s mission has become redundant. New Zealand’s productivity performance has been less than stellar. To quote Michael Reddell, writing at Croaking Cassandra:

Productivity growth in the last decade or more – under both governments – has been materially lower than it was earlier in the period – under governments of both parties.

Productivity growth is something that should matter to everyone. Simply put, it is achieving more socially valuable things with fewer socially costly resources. Every fan of energy efficiency is also a productivity fan. Likewise for fans of better healthcare, improved education, or lower taxes. They should be cheering for productivity growth, and deeply concerned should productivity growth falter.

Mt Tutuko, Fiordland National Park. Dave Heatley

So what might explain the demise of the NZPC?¹ It’s an interesting story, one that could be told from many different angles.² In this post, I tackle it by looking at the NZPC’s underlying purpose, why it was constructed as an Independent Crown Entity (ICE), and the tensions that the ICE model creates between “independent” commissioners and their political masters.

Productivity growth requires change, and change is contested

Productivity growth — at the national level — is an emergent property. It is the consequence of other things, rather than a setting that can be dialled up or down by governments or private organisations. The question facing a government is this: How should it organise its own activities and use the levers it has available — including regulating, spending, taxing, and service delivery — in ways that encourage, rather than discourage, the activities and behaviours that contribute to productivity growth?

A really good model for thinking further is: what is preventing resources — labour, capital, ideas, data, land, etc. — flowing to their most valuable use? Answers, of course, change depending on the context. And even in a specific context, they will change as relative prices move, new technology is adopted, and preferences shift. To improve productivity we have to ask this question and to act on the answers we uncover. And then to keep asking and acting.

The answers that improve productivity will, almost inevitably, involve changing the status quo. But change is uncertain — it might go badly. And it is almost always contested — by people who fear change, trust the status quo, or have made financial and other commitments assuming things won’t change.

Unravelling what will help improve productivity, especially in a contested environment, is a complex task. One that takes time, research, expertise and judgement. It’s not a one-off. This year’s productivity improvements, while welcome, just lift the baseline. Next year’s will likely require looking again for bottlenecks, perhaps in different parts of the economy. And many of the really worthwhile improvements cut across industry-sector and government-agency boundaries, so are not likely to be found by agencies focused on their direct responsibilities.

National productivity improvement is a marathon not a sprint. So it makes sense to have a long-lived organisation, focused on productivity. Such an organisation can develop and retain specialist expertise, and improve its performance over time. Ideally, it can develop a reputation for solid research, non-partisanship, being open to persuasion by the evidence, and good judgement.

But that research and judgement won’t always be politically useful or convenient. New Zealand is not the first government to discard a Productivity Commission for those reasons — Queensland, for example, no longer has its PC.

Court jesters & licensed fools

Monarchs face a difficult problem. They are too powerful. Their whims can have irreversible consequences for those around them. What sane courtier would deliver bad news or unwelcome analysis when the Queen’s reply might just be “off with his head”?

The downside of such untrammeled power is that the monarch hears only good news — what today we might call “spin”.³ An economist might recognise the underlying information asymmetry — a Queen knows her courtiers may have more and better information than she does, and does not know which of them to trust.

An institutional solution, common in Medieval Europe, was the court jester or licensed fool — one granted legal privileges to speak their mind to the Monarch without the usual punishments for bad behavior.

the jester's function as adviser and critic … is what distinguishes him from a pure entertainer who would juggle batons, swallow swords, or strum on a lute or a clown who would play the fool simply to amuse people … it would take an obtuse king or emperor not to realize what he was driving at, since "other court functionaries cooked up the king's facts for him before delivery; the jester delivered them raw.”⁴

Ministers in modern-day democracies, while perhaps not as quick to sever heads, face a similar risk of being surrounded by those delivering what they think their minister wants to hear, rather than what their minister might need to hear.

Enter the Independent Crown Entity

Independent Crown Entities (ICEs) are government organisations that operate under the Crown Entities Act 2004.⁵ The are headed by Commissioners, who have a duty to operate independently from the government of the day. Commissioners are appointed for fixed terms, and cannot be sacked, except in very limited circumstances (e.g. physical or mental incapacity).

ICEs, and specifically those whose purpose is to provide advice to government such as the NZPC, are institutional analogues of the licensed fool of yesteryear.

ICEs, acting independently, will inevitably offer politically inconvenient or just plain useless advice to government ministers, whose patience may wear thin. While Commissioners cannot be picked off and sacked, a government can, by Act of Parliament, disestablish an ICE. This implicit threat hangs over every ICE, encouraging Commissioners to keep their advice relevant and useful, not just to the current government, but — looking ahead and reasoning backwards — to its potential replacements.

Conventions matter, and breaking them has consequences

The New Zealand Productivity Commission Act 2010, which created the NZPC, was supported in Parliament by all parties except the Greens. The clear intent of that Parliament was that it would survive changes of government (presumably subject to productivity remaining a problem and the NZPC proving itself useful).

The NZPC survived its first change of government in 2017, but not its second in 2023. What changed? In my view this came down to Finance Minister Grant Robertson disregarding a crucial yet unwritten convention. That convention is that while appointments to Commissioner positions are the Minister’s prerogative, they need to appoint people that are capable and competent of working with alternative governments. This doesn’t mean that appointees must have no prior political affiliations — that likely narrows the recruitment pool too far — but they do need to be able to act, and be seen to act, in their role as Commissioner without ideology and partisanship.

The Finance Minister’s appointments to the NZPC from 2020 onwards broke this convention, in my opinion. It is also possible that Grant Robertson thought the convention was already broken — by the appointments made by the National Party Finance Ministers who preceded him. If so, that reinforces my case that the convention is broken, and institutions need changing to reflect this post-convention reality.

It appears that decision-makers in the National and ACT parties decided they could not work with the commissioners appointed by Robertson. So, the incoming government was faced with three options, none particularly attractive:

1. disestablish the NZPC;

2. replace Commissioners one at at time as their terms expired (2026 for Chief Commissioner Ganesh Nana); or

3. try to buy out or otherwise persuade the Commissioners to resign, with the threat of disestablishment if they did not cooperate.

Option 3 may have got the incoming government into legal or political hot water. If they wanted to avoid that possibility, then I can see why option 1 looked the most attractive.

What does this mean for organisations offering independent advice?

We now have to regard the convention as broken. So, assuming that current and future governments decide they want licensed fools — organisations that offer independent advice on long-run, complex and contested issues — the institutions will need to adapt. Some suggestions:

• ministers should be required to consult opposition parties on Commissioner appointments;⁶

• opposition parties are granted veto power over minister’s choices for Commissioner appointments;

• introduce a Parliamentary confirmation process for Commissioner appointments (e.g. Select Committees); or

• require all Commissioners to tender their resignations after a change of government.

Alternatively, we could adopt, or learn from, the Offices of Parliament model. (This currently includes the Auditor-General, Ombudsman and Parliamentary Commissioner for the Environment — all of whom are responsible to the Parliament rather than the Executive.)

The simplest of these suggestions is to require Commissioners to tender their resignations to an incoming government. It could be argued that this would further politicise supposedly independent organisations. But I think that cat is already out of the bag. Further, there is a valid counter-argument: potential applicants would self-select — those who expected they would not be acceptable to a new government would be less likely to apply for Commissioner positions.

I’m also attracted to the idea of Parliamentary confirmation processes, because of the transparency they would create around appointments. Regardless of my leanings, I think this is a discussion we need to have.

By Dave Heatley

Tree fuchsia (Fuchsia excorticata), Resolution Island, Fiordland. Dave Heatley

1. I have to declare an interest here. I worked for the NZPC from its inception in 2011 until I left to pursue other interests in early 2021. I remain proud of the work the Commission did during that decade, and retain an emotional attachment to the organisation as I remember it. There was a near total turnover of Commissioners and staff in 2021, after Finance Minister Grant Robertson’s 2020 appointments of Bill Rosenberg as Commissioner, and Ganesh Nana as Chief Commissioner. A “distinct shift in the ideological underpinnings” of Commissioners, along with a loss of institutional memory, combined to reduce the quantity and to change the character of NZPC outputs. I won’t offer my opinion here on changes to the quality of outputs. If you want to form your own, I suggest you contrast More Effective Social Services (2015) with A fair chance for all (2023).

2. The disestablishment of the NZPC was announced by press release, which was pretty rough on those who worked there (some of whom are friends, former work colleagues, and associates). That said, the outcome wasn’t entirely unexpected.

3. A similar incentive structure is immortalised in Hans Christian Andersen’s folktale The Emperor’s New Clothes. No sensible person, realising the emperor’s power over them, wants to be the first one to announce that the emperor is naked.

4. From Beatrice K. Otto (2007). Fools Are Everywhere. The Court Jester Around the World. University of Chicago Press.

5. The NZPC is one of 20 ICEs. Others include the Commerce Commission, Electricity Authority, Law Commission, Climate Change Commission, Takeovers Panel, and Drug Free Sport New Zealand. (The full list can be found on the Public Service Commission website.) This post is based on the specific case of the NZPC. I have not investigated the extent to which it applies the other ICEs.

6. Arguably this is already the case for appointing the Governor of the Reserve Bank. (The bank is not technically an ICE, but many of the considerations in this post are applicable.) Finance Minister Grant Robertson introduced changes to the Reserve Bank’s Act requiring the Minister to consult opposition parties on appointments, yet he disregarded the objections of the National and ACT parties in 2022 when reappointing Adrian Orr as Governor.