The hard part for Labour will now be getting all the pieces of the poverty-wage-productivity-migration puzzle into place simultaneously, writes Danyl Mclauchlan.

Jacinda Ardern has referred to it as the “compassionate budget” which sounds like the sort of phrase this prime minister mutters out loud in her sleep. This year, the midpoint of her second term in government, probably represents the apex of Jacinda Ardern’s domestic political career, with her finance minister Grant Robertson also at the height of his powers. They need to do more than talk about compassion. If they’re ever going to deliver anything like transformational change, now is the time to do it.

And they are! Or trying to, anyway. The 2021 budget is a more coherent, more ambitious document than we’ve previously seen from the Ardern and Robertson government. And it is compassionate – but it’s also technocratic. Labour is using its political capital and absolute majority to try and solve three very hard, closely interlinked problems: endemic poverty, low wages and low productivity.

Somewhere between 10-15% of New Zealanders live in poverty, depending on how you define the term, and the social and life indicators for this group are poor: they’re more likely to have physical and mental health problems, they have shorter life expectancies, they’re more likely to have drug or alcohol problems, more likely to be the victims of crime, more likely to wind up in prison. This is bad from a moral point of view, because most of these people are born into poverty and spend their lives trapped in it through no fault of their own.

But it’s also bad from a fiscal point of view, which tends to be the way the political system sees things. Instead of becoming productive taxpayers, people below the poverty line cost the state money via the health, welfare and criminal justice systems. The easiest way to get them out of poverty is just to give them more money, which reduces health costs, etcetera, downstream. So that’s what Labour has done, with the largest welfare increases in a generation.

But that creates a new problem. Welfare is supposed to be for people who can’t work, or to provide a temporary safety net for those who can. But the higher benefits are, the less incentive beneficiaries have to make that transition back into paid work. Which gets very expensive very quickly, and you’ll end up with a right-wing government reversing the welfare increase because the public doesn’t want to pay for it.

So you also need wages to be a lot higher than welfare. Which is why Labour have also raised the minimum wage and introduced fair pay agreements to bring back collective bargaining and empower unions to negotiate on behalf of all workers in their sector. Employers will simply have to pay their workers more and this will drive up wages across the board. In theory.

Then you factor in the government’s immigration reset. The New Zealand economy is unusually reliant on migrant labour. What the government would like to see is New Zealanders who are currently on welfare training to be, say, nurses in the aged care sector, because they could earn a lot more than they get on a benefit. But what we actually see is that the pay in that sector is terrible so the aged care companies are increasingly reliant on migrant workers from India and the Philippines. Take away those migrant workers and you’ll also drive up wages. In theory.

Which brings us to the third hard problem that the government is trying to solve: New Zealand workers aren’t very productive. This isn’t because we’re lazy: we work longer hours than the OECD average. Many economists suspect it’s because we’re poorly managed, poorly equipped and poorly trained. And, because our wages are low and employers have a large pool of migrant workers to draw on, it’s not economic for businesses to increase productivity by training their workers or buying decent equipment. They just hire more people to make up the productivity shortfall.

So the best case outcome from this budget is that people on welfare are healthier and happier; they use welfare as a temporary solution to transition between jobs because the jobs that are available pay more and have better conditions. Because labour is more expensive, employers try to get more value out of their workers by training them and equipping them properly. This creates a virtuous spiral. The higher productivity drives wages even higher! New Zealand escapes its decades long productivity and poverty traps. And this helps solve the housing crisis! Fewer migrants means less pressure on house prices, and higher wages reduces the currently insane rent and mortgage to income ratios! In theory.

John Key’s National government tried a top-down version of this transformation. You might remember its “Business Growth Agenda”. But you probably don’t. It created the Productivity Commission and MBIE, a super-ministry that would deliver growth, improve productivity and drive up wages. But MBIE, well, it doesn’t do any of these things. So Labour’s approach is bottom up. Start by lifting people out of poverty and hopefully everything else falls into place.

The worst case scenario for the government is that businesses that rely on cheap labour automates our outsources the work: most of the checkout operators in the country are made redundant; the transition of retail to online accelerates; agriculture replaces its seasonal fruit pickers with robots. Businesses that can’t automate and can’t afford the higher labour costs shut down. Most of these workers go on welfare. The cost of Labour’s new, more generous welfare system blows out at the same time as the government’s tax take goes down. The economy goes into recession.

The hard part for Labour will be getting all the pieces of the poverty-wage-productivity-migration puzzle into place simultaneously. It’s easy to raise main benefits: they just pass the legislation in the House. But Fair Pay Agreements and migration settings will be hard fought battles. It’s easy to imagine outcomes in which the industries who rely on migrant workers successfully lobby for exemptions from the immigration reset, making it meaningless; and the public service simply fails to implement Michael Woods’ industry bargaining plans, while the private sector reacts to the higher minimum wage by cheerfully automating more jobs away.

Solving the hardest problems in the New Zealand economy was never going to be easy, but at least the government is trying. You can’t help but feel compassion for them.