A year ago this week, the John Key-led government was sworn in for its third term. This followed a remarkable election night victory, revealing voters had turned their backs on both Kim Dotcom and David Cunliffe’s lurch to the left.

However, the government’s third honeymoon proved short-lived when the election night outright majority evaporated following the counting of special votes.

So, too, it seems did the government’s appetite for pressing ahead with the reforms that had seen New Zealand emerge from the global financial crisis the envy of most Western economies.

During its first two terms, the Key government’s approach, while incremental, delivered a series of important policy changes. These not only saw growth return to the economy (as well as restore the government’s finances to good order) but they also improved longer-term prospects with micro-economic reforms.

These included Paula Bennett’s welfare restructure, increased labour market flexibility, the 2010 tax change that lowered and flattened income taxes, asset sales and Resource Management Act (RMA) changes as well as starting much-needed reform to the education sector, with national standards, charter schools and the teacher pathways initiative.

Despite initial frustration in the business community about the slow pace of change in the first term, taken together over two terms this had some commentators, including the New Zealand Initiative’s own executive director describing the reforms as “radical.”

Job not completed

Our entreaty to the government following its election success was that these reforms needed to continue. The job is nowhere near done.

New Zealand now escapes a place in the bottom quartile of the expanded OECD’s league table of GDP per capita. But our 20th place compares poorly with Australia’s eighth and is well behind other small nations such as Norway (second), Switzerland (third) and Ireland (sixth).

And if the doubts we expressed at the time that the New Zealand economy was not the “rockstar” it had been labelled seemed unfair, they do not now, with the Reserve Bank forecasting lower growth for this economy than the Reserve Bank of Australia’s for its own.

As we argued in The Case for Economic Growth earlier this year, growth matters. Poor nations cannot afford world-class healthcare or universities. Nor do these countries provide challenging job opportunities for their best and brightest.

Long tail of disadvantage

Even more concerning than the low ranking in GDP per capita is that the average hides a long tail of disadvantage. Although the number has been falling since the report of the Welfare Working Group in 2011, 180,000 children – or 17% of the total – are growing up in benefit-dependent households.

Of the 34 OECD nations, New Zealand ranks 25th for child health and safety, 24th for infant mortality and 26th for deaths among four-year-olds. As the group’s report made clear, work provides the best route out of poverty for able-bodied New Zealanders. For that, two factors are critical: those not in the workforce must have the education and skills needed by employers; and economic policy settings must encourage growth. Both of these require attention.

A big part of the problem hides within the much-vaunted – but deceptive – rankings in the international education tables. The averages mask high levels of underachievement among the most disadvantaged communities, especially Maori and Pasifika.

About 20% of school-leavers lack basic literacy and numeracy skills. The school system fails the least advantaged. And while the statistics might suggest some remarkable improvements in NCEA success rates among Maori and Pasifika over the past two years, the results flatter to deceive, given the gap between roll-based and participation-based examination success.

Skills lacking

The challenges facing the unskilled in gaining meaningful employment will only get bigger with future technology. Tomorrow’s Schools is not equipping the least advantaged for tomorrow’s jobs. New solutions are needed. The cautious first steps with the Kura Hourua/Partnership Schools initiative are showing early promise (notwithstanding the much-publicised challenges faced by one of the initial group of five partnership schools).

Evidence from Sweden, UK and US suggests New Zealand’s disadvantaged pupils would have much to gain from the government extending the partnership schools concept to existing schools.

Policy settings encouraging growth also need urgent attention. The RMA and local government funding require fundamental change. With a low population density and with less than 2% of all available land built on (including roads), how has land for residential and industrial development become such a scarce resource?

This is constraining growth and the creation of jobs, while the high cost of housing in Auckland is creating poverty. This problem is man-made – and one for which central government is to blame. A radical rethink both of the planning laws and the incentives they create for local government and their communities is urgently required.

Labour market reform

Despite the workforce increasing by 7% since 2008, unemployment among 15-19 year olds remains stubbornly high at 20%. That this is happening when the overall workforce is expanding suggests a portion of the youngest and least skilled have been priced out of the labour market.

This should not be a surprise when New Zealand has one of the highest relative minimum wages in the OECD. Is employment beyond the reach of the most vulnerable? Youth employment laws need rethinking.

Fiscal settings also pose a challenge for growth. The fiscal balance may be the envy of the OECD but an ageing population and falling fertility rates mean an increasing percentage of the population will become dependent for public services on a decreasing pool of taxpayers.

This poses the risk of an unsustainable public debt spiral. The most obvious solution is one the government has steadfastly resisted: raising the age of eligibility for New Zealand superannuation. Unless policy settings result in materially faster rates of productivity growth, the superannuation issue is one the government will be unable to continue to ignore.

These are big challenges, especially when the economy remains vulnerable to global shocks, such as this year’s collapse in world milk powder prices.

A year ago, in the immediate aftermath of his third election win, Mr Key was already talking of a fourth term – though with appropriate humility he acknowledged “you’ve got to earn it.”

The evidence of the past year suggests the government has a long way to go to do this. Pandas and a new flag won’t help lift educational underachievement, build the houses Aucklanders desperately need or create jobs for unemployed school-leavers. Nor will overtly political decisions thwarting New Zealand businesses from selling their property to the highest bidder to free up capital to invest in job-creating projects.

Last Tuesday’s announcement of a successful conclusion of the Trans-Pacific Partnership is a major step forward. But if the Key government wishes to secure a fourth term, it needs to regain its hunger for domestic reform.

Much more needs to be done if all New Zealanders are to enjoy the prosperity they deserve. This is the real challenge for the prime minister and his government. And it’s not just the key to a fourth term but the key to a meaningful legacy.