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Opinion: Why catching Australia will define the Key government
July 20th, 2009
By NZ Business Roundtable executive director Roger Kerr
Shortly the government is expected to set up an advisory group to report on how to achieve its goal of lifting New Zealand’s per capita income levels to those of Australia by 2025. Former Reserve Bank governor Don Brash is tipped to be named as chairman.
The goal is the counterpart to the Labour government’s “top priority” economic goal of getting New Zealand back into the top half of the OECD.
Initially it aimed to do so by 2010 but later any target date was dropped.
If Labour was ever serious about its stated goal, it had no program to achieve it; indeed its failed policies were negative for growth overall. New Zealand dropped a further rung on its watch.
There are several interesting aspects of the new government’s goal. Firstly, it is more challenging.
Australia was in 19th place in the OECD rankings in the early 1990s and has now climbed to 12th place. And New Zealand may be chasing a moving target.
Our counterpart organisation, the Business Council of Australia, wants to see Australia among the top 5 OECD countries by 2012.
Secondly, the government has set a firm date of 2025 for achieving its goal.
Thirdly, the advisory group is to report annually on progress. This will make it harder for the government to make empty claims about being ‘on track’, as ministers in the previous government routinely did when asked.
Can the target be met?
In my view it is challenging but feasible.
For 100 years to the 1970s New Zealand’s living standards roughly matched Australia’s.
Assuming Australia maintains its recent trend growth rates in GDP per capita, it would require New Zealand to return to the rates of labour productivity growth achieved in the 1990s, and improve on them. Increased workforce participation would also help. Hong Kong and Singapore, and Ireland in the 1990s, have demonstrated that small countries that manage their affairs well can grow rapidly.
The Confidence and Supply Agreement between National and ACT states that “Both parties recognise that achieving [the 2025] goal will require significant improvements in New Zealand institutions and policies.” It adds that “Their joint commitment to limited government – government limited to its proper role – and greater economic freedom will need to be consistently adhered to.”
This is a promising start. The quality of institutions and policies is far more important than factors such as natural resources in determining prosperity.
Australia’s economic performance was deteriorating before the Hawke-Keating reforms and improved well before the recent mining boom. It is not hard to list superior institutions and policies in Australia. It is ahead of New Zealand in many rankings of economic freedom and international competitiveness.
A key difference is the size of government. Despite the federal, state and local government layers, total government expenditure in Australia is around 35% of GDP compared with 45% in New Zealand. Shrinking the income gap requires smaller government in New Zealand (which would facilitate moves to a lower and flatter tax structure). Australian governments, both Liberal and Labor, have continued to exit
commercial activities. The Queensland Labor government has recently announced a $16 billion sale program including motorways, the Port of Brisbane and rail assets. There is much more private sector involvement in infrastructure in Australia.
Possibly New Zealand retains a more flexible labour market overall than Australia. However, the government‘s 90-day trial period for small employers is much more limited than Australia’s 12 month period for small employers and 6 month period for large firms.
Australia typically scores above New Zealand for education performance. There is more choice and competition in its education system, with around a third of secondary students attending private schools.
The Rudd government has recently announced an increase in the pension age to 67, a move that our government has ruled out. Australian welfare rules are typically tighter than New Zealand’s.
Of course, not all the differences are in Australia’s favour, and recently the Rudd government has made backward moves, such as a massive increase in government spending and re-regulation of the labour market.
And Australia is no standout. In many ways Hong Kong and Singapore, with small governments and essentially flat tax regimes, are better models.
New Zealand needs spending, tax, regulatory and social policies of the highest quality. As Bill English has said, “you need to do 200 things to raise productivity.”
At present, New Zealand is not on a path to close the income gap.
Treasury’s assumption is for trend labour productivity growth of 1.5%, less than half the necessary rate.
The NZ Herald’s recent Mood of the Boardroom survey revealed support for the government’s directions but also a view that it was in cruise control.
The income gap won’t be closed without far-reaching reform.
Some will complain that the necessary agenda will reflect the principles of earlier reforms. But their merits are now widely accepted and controversy is largely limited to academic debate about whether they were too fast or too slow, or in the wrong order.
The damage of recent economic mismanagement won’t be repaired this parliamentary term. But by the time of the next election it should be apparent whether the Key government is on track to achieving the goal that will define its success or failure.
Roger Kerr (rkerr@nzbr.org.nz) is the executive director of the New
Zealand Business Roundtable.
Tags: Act Party, Australia, bill english, Business Council Australia, Confidence and Supply Agreement, Don Brash, flat tax, GDP, Hawkes-Keating government, Hong Kong, John Key, Kevin Rudd, Labor Party, labour market, Labour party, Liberal Party, Mood of the Boardroom, National party, NZ Business Roundtable, NZ Herald, oecd, Queensland government, RBNZ, Roger Kerr, Singapore, small government, Treasury, welfare
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July 20th, 2009 at 6:52 pm
Australia like NZ suffers from obscenely unaffordable housing. They, like us (and unlike most other OECD countries) offer clear preferential treatment for property investment ie reduced CGT and negative gearing tax losses, not to mention too much immigration which is designed clearly to prop up the property industry (NOT to meet job skill vacancies, otherwise WHY IS IMMIGRATION STILL HIGH WHEN UNEMPLOYMENT IS GOING UP!!!) .
How does one attain a good OECD ranking? If its based on meaningless “figures” that say nothing about the ability of average families to afford the lifestyle that their parents could afford then it is meaningless. Australia like NZ has the following:
- houses > 6.5 median incomes
- VERY low savings rate
- massive overinvestment in property (again not as bad as us, but still very bad)
- immigration levels that are not met by adequate housing supply and consequently result in INFLATION.
- Govt handouts to prop up the market (NZ not as bad here, but the “welcome” home loan thing is a step in the wrong direction).
- a high and increasing current account deficit, despite increasing exports WHY? too much borrowing overseas to support overinflated assets.
SO WHY DO WE WANT TO FOLLOW AUSTRALIA WHEN THEY ARE NOT ADDRESSING THE REAL ISSUE WHICH IS MASSIVE OVER INVESTMENT IN PROPERTY. There is no point harking on about being more productive when we are pissing away productivity gains via increased borrowing from overseas to drive a ridiculous asset boom. You can be damn sure that if we increase our incomes, we will use that income to drive up the cost of existing assets, meaning the next generation needs to become even more productive to afford those inflated assets. A gambling addict ends up in the same position regardless of his income – its the casinos (banks, real estate agents and IRD) who benefit from the increased productivity. I work in Aus – a guy I work with earns a fantastic income (200,000 per year), his wife also works. He’s just bought a 250msq property 5 k out of Melbourne CBD for a mill. He’s worse off than his plummer single income household parents …. but hey, the banks are better off.
July 20th, 2009 at 9:01 pm
Mmm not sure about some of this guy’s comments, typical far right knights of the roundtable old boys network stuff:
-education: I have a few friends with kids in Aus, they say the public schools are generally poor and people tend towards private shcools. If this is what he means by “choice” (ie. having a choice of more “private schools”) then I don’t think its a choice I would appreciate
- bureaucracy : from what I ‘ve heard the bureaucracy is just as bad if not worse in Aus
July 20th, 2009 at 9:46 pm
I agree totally with Matt. Typical far-right claptrap, using highly selected data. Kerr says “total government expenditure in Australia is around 35% of GDP compared with 45% in New Zealand”. Selective use of data, only choosing Federal as opposed to State taxes etc., ignoring compulsory super in Oz (which ironically Kerr also hates the idea of).
A rather more neutral commentator, the OECD, suggests that NZ’s tax wedge is only 21.2%, as opposed to Oz’s 26.9%.
http://www.oecd.org/document/6/0,3343,en_2649_34533_42714758_1_1_1_1,00.html
I have several times suggested to Bernard that putting these politically driven rants onto his site risks his reputation for impartiality and objectivity, but no reply.
I suppose at least we have the inside running on what the biggest donors to the National Party are whispering in Key’s ear, so that’s something!
I’m not some lefty, I was horrified at Clark/Cullen/Simpson pouring money into middle class welfare (WFF), etc, but doesn’t mean we have to go feral here!
July 20th, 2009 at 9:57 pm
This article reads like the bit before the Tui’s punch line … Yeah…Right
With the emphasis on the Right
That wouldn’t be because of the huge Queensland deficit would it? Go into debt and sell the family silver..Gee thats a model NZ wants to follow again… Yeah…Right.
http://www.theaustralian.news.com.au/story/0,25197,25213411-5018775,00.html
And huge AU government subsidies for the private schools. Following the rotting pier policy of Howard where the Public School system was deliberately under funded while the private school system had subsidies thrown their way…. Sounds like something that the National/ACT/Maori party government would be keen on. More middle class welfare…. Yeah… Right
For those interested in some background reading on the AU scenario check out
http://www.aeufederal.org.au/Debates/PSfunding.pdf
Yes!! Lets follow the Singapore model! Over 80% of housing provided by the Government.
http://www.macalester.edu/courses/geog61/kdriggers/housing.html
Now how hard would that be for any NZ government to implement? Not quite as Right as the other suggestions.
July 20th, 2009 at 10:31 pm
Roger K never appears to respond to any comments on his articles and so I can’t see the point of including them on this kind of site? Plus, that being the case, can’t see the point of commenting.
Bernard, some articles are not valuable, useful enough unless the authors attempt at least some degree of engagement – might as well just read the one-way transmission hard-copy NBR, Herald, etc. Interest.co needs to keep leading the pack in this sphere of NZ journalism.
July 21st, 2009 at 12:22 am
Having lived in Aus for ten years, returned 4 yrs ago, There are many factors that make the gap in wages not as good as it appears. Purchasing Power Parity for one.
And the fact that Aussy due to the poor commoners money being forced into the slaveminded elitist playground via compulsory superanuation, massive dollops of the commoners savings get transfered to the trust funds of the financial elite at a regular clip. The income of the bullshit sector is then thrown in with the realsector and averaged or medianed, either way it distorts the average/median wage well above that, that shows up on the biannual actual wage monitored of tax department figures.
Bit like the estimate and actual on your power bill.
Further to above -
http://www.interest.co.nz/ratesblog/index.php/2009/07/15/have-your-say-key-says-nz-needs-world-class-tax-system-to-compete/#comment-29230
July 21st, 2009 at 8:56 am
According to Whitehead, we have 250,000 state sector employees, with a budget of 62 billion on a population base of 4 million. Thats 15,500 for every person in NZ.
Does anybody have the comparative data for Aus, and also NZ data on just what % of the population contribute.
July 21st, 2009 at 1:35 pm
Some quick replies
1. Over the 16 years 1990-2005 investment in housing in New Zealand has been 5.4% of GDP which is lower than the OECD average (5.9%) and well below the 6.5% in Australia (OECD figures). Hardly an explanation for the per capita income gap. But land supply regulations in both countries are a real problem.
2. New right? Get over it! The policy differences I cited are ones LABOR governments in Australia have been responsible for.
3. Subsidies for private schools? Surely we should be interested in funding children’s education, not schools. Government schools get a 100% ‘subsidy’. Why should we care who owns the real estate? Comparable funding of government and private schools exists in Holland, Sweden and Ireland too. Last time I looked they didn’t have ‘new right’ governments.
4. Singapore? Look at the overall picture. The government spending share of the economy in Singapore is under 20% – half ours.
5. The gap in wages is not what it appears? There’s plenty wrong with Australia’s policies, as I said, but if it’s such an unattractive place why are the migration flows predominantly one-way?
July 21st, 2009 at 1:49 pm
Iain – I agree, although some sectors clearly pay more in Aus, there are many that don’t.
I considered moving to Aus, but found that I can actually earn more in NZ
July 21st, 2009 at 2:07 pm
Roger – good on y’ for responding as you have.
How might a Singaporean approach to inflation control be useful to NZ?
July 21st, 2009 at 2:33 pm
Roger,
Agree that land supply regulations are a problem in both countries.
What is your definition of “investment in housing” – if it includes building new houses then maybe NZ has a lesser proportion of that part of the investment. I find your stats hard to reconcile considering NZ has 90% net wealth in housing, Aus around 80%, US around 60%. Our house to income levels are also significantly higher than most other countries. If more of our net wealth is tied up in housing surely we have been putting more money towards it??? Would love to see your breakdown. Also would love to see what the investment rates were pre 1990, and post 2005 (the bubble only stopped inflating end of 2007, that leaves at least 2 years).
July 21st, 2009 at 2:38 pm
We can analyse all the stats from around the world we like
We can come up with all the fiscal policies we like
It will no little to nothing at all.
It is not a fiscal issue but a social issue, a mind set in NZ that is holding us back.
While we have apprentice schemes that have scraped what worked for generations,
A country that looks to have 2 populations under 2 flags dividing it,
An education system where student only have their teacher in the class teaching effectively 60 to 70% of the time…
Throw a 1st yr Uni student a 1967/9 School Cert chemistry , maths, English or physics paper…..they havnt a chance of passing…I have done so, many times.
Parents no long have the responsibility of raising their children
The list goes on and on…
RK
“For 100 years to the 1970s New Zealand’s living standards roughly matched Australia’s.”
It has been the social attitude change rather than a fiscal one..
Remember the propaganda drive? “Kiwis can do…” what a waste of time and money.
Bottom line, MAKE the citizens of NZ responsible, and forget the education/slap on the wrist BS… No pain no gain.
July 21st, 2009 at 2:55 pm
Steps, what this rubbish “An education system where student only have their teacher in the class teaching effectively 60 to 70% of the time…” ?
July 21st, 2009 at 6:11 pm
Wally click on my name, email the webmaster, I will explain.
July 22nd, 2009 at 6:11 am
Roger Kerr -
“Now the problem is, that neither governments nor the vast majority of people have money. Maybe that sounds like an exaggeration but if we think about it some more, it is the gospel truth. Governments, whether liberal, socialist, conservative, democratic, whatever you may call them, do not have money. They are taxing us to death and yet they are making debts. And most of them are already so deeply in debt that there seems to be hardly a hope to pay off what was borrowed.”
http://www.hasslberger.com/economy/money.html
any financially literate person knows the central bankers and their corporate subsidiaries, who you are a paid spin doctor for, truly run this and many other countries from the back office. The producty and efficiency gains for the elite that you seek are revenues minus inputs equals profits, if you and your ilk could reduce the labour input to once again only having to feed slaves, you would. Then you would say that the slaves are very lucky there is slavery or they would not get fed at all.
Got a go get back on that hamster wheel, but happy to debate you with the facts anytime.
July 22nd, 2009 at 11:39 am
Matt Nolan @ TVHE has a post on this issue. He asks: “When did NZ’s right become communist?”
http://www.tvhe.co.nz/2009/07/22/when-did-nzs-right-become-communist/
Cheers
Alex
July 22nd, 2009 at 11:43 am
Steps, how do you measure a teacher’s effectiveness?
July 22nd, 2009 at 12:31 pm
Alex – Matt’s article is worth a look. However, there is only one real top primo, award winning, finger-licking, ever-fizzing NZ blog site in this space as far as I’m concerned – so I’ll make my comment/response on his article here. (Soory Matt.) That is, have squizz at a paper by Phil Rennie, here:
Why is Australia so much richer than New Zealand?
http://www.cis.org.au/executive_highlights/EH2007/eh54507.html
Some clips, from the full paper:
“Geographic isolation and a small population are important factors in New Zealand’s underperformance compared to the rest of the world, but Australia suffers similar conditions and has overcome them more successfully. Australia has not moved closer to the rest of the world over the last thirty years, and nor has New Zealand moved further away.”
[I highlighted a similar point to in my review of John Kay's book 'Culture and Prospertiy' - I've linked to it dozens of time here so won't bore folk again.]
“The resource boom’s impact on Australian growth is often overrated. New Zealand’s commodities have also enjoyed record returns, and its exports make up a greater proportion of GDP than do Australia’s. In any event, natural resources are no guarantee of growth.”
[Similar point made by John Kay.]
“New Zealand firms have invested less in capital than their Australian counterparts, but not because of a lack of savings or finance. Instead, the major challenge for New Zealand seems to be a lack of profitable investment opportunities.”
[Why is that???]
“Government policy has a major role to play in creating a healthy environment for growth and investment. International surveys show little difference between the two countries in terms of red tape and regulation, but the direction of policy is just as important as the static picture. Ad hoc government interference in areas such as energy, telecommunications, and asset sales has greatly increased investor uncertainty in New Zealand.
Tax is a major area of difference between the two countries. Australia is a much lower taxing country, especially in terms of income tax. This affects incentives to work, save, and invest.
Prosperity does not come by accident. Australia has a stronger political consensus around policies for growth, which contributes to investor confidence. In contrast, New Zealand halted most major reform in 1993, and has increased tax and regulation since 2000.”
To counter Matt’s observation that Bill and JK have turned red, I doubt it, maybe they have recognised it’s time to the end left v. right slog when it comes to economic reform – maybe they’ve been reading John Kay’s work, and that of Eric Beinhocker, ‘The Origin of Wealth’, which contests the classic orthodoxy with a complex adaptive approach to economics which does not support the more extreme left/right dogmas on central planning or free markets. [Have also reviewed that and linked to it loads of times, so again won't bore folks, well anymore than usual.]
However, I don’t think we should get our hopes up too much I’m afraid to say:
http://www.stuff.co.nz/national/politics/2612914/Brash-to-head-productivity-taskforce
“My understanding is the composition hasn’t been finalised yet. It is going to be balanced. It just won’t be from one political persuasion or one sort of approach to how we resolve these issues,” Mr English said.
“If they come up with things that the Government finds politically unacceptable then they are not going to make progress.”
As I’ve commented elsewhere, who is involved is important, but what’s more important is the scope of the terms of reference and NOT precluding effort on the nettles that typically successive governments have chosen not to grasp:
http://www.interest.co.nz/ratesblog/index.php/2009/07/16/opinion-why-the-rbnz-needs-new-tools-to-control-the-banks/
Not robustly addressing our taxation structure to broaden, flatten, lower the rate, incentivise ‘winning behaviours’ and not modifying mon.pol with an effective volume control, will mean much of what goes on will be wishful thinking, so classic of the ‘talk-fest’ events our governments seem so capable of.
I think I can guess right now who they won’t be inviting into this work, can you?
Cheers, Les.
July 22nd, 2009 at 1:04 pm
Wally Says:
“Steps, how do you measure a teacher’s effectiveness?”
Wally email me…Im not anti teachers at all, if you have that impression.
Posting here does away from the subject of the thread.
I work , not as an educator, but as a fly on the wall in classrooms…
Our family and friends work as teachers, Principals, in the service industry to schools ….
July 22nd, 2009 at 1:15 pm
Why not here Steps? A quarter century of frontline teaching in two NZ colleges left me with the realisation that all measurements are unsound.
July 22nd, 2009 at 3:06 pm
Jimmy: I hope this helps. For the 1970-05 period, GFCF residential investment was 5.1% of GDP here, and 6.2% in Aus (so by deduction the difference in 1970-1990 was very similar to that in the more recent period). I don’t have the latest comparative at my fingertips, but residential investment in both countries has fallen sharply in the last couple of years. These are of course real resources devoted to building houses. They are not to be confused with the wealth data, which simply tell one that (a) houses are very overvalued, and (b) total household savings have been low for a long time (so once the house is “financed” there isn’t much “left over” for other forms of wealth). NZers own a much larger share of the NZ housing stock than they do the NZ productive capital stock.
Conclusion: housing hasn’t got much to do with the per capita GDP differences between the two countries which was the focus of my article.
July 22nd, 2009 at 9:56 pm
Why the fascination with matching Australia? A country with a much larger population base and vast natural resources that have ridden the commodity boom – as the adage goes when Aussie needs more money they just dig it out of the ground… Not a good basis for comparison or a feasible target to aim for.
Also as noted by Roger NZ enjoys (?) a far more liberal workplace regulation regime than Australia – unions over there are in a similar state to what they were here pre the ECA.
So if we draw a comparison based on income and labour productivity it would appear the answer is bring back the unions?
In my opinion Australia is not known as the innovator in any particular area so hardly a model to copy. NZ needs to put focus on our strengths – innovation in industries that are not challenged by distance and a small population base.
We need to stop whinging about the size of government and taxes and get real. The real issue is the need to challenge the thinking that fixed-asset investment is the only way to get ahead in this country. We need to be incentivising investment in highly productive, export $ earning sectors and conversely removing incentives for investment in the non-productive sectors.
All the complaints about red tape this or tax level that are obscuring this issue – if the capital and investment attitude isn’t there then even zero taxes and no red tape won’t help.
So far the current government has removed tax credits for R&D investment and has a core constituency for whom a capital gains tax on property would be electoral suicide. So we’ve failed before we even started…
July 22nd, 2009 at 11:10 pm
“Steps, how do you measure a teacher’s effectiveness?”
I dont, I measure the effectiveness of the system (education and society) as to the results it produces
I see children coming out of primary school , classrooms of them who are still being taught how to write in a manner that can be understood by a 3rd party…And students heading to college still way behind 30 yrs ago
“Throw a 1st yr Uni student a 1967/9 School Cert chemistry , maths, English or physics paper…..they havnt a chance of passing…I have done so, many times.”
They would not be failed on the periodic table because a few of the gaps have been filled in.
I do not believe this issue lays just with the quality of teachers (some teachers would make better brain surgeon or drain layer) or our PC correct policies, but the biggest is a social issue, everything from junk food, parental expertise as a result of a huge social experiment over the last 20 to 30 yrs…
July 23rd, 2009 at 12:07 am
Hi Roger,
Interesting stats. If you are referring to “investment” as building of new houses as opposed to bidding up the cost of existing houses then I agree that we are not overinvested. We are perhaps underinvested here.
You seem to accept that houses are overvalued – when houses are overvalued, a new entrant needs to put a higher proportion of income to housing, result is there is less money to put towards productive investment . This would affect GDP output surely? My point all along (although maybe unclear when I used the word “invested” as opposed to “speculated”) was that Australia has similar structural problems with us in that they also put too much money towards buying houses. They are restrained to some degree by the compulsory 10% super (which perhaps explains why we have 90% in property and Aus has 80%). That said, for both countries as long as the overpaying of household income to housing remains, we NEED to be more productive in order to finance the mortgages borrowed from overseas. I see this as a major issue – if a family is only required to put 25% (as opposed to 45%) of income towards a house, then the family doesn need to earn as much to enjoy the same quality of life.
So thats my point really. Aus taxation is not dealing with their housing bubble. The housing bubble is sucking a huge chunk of Aus/NZ earnings overseas. Why should we follow the Aus model when they cant seem to see the elephant in the room either? Stop the leak of mortgage interest from NZ and we dont need to be as productive to stay afloat. Its easier to stop a leak in the tank than earning money to pay for more fuel.
July 23rd, 2009 at 12:08 am
Catch up to Australia??? NZ Herald today has headlines how returning NZs will bring stability. If this is so, why does the Government encourage and permit NZs to retire to Australia? Why do we have a retirement policy that allows NZs to move to Australia with a lifetime of capital and we still pay to the Australian government their pensions? The pension money from NZ is then spent in Australia, Their capital is in Australia. Duh!!!!
July 23rd, 2009 at 7:25 am
Brian Fallow: NZ should heed recession warning
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10586041&pnum=0
“There is a danger that people treat this recession as viral, something that we suffer through then can shake off and carry on as before.
It is much more like a first heart attack, a serious wake-up call to change our ways on a sustained basis, or the next shock will be much worse.
Our productivity levels place us in the bottom third of the OECD, in the same neighbourhood as Greece and Korea.
But we like to live as if we were still in the top third like the Australians and have borrowed heavily to fund the difference – so heavily that the country’s net external liabilities are approaching 100 per cent of GDP.
We need to be realistic about how compressible Government spending is in a democracy.”
Or, indeed what is possible with NZ’s type of ‘MMP-hamstrung’ democracy, where in addition strong vested interests seem so evident – no to banking inquiry, no to mon.pol change – leading to instructions like:
“If they come up with things that the Government finds politically unacceptable then they are not going to make progress.”
Progress – what progress?
We need surgery, not a band-aid, so get ready for more heart attacks, or worse…
http://www.interest.co.nz/ratesblog/index.php/2009/07/21/have-your-say-opposition-sets-up-bank-profit-inquiry/#comment-29956
http://www.interest.co.nz/ratesblog/index.php/2009/07/21/have-your-say-opposition-sets-up-bank-profit-inquiry/#comment-29932