NZ can catch Australia: Brash

Don Brash is confident that the gap between New Zealand and Australia can be closed. Photo / Herald on Sunday

The goal of catching up with Australian levels of productivity and income by 2025 is a challenging one but Don Brash, who is to chair a taskforce to advise the Government on how to close the gap, believes it can be done.

"It's a big gap. It has emerged over 30 or 40 years," he said.

"The better Australia does, the bigger our task. But we either take on that task or accept that we gradually become a distant Tasmania to the Australian mainland."

Brash said he was confident the gap could be closed but would not be drawn on how, saying he did not want to prejudge the conclusions of the taskforce, whose other members have yet to be appointed, let alone deliberate.

For a while, back in the 1960s, New Zealand's economic output per head was slightly higher than Australia's.

But last year, according to the OECD, while Australia's population was five times New Zealand's its gross domestic product (GDP) was 7.2 times larger, implying per capita GDP was 31 per cent higher across the Tasman.

Much of the gap is a legacy of the 1970s and 1980s. New Zealand's per capita GDP went more or less sideways between the mid-1970s and the end of the 1980s, while Australia and the OECD as a whole continued to forge ahead. When growth resumed in the 1990s at an internationally respectable rate, it was from that comparatively low base and it has not been strong enough to narrow the gap.

And much of the growth has come from people working longer rather than more productively.

In 2006 New Zealand ranked fifth in the OECD for hours worked per head but only 22nd for labour productivity (Australia was 10th).

Announcing the 2025 task force to advise on the policies and institutions needed to close the gap and monitor progress towards it, Act leader Rodney Hide said yesterday that achieving the 3 per cent a year labour productivity growth needed to achieve the goal would be a stretch.

"Under Labour we never came close but we have achieved 3 per cent in the past and ... we can again."

Statistics New Zealand says labour productivity growth averaged 1.3 per cent a year over the eight years to March 2008. That compares with 2 per cent in Australia, and 2.5 per cent during the 1990 to 1997 cycle. Hide and Brash both rejected the suggestion that Australia's superior economic performance could be put down to having the resources of an island continent.

"Plenty of countries with lots of resources are not succeeding while others with none are doing phenomenally well," Hide said.

Research by Treasury economists in recent years has highlighted the importance of New Zealand's relative capital shallowness - or low levels of physical capital per worker - in explaining the productivity gap.

Thirty years ago the capital-to-labour ratio was almost the same on both sides of the Tasman but by the early 2000s Australia's was about a third higher. Some economists have pointed to weaker wage growth in New Zealand, especially since the labour market reforms of the early 1990s, as part of the explanation, making it more attractive for firms to grow by a strategy of more hands to the pump, rather than investing in a better pump.

The Treasury notes that the difference in multi-factor productivity - the effectiveness with which both labour and capital are used - has not been markedly different between the two countries in the current decade: 0.5 per cent a year in New zealand and 0.7 per cent in Australia.

This suggests that capital deepening - an increase in capital per worker - explains most of the higher labour productivity growth across the Tasman.

Brash appeared to accept the importance of capital deepening yesterday but said that ideas about how to improve it would have to wait until the taskforce's first report, due in October.