Don Brash: 2025 advice best shot at bridging gap

The report of the 2025 Taskforce, released on Monday, has been dismissed for all kinds of reasons by all kinds of people.

Some say that reaching Australian income levels by 2025 simply can't be done. Well, it certainly can't be done with present policies - on that most people agree.

But reaching Australian income levels by 2025 was what the Government committed to achieve in its coalition deal with the Act Party last year and is a goal which the Prime Minister has confirmed repeatedly.

Taskforce members share the PM's view that achieving the goal is vital if we are to staunch the flow of Kiwis across the Tasman.

The equivalent of all the people in Whangarei, Gisborne, Masterton, Nelson, Timaru and Invercargill left New Zealand in the past 10 years. That outflow will only get worse if the gap continues to widen.

Some have said that the taskforce members should have been more politically realistic in framing our recommendations, taking into account prevailing political views.

Perhaps that would have given us a more favourable reception from the Government, but we were explicitly asked to provide the recommendations which we believe would enable us to match Australian incomes by 2025, and to leave the political judgments to the politicians.

And coming up with recommendations which simply endorsed currently popular measures would have meant that we had achieved nothing at all.

Many people have dismissed our recommendations as somehow too "radical".

But what is radical about reducing government spending to the level it was, relative to national income, in 2005 (at the end of the second term of the Labour Government)? That hardly had most people lamenting the small size of government in New Zealand.

Last week the Minister of Finance said that government spending had increased by 45 per cent over the past five years and noted that that "kind of rampant spending growth is unsustainable and cannot continue".

Many of the major increases in government spending in recent years have no policy justification at all - interest free student loans being one of the best examples. When the private return from tertiary education has never been higher, it is unclear why taxpayers should provide even more generous subsidies than previously applied.

And what is radical about suggesting that there should be a gradual increase in the age of eligibility for New Zealand superannuation? Australia is doing it and so are Denmark, Norway, Germany, Britain and the US. No serious observer doubts that New Zealand will have to do it in due course.

What is radical about suggesting that as a general rule, government should not own commercial companies?

Most developed countries have been gradually selling state-owned enterprises for years. The Australian Government sold Qantas and Telstra. The British Government sold British Airways and much more besides. The German Government even sold its Post Office.

What is radical about suggesting that a government should insist on rigorous cost-benefit analysis before embarking on any major investment programme? We don't have so much capital that the government can afford to squander it on half-baked projects in which returns fall far short of costs. It's worth recalling that assets in Crown ownership are worth some four times the total market capitalisation of all the shares on the NZX.

What is radical about allowing more competition in the school sector? We take it for granted in pre-school childcare, and they take it for granted in Sweden, hardly a bastion of extreme right-wing views.

At a time when youth unemployment is skyrocketing, and the Government is having to think of ways of subsidising employers to hire young people, what is radical about recommending the reintroduction of youth minimum wages?

Taskforce members come from a wide range of backgrounds. We reached our recommendations unanimously. We believe our recommendations would give us the best shot of reaching Australian income levels by 2025. We don't claim infallibility. Perhaps there are other ways. But some of those which were recommended to us have little merit, and our report explains why we rejected them.

For example, some people argued that faster economic growth would happen if only the government would provide more support for research and development, or more support for industries with particularly attractive prospects.

We noted that the government already spends more on R&D, relative to national income, than do the governments of much richer countries such as Canada, the US and Britain and that the relatively low spending on R&D in the New Zealand private sector is undoubtedly influenced in part by the fact that so many New Zealand companies get access to the latest technology through a foreign parent.

We noted that government support for particular industries has a long history in New Zealand - from the high protection provided, disastrously, to manufacturing from the late 30s till the 80s, through the Think Big projects of the late 70s and early 80s. And to the superyacht and film-making industries of the past decade.

All of those special subsidies came at a cost to the rest of the economy, in some cases enormous cost. Governments don't have either the information or the incentives to "pick winners". The cost of the government support always comes at a cost to the rest of the economy.

We expressed genuine concern for the impact on exporters of the big cyclical fluctuations in the exchange rate, but discovered that not only are those big swings no greater than in many other countries (such as Canada, Japan, and the US) but that there are no obviously available remedies.

For reasons we explain, the "Singapore model" is not feasible for New Zealand, and adopting the US dollar would be fraught with risk. We acknowledge that there may be a case for adopting the Australian dollar, though that would still leave many exporters exposed to the fluctuations between the Australian dollar and the US dollar - fluctuations which in recent years have been every bit as big as those between the NZ dollar and the US dollar.

The best assistance that the government can provide to exporters is to avoid big increases in government spending when resources are already stretched, because that only forces the Reserve Bank to tighten monetary policy and puts upwards pressure on the exchange rate.

What is commendable is the Government's willingness to be held accountable for its 2025 promise.

* Dr Don Brash is chairman of the 2025 Taskforce.