Editorial: Key must act to close gap with Australia

The first report of the "2025 Taskforce" is exactly what John Key would have expected when he agreed to this Act Party initiative. The taskforce led by Don Brash has given him an entirely predictable policy prescription for a rate of economic growth that might enable our living standards to catch up with Australia's by 2025. In essence, it involves the Government doing well the things that governments can do.

This means spending not more than it strictly needs to, keeping tax rates as low as possible, regulating minimally, privatising public services. It does not mean "playing at business", as the taskforce describes support for research and development, which the Government recently gave the kiwifruit industry, or venture capital grants, sectoral growth plans, productivity incentives and the like.

To close the income gap with Australia, the report points out, New Zealand's per capita growth rate over the 16 years to 2025 will have to be twice the rate it has been for the past 16 years. In other words, the lift we gained from about 1993 as a result of drastic economic reform would have to be doubled. Many might question whether a resumption of the previous reform track would be enough. But few could argue that the additional public spending in Labour's latter years has done anything to improve our prospects.

Government spending as a proportion to the total economy rose from 29 per cent in 2004 to around 36 per cent now. Much of it was particularly wasteful in economic terms. Two "egregious examples" cited in the report were interest waivers on student loans ($500 million a year) and a trebling of daycare subsidies ($1 billion a year).

Universal benefits such as these mainly go to middle-income taxpayers who could afford to pay for them themselves, particularly if income tax rates were lowered at the same time. Generally, private purchasing is better for the economy because it monitors value more effectively, punishing sloth and rewarding effort.

For the public health and education services the taskforce would restore contestable funding and competitive provision, much as occurred in health in the 1990s but was resisted by the education unions. Other public savings it proposes include raising the age of eligibility for national superannuation and targeting doctors' and pharmaceutical subsidies to the lower paid.

It would sell all state enterprises that operate in markets where competition exists or could exist, wind up the Cullen Fund and use its assets to reduce debt, and introduce a traffic congestion charge for Auckland as a forerunner to road charging generally.

Mr Key of course has already ruled out some of these, at least for this term, and will probably run a mile from all the recommendations for getting public spending back under 30 per cent of GDP within three years. They are the sort of measures Finance Minister Bill English has frequently dismissed as "slash and burn". But Mr English has begun working on a 2010 Budget that will have to show some credible steps to reduce public spending.

Both of them would have known the remedy Dr Brash, their former party leader, would prescribe. If they cannot bring themselves to embrace it, they ought to have alternatives to offer.

The 2025 Taskforce is just the first of several strategic panels due to report before Christmas. Perhaps they will produce something more amenable to Mr Key's cautious politics, but the Brash prescription will not go away. It will haunt questions the Prime Minister will continue to face about tax, spending and the quest to catch up with Australia. Narrowing that gap is important to this country's survival as a place where young, mobile people might choose to live.