Editorial: Key needs to be bold to close the gap

Opinion

Alan Bollard probably regrets talking about making the most of the "crumbs that come off the Australian table". But poor choice of phrase aside, the Reserve Bank Governor was making a reasonable point about the advantage to New Zealand of being so close to a country "blessed by God sprinkling minerals". The two economies are already closely interlinked, and we should make every effort to profit from Australia's good fortune.

But Dr Bollard went too far in saying there was no chance of closing the income gap with Australia. If the Government's aim of achieving this by 2025 is too optimistic, it must, nonetheless, remain an important goal, irrespective of the year selected as the target. Anything less than a reducing gap and young, mobile New Zealanders will continue to select Australia as their preferred place of residence.

Dr Bollard's resigned view springs from Australia's wealth of minerals "across the top of the surface in very easily accessible areas". He might have added that, generally, no questions of environmental protection hamper the extraction of these riches. Most are in remote areas that are of little use for other activity. The governor might also have noted that Australia has the good luck to have a ready market in a booming China. But mineral riches do not, on their own, guarantee prosperity. As Dr Bollard noted, Australia had handled its economy well. This enabled it to cope better than most when Chinese demand for minerals ebbed during the recession.

The flaw in the governor's attitude to closing the income gap on the basis of Australia's mineral wealth lies in his disregard of this country's own considerable strengths. These centre on its excellence as a producer of agricultural products. The demand for this internationally is no less than that for iron ore or bauxite, and New Zealand has the opportunity to extract ever-greater dividends from it. It also has no shortage of water, which, with climate change, looms as an ever-increasing problem for Australia, particularly its farmers.

Thirty years ago, New Zealand had the same wage rate as Australia. Now, Australian incomes are about a third higher than those here, as is productivity. Closing that gap by 2025 would require New Zealand's per capita growth rate over the next 15 years to be twice the rate it has been for the past 15 years. That seems out of the question. The prescription of the Don Brash-led 2025 Taskforce has been dismissed by the Government as too radical. Today, at the opening of Parliament, the Prime Minister has the chance to offer his own recipe.

An important part of that will be his plans for reforming the tax system, so that the right economic incentives are provided. As well as reducing tax rates to as low as possible, this should include disincentives for property investment. Boldness here would promote a culture of saving, thus providing a local and less expensive source of capital for companies seeking to expand.

John Key has taken Dr Bollard to task over his pessimistic analysis of the chances of closing the income gap, saying it is "a fairly negative view". He described the task as "challenging". In fact, both their assessments contain worthwhile sentiments. The Prime Minister is right to take up the challenge in terms of this country's attractiveness as a place to live. And Australia must be the benchmark because that is the obvious destination for those seeking a higher standard of living.

Dr Bollard, for his part, is right that we must strive to cash in on Australia's good luck and impressive head of economic steam. Our good fortune is that just the Tasman Sea separates the two countries. Taking advantage will be an important driver if New Zealand is, eventually, to match Australia's economic growth and wage rates.