KEY POINTS:
The Government's flagship Closing the Gaps plan, focused on ending social and economic differences between Maori and non-Maori and put in place after it was elected in 1999, was abandoned within a year.
Its focus then shifted to closing the income gaps with the top half of the OECD. But 10 years later (taking into account forecasts), it will not have moved New Zealand one rung up the ladder.
The National Party talks about closing the wage gap with Australia, but it is doubtful whether the policies it has so far put forward would do anything to narrow it.
The task is challenging. In Australia wages are already 30 per cent higher than in New Zealand, and a comparison of productivity growth trends in the two countries suggests the gap between the two will widen even further under present policies.
Productivity (a measure of how efficiently inputs such as capital and labour are used within the economy to produce outputs of goods and services) is the key determinant of any country's ability to generate higher incomes for its citizens.
Statistics New Zealand productivity data for the "former measured sector" (which covers most of the business sector and around 63 per cent of the economy) allows comparisons with Australia to be made on a like-for-like basis.
Between 1992 and 2000 the average annual rates of growth of both labour productivity and multifactor productivity in New Zealand on a point-to-point basis outstripped the comparable growth rates in Australia. (Multifactor productivity reflects improvements in knowledge, technology and innovation - the Government's so-called "economic transformation" goals.)
This strong performance reflected the gains from the economic reforms of the 1980s and early 1990s.
But for 2000-07 the position has reversed, with Australia doing better than New Zealand, even though Australia's average productivity growth rates have also fallen relative to the 1990s. New Zealand's average labour productivity growth rate has dipped to 1.2 per cent, well below the 3 per cent of the earlier period.
Together with labour productivity, incomes are determined by working hours. Here recent data indicate that full-time employees in Australia work slightly longer average weekly hours than full-time employees in New Zealand.
In looking at relative economic performance, productivity data should not be viewed in isolation, since issues of measurement and interpretation arise.
Another comparison is the size of Government, and the weight it places on the productive sector of the economy and its performance. This is arguably the country's biggest obesity problem and a major factor inhibiting productivity and per capita income growth.
Government expenditure at all levels in Australia (federal, state and local) is estimated at 34 per cent of GDP in the coming year (and the Rudd Government is seeking to cut spending), compared with 43 per cent for all levels of Government in New Zealand, according to OECD figures.
As the Business Roundtable has often pointed out, no comparable OECD country has achieved high rates of economic growth on a sustained basis with total Government spending at more than 40 per cent of the economy.
Another comparison concerns economic freedom.
While recent Australian Governments can be criticised for their reform efforts, they have stayed on a path towards greater economic freedom, which facilitates entrepreneurship and growth.
The 2008 Heritage Foundation/Wall Street Journal index of economic freedom ranks Australia fourth, after Hong Kong, Singapore and Ireland and ahead of New Zealand, which has fallen to sixth.
The 1996 index had New Zealand in fourth equal position while Australia ranked 17th equal.
It is well established in economic research that a country's institutions and policies are the main determinants of productivity and income growth. Recent IMF research has concluded that Australia's superior productivity performance is largely explained by its economic reforms, particularly in the labour and product market areas.
Thus it is mystifying that recent productivity research by the Treasury does not focus on the impact of New Zealand's economic reforms on the productivity improvements of the 1990s, and the impact of policy reversals and increased Government spending, taxation and regulation on the much lower productivity growth rates in the current decade.
Australian Prime Minister Kevin Rudd was able to adopt "me too" policies leading up to last year's election - Australia has been heading in generally sound directions under the Hawke, Keating and Howard Governments.
Nevertheless, he criticised the Howard Government for dropping the ball on economic reform.
Closing the gap with Australia is not an impossible dream, but New Zealand will need material changes in direction to do so.
At present no major political party proposes them.
* Roger Kerr is the executive director of the New Zealand Business Roundtable. rkerr@nzbr.org.nz
