Can we catch the Aussies? Too right we can

The Aussies win at everything, but Don Brash's taskforce isn't giving up. Photo / Brett Phibbs

When Australia scooped a swag of medals at last month's Commonwealth Games, it might have triggered the customary bout of self-flagellation over our woeful relative performance: 177 medals to New Zealand's 36; 74 gold to New Zealand's 6.

Our transtasman cousins were way ahead - we finished just below Scotland.

Yet reaction amounted to a collective shoulder-shrug. It's as if we have bowed to the inevitable.

Such defeatism hasn't yet spread to our economic fortunes. In its second report, the 2025 Taskforce - set up to advise on closing the income gap with Australia - flails away like a punch-drunk boxer who doesn't know when to quit.

It starts with the technical knockout. A year ago, the claimed income gap (measured as something called Real GDP per capita) was 35 per cent in Australia's favour. But the OECD now expects Australia to enjoy a slightly higher rate of GDP growth per head than New Zealand over the next 15 years - meaning the gap could blow out to 42 per cent by 2025.

Meaning the OECD (in an April report) predicts the "dollar gap" in GDP per head will rise from $16,400 in 2010 to $24,100 by 2025.

To close the gap by 2025, New Zealand will need to increase its GDP two per cent faster on average than Australia's - by about 4 per cent - every year. No OECD countries with government spending as high as New Zealand's have kept up such a growth rate for 15 years.

Yet the taskforce, headed by former Reserve Bank governor and National Party leader Don Brash, believes it is achievable. Its recipe is straight from the New Right Economics 101 textbook - tax cuts, asset sales, deregulation, welfare tightening, reducing government spending by private provision of health, education and infrastructure; more foreign investment ...

It is so familiar it raises the question, these same ideas were tried in the 1980s and 1990s, so why has the GDP gap been almost continuously expanding since 1982?

The report anticipates such scepticism. "The evidence ... provides strong support for the proposition that productivity and economic growth in New Zealand were increased as a result of the economic reforms instituted by New Zealand from the mid-1980s, both absolutely and by comparison with Australia.

"However, public policy in New Zealand in the past 15 years has often been inconsistent with achieving increased levels of productivity, whereas Australia continued to introduce a range of productivity-enhancing reforms over that same period."

So it's Brash to the future then. The report says the Government has taken steps to improve our economic growth but is well short of the policies needed to even begin reducing the gap.

Many of its claims are debatable and some quite dubious. But it at least points to the tough policy options which a cash-strapped government must consider if it wants to tackle the biggest issue facing New Zealand: stopping the exodus of our young talent in search of higher rewards - the brightest of which look well beyond Australia.

The report estimates a net 412,000 New Zealanders could leave over the next 15 years - and taxpayers will have spent perhaps $30 billion educating and providing medical care for them.

It says New Zealand "cannot afford to continue its existing state funding of health and education" if the exodus is going to be as big as this.

THE REPORT SAYS

Role, size, and influence of government
The OECD puts New Zealand's state spending at 45 per cent of gross domestic product, compared with 35 per cent for Australia. The rate of increase is the fastest since the late 1970s and early 1980s.

"... Closing an income gap of the size New Zealand faces ... cannot be done with Government spending at more than 40 per cent of GDP. A focus on removing unproductive government spending which does not improve economic and social outcomes, and on cutting the most inefficient taxes as a result, will have a substantial positive impact on growth.

"The increased Government spending has contributed little to core government functions. Much of it is 'tax churn' collected from and returned to middle-income earners in the form of universal provisions such as interest-free student loans, early childhood subsidies, KiwiSaver subsidies and subsidised doctor's visits."

Taxation
Firms and individuals respond to taxes by working, saving and investing less than they would otherwise. Even GST has materially adverse effects on economic activity.

The Government needs to be much more focused on efficient provision of public goods and support for those genuinely in need, rather than creating spending programmes that benefit only the same middle-income families who pay taxes.

Asset sales
Where a high proportion of services are provided or owned by the public sector, there is less competitive pressure to drive productivity growth and innovation.

There have been no major state asset sales in New Zealand since 1999, putting us out of line with other advanced and emerging countries.

SOEs and other Crown trading enterprises could contribute much more to the economy if they were wholly or partially privatised, including through selling shares to the New Zealand public.

Public-private partnerships
New Zealand is well behind Australia and many other OECD countries but can learn from their mistakes. In Australia, about 20 per cent of infrastructure projects worth A$30 billion have been completed using PPPs since 2000. Our Government has announced plans to use PPPs for a prison, new school property and ultra-fast broadband, and to investigate their use for infrastructure.

Welfare
New Zealand has too many people who lack the human capital or the incentives to be productive participants in the economy at the minimum wage. The single most important issue in welfare reform is to establish a focus on return to work with every form of benefit.

Health
Despite substantial increases in salaries for medical and nursing professionals, health sector productivity has fallen. As the range of treatments and drugs improves and the average age of the population increases, it will not be sustainable to continue increasing spending in return for few perceptible health gains. The report calls for a health taskforce to look at the best overseas systems and advocates:

* Separating the ownership and purchasing functions of the DHBs.

* Shifting some forms of care from secondary to primary and community settings, providing more convenient care at reduced cost.

* Greater private sector involvement in providing facilities and services.

The taskforce criticises subsidy levels and universality on prescriptions and GP visits.

Education
In Australia, non-government schools account for around 35 per cent of enrolments and government spending per student in those schools is, on average, 48 per cent of that in state schools.

The report estimates savings of nearly $1 billion if our Government reduced the portion of compulsory education funded entirely by the state to the Australian level of 65 per cent of enrolments.

Superannuation
Australia last year announced that eligibility for the pension would be progressively raised to age 67. Doing the same in New Zealand would make "a material contribution" to closing the income gap.

Further consideration should be given to KiwiSaver subsidy levels. About $1 billion a year is being spent on KiwiSaver to support "what appears to be a second-best response to current policy settings".

Research and Development
NZ ranks fourth in the OECD for proportion of its workforce engaged in research. But on most other measures its R&D performance is low and has been for some time.

Shift the balance to private funding of R&D by giving private firms stronger incentives to make this investment. Remove the policy and structural barriers that inhibit competition and evolution of the institutional structure of the research and tertiary education sector. Stronger incentives and less regulation will be more effective than planning the system from the centre.

Regulations
The Resource Management Act "continues to be one of the most important regulatory barriers to higher growth rates". The taskforce recommends urgent reform "to take it back towards the original intent as an effects-based, broadly permissive statute".

Houses in New Zealand are among the most expensive in the world relative to income, mainly because of planning constraints on land supply. Rules on hazardous substances and new and genetically modified organisms have dramatically reduced productivity and increased the costs of research.

"New Zealand is systematically constraining the ability of its scientists to develop technologies that have the potential to improve productivity, reduce the impact of pests, and reduce the impact of chronic illness."

Labour market
The best protection workers have is a strong and highly competitive labour market in which they have credible alternative employment options. The case for any minimum wage at all is questionable, and it should be reduced in value.

Foreign investment
If a foreign owner is prepared to pay more for an asset than any New Zealand national, they must place a higher value on the land than potential domestic owners. Obtaining more value from existing assets, by investing in them or changing the production technology applied to them, drives economic growth, and blocking such investment will reduce economic growth.

For the full report click here and follow the link