Fran O'Sullivan: Transtasman gap haunts Key

What's happened to the "high quality advisory group" that John Key and Rodney Hide promised they would task with the challenge of investigating how New Zealand would close the income gap with Australia by 2025?

Nearly nine months into this Government's (first?) three-year term, nothing has emerged. Yet before becoming Prime Minister, Key made huge political capital out of the fact that New Zealand's income on a GDP per capita basis had slid markedly during his predecessor's near nine years in power.

Within a week of National securing the most seats at the 2008 election, he had signed a confidence and support deal with Hide which spelled out their parties' joint aspirations for greater prosperity for New Zealanders - with Australia singled out as the benchmark.

Attaining the "concrete goal" of closing the income gap by 2025 would require a sustained lift in New Zealand's productivity growth to 3 per cent a year or more.

The political leaders' ambition was crystal clear: a high-quality advisory group would be established to investigate the reasons for the decline in New Zealand's productivity performance, identify superior institutions and policies in Australia and other more successful countries, and make credible recommendations on the steps needed to fulfil National and Act's aspirations.

About 10 days ago, the Wellington rumour mill was running hot that a paper would be discussed at the next Cabinet meeting. But nothing eventuated.

Hide's people now say the chair of the advisory group may be announced next week when the Act leader gets back from holiday. A couple of names have been under consideration.

Political sources suggest they are former National leader and Reserve Bank Governor Don Brash and former Treasury secretary Graham Scott.

The political drum goes that Hide had all but secured support for Brash to chair the group - right down to suggesting who else should be among the membership. But Bill English - who has employed Scott as his "purchase adviser" - preferred his former Treasury boss (the Finance Minister was a Treasury analyst before entering politics) over his former party leader.

Those of an unkind bent are saying that English - whom Brash toppled for National's leadership - does not want him running the ruler over New Zealand's economic performance against its largest neighbour.

Frankly, both English and Brash are better than that.

But just as with the team that was set up to review the foreshore and seabed legislation, the makeup of the membership will be critical to outcomes.

Hide exerted plenty of behind-scenes leverage to extract the commitment from Key during their post-election talks.

But while Key and Hide have been busy with other priorities - like dealing to the effects of the international recession on New Zealand confidence (Key) and leading change in Auckland (Hide) - the foreshore and seabed review team has already done its business.

The fact that Key made this a priority (it was a commitment that the Maori Party secured as part of its own confidence and support deal with National) has an element of electoral calculation.

But in the long run it is far more important for all New Zealanders' economic health that the income gap with Australia is closed.

This will not be a simple task.

English used a recent appearance before Parliament's finance and expenditure committee to emphasise that the recession had exposed long-standing imbalances and structural weaknesses in the economy that would have to be dealt with if New Zealand was to lift its productivity and close the income gap.

He pointed to the fact that the non-tradeables sector, which focuses on producing goods and services for domestic consumption, has grown 18 per cent in the past five years - overshadowing the performance of the tradeables (exporting industries and those competing with imports) which had contracted by 5 per cent over the same period.

He noted the Government would be pressing ahead with regulatory reforms and a multibillion-dollar investment in productive infrastructure and with providing better, smarter public services.

The problem facing New Zealand is that while policymakers concentrate on the fundamentals, Australia is poised to come out of the recession at a much faster clip.

Projections in Australian Treasurer Wayne Swan's May Budget forecast Australia would move from negative GDP growth to positive growth by 2010-11, then book above-trend 4.5 per cent GDP growth in 2011/12 and 2012/13 before getting the Budget back into surplus by 2015/16.

English's May Budget forecast New Zealand would experience a continued period of weak economic growth over the next couple of years as the economy continues to be affected by low global growth and the need to unwind past imbalances.

Real production GDP was estimated to have declined by 0.9 per cent in the year to March 2009, with a further 1.7 per cent decline forecast for the March 2010 year. The Budget forecasts noted the recovery from weakness in New Zealand and abroad is expected to be relatively drawn-out.

Real GDP growth is expected to lift to around 1.8 per cent in 2011 and just below 3 per cent in 2012 before reaching 4 per cent in 2013. On the May projections the New Zealand Budget will not be back in surplus for 11 years.

This suggests that some very big-brained thinking will be necessary to come up with competitive policies that attract or retain more companies and talent to invest in New Zealand. So far, what is on offer in Wellington is relatively timid stuff.

Even policies - such as using tax to incentivise more investment - have yet to get over the line.

In the National-Act agreement, Key and Hide said the advisory group would report annually on the progress made to improve the quality of institutions and policies and whether New Zealand is on track to meet the 2025 goal.

With the first report due in three months, the politicians better get cracking.