Key, Bollard cross swords

Alan Bollard. Photo / Mark Mitchell

Prime Minister John Key has vowed to stick with his goal of closing the income gap with Australia, despite an embarrassing dismissal by the Reserve Bank Governor who said there was no chance of it happening.

Speaking on TVNZ's Q+A programme yesterday, Alan Bollard said Australia had been "blessed by God sprinkling minerals" and had handled its economy well. He said New Zealand would do better to make the most of the "crumbs that come off the Australian table".

He said it was up to the Government what its own goals were, but he did not believe catching up with Australia was possible.

However, Australia's success was good news for New Zealand and the real challenge was in working out how to capitalise on it.

Dr Bollard's comments come as Mr Key is set to deliver his first major speech of the year at tomorrow's opening of Parliament, outlining his economic plans for the year and changes to the tax system.

Labour leader Phil Goff said it was a major embarrassment for the Government and showed it lacked the proper plan to hit the target.

However, Mr Key said he had no intention of dropping the goal - which his own Finance Minister, Bill English, has also previously described as "aspirational" rather than realistic.

On One News Mr Key said he did not believe the task of closing the income gap was impossible. While Dr Bollard was an intelligent man, his job was monetary policy and he did not have to look at the wider picture.

"Nor does it mean just because it is difficult, as he correctly points out, that we should abandon that goal."

Mr Goff said the dismissal was a major embarrassment for the Government, which had based its campaign on catching up to Australia's income and living standards and spent about $500,000 on a taskforce to find ways to do so.

"It was pretty radical coming from the Government's own Governor of the Reserve Bank. He said what other economists are saying: not a snowball's chance in hell. There simply isn't the plan there to do it."

Mr Goff said the latest unemployment figures showed that far from closing the gap, the Government was widening it. Australia did have advantages, but New Zealand had shown success in niche areas.

"I'm not fatalistic about New Zealand being unable to close the gap. But based on the evidence so far this Government is taking us in the opposite direction." New Zealand incomes were about one-third lower than those in Australia and unemployment was higher after years of being lower.

Mr English has rejected many of the changes recommended by the Taskforce 2025 report, headed by Dr Don Brash - the former Reserve Bank Governor. That group had recommended significant cuts to government spending and lowering the top tax rate to 25 per cent or 20 per cent.

The Government is expected to outline its broad response tomorrow. Dr Bollard said from the point of monetary policy a tax system which advantaged property investment over investment in other areas was undesirable. He said changes should neutralise the difference between investing in property and investing in businesses.

Among the proposals the Government is considering is a land tax of 0.5 per cent and an increase in GST to offset personal income tax cuts.