Tasmanian disease holds lessons for NZ

By KEVIN TAYLOR


Tasmania's dismal economy holds critical lessons for New Zealand, says a report.

It warns that New Zealand must adopt and maintain superior institutions and policies to avoid a so-called "Tasmanian future".

The report, written by Australian economic consultant Jeffrey Rae and published by the Business Roundtable, details the poor performance of a state whose economy has been the subject of more than 75 reports since federation in 1901.

During the past two decades, Tasmania's commodity-based economy has performed dismally in every key economic indicator.

Australia's economy as a whole grew more than 53 per cent in real terms between 1985-86 and 1998-99, but Tasmania's grew just 17 per cent.

The number of full-time jobs has declined in the state, unemployment has been higher and labour market participation lower than in the rest of Australia.

Tasmania's population is shrinking and ageing, and it is suffering brain drain as the best and brightest look elsewhere for better prospects, the report says.

The state, with a population of about 460,000 according to the 1996 census, relies heavily on federal Government help to maintain living standards.

Tasmania also has the highest public sector debt of any Australian state - in June 1996 it was $A3.3 billion ($4 billion), or about $A7000 for each resident.

Attempts have been made since to cut state government spending and a budget surplus was achieved in 1999-00.

Net public debt as a proportion of the state's gross domestic product is now half what it was in 1996, but that has been achieved largely by tax increases.

Mr Rae says Tasmania's tax system relies on a narrow base of payroll and land taxes.

The burden of the high average tax rate falls heavily on business, he says.

That approach causes serious economic distortions. The extent of concessions and exemptions mean tax rates are higher than they would otherwise be.

Tasmania is also groaning under the weight of regulations imposed by multiple government agencies.

The state has more than 260 quangos and the report notes that whenever there was a problem, Tasmania set up a quango.

Business also suffers from excessive regulation, with over-emphasis on highly detailed and prescriptive rules that stifle innovation and tend to protect the status quo from competition.

Environmental regulations have hindered economic development, Mr Rae says.

A pulp mill that would have resulted in 420,000 tonnes of pulp exports annually was canned after protracted delays caused by federal and state intervention over the setting of environmental standards.

Activists also halted hydro-electric development.

Mr Rae cites one example of over-regulation as being the extensive overlapping of licensing systems.

An investor wanting to establish a business exporting and retailing wine, distilling wine into brandy and providing tourist accommodation would need up to 28 licences from 15 government agencies.

Tasmania also has a proportional representation system that tends to deliver ineffectual minority governments.

Mr Rae says the biggest lesson for New Zealand is the crucial importance of sound institutions and public policies.

Perhaps the most immediate institutional risk is proportional representation, which is not easily grafted on to a Westminster system without risking a severe reduction in the effectiveness and efficiency of government, he says.

Excessive regulation also discourages economic development that could benefit the whole community, and high levels of public debt impede economic development.

But even where governments avoid unsustainable fiscal deficits, many do so by maintaining higher taxes - rather than cutting spending - and by concentrating the tax burden on business.

This also discourages business investment, and thereby economic development.

Mr Rae says moves within Australia for internal free trade, a common currency and removal of economic barriers to growth and development have not been enough to ensure Tasmania's prosperity.

"On the contrary, Tasmania shows how easy it is for a peripheral economy to dissipate the benefits of economic integration through its own mismanagement."

Mr Rae says that while size and location hold natural disadvantages for New Zealand, they are most unlikely to prevent it achieving the prosperity of high-income countries.

Weaknesses in New Zealand's institutions and policies are the most likely cause of its return to a mediocre performance after the improvements in the mid-1990s.

"New Zealand can avoid a Tasmanian future but to do so it will need to adopt and maintain superior institutions and policies," he says.

Business Roundtable executive director Roger Kerr said Tasmania's economic performance was a salutary lesson for this country.

Both had similar characteristics: an isolated economy and lack of presence - "it's off the radar screen."

Tasmania was beautiful, said Mr Kerr, but it had made one mistake after another in the last 20 years.