Catch Australia? Yeah right!

elocal Magazine, ed. 175. 25 September 2015

One of the promises the National Party made when campaigning for the 2008 election was that it would raise the average standard of living in New Zealand to that in Australia, so that New Zealanders would no longer feel so tempted to move across the Tasman.  Soon after the election, National signed a Confidence and Supply Agreement with the ACT Party, which involved setting up a five-person Taskforce charged with making recommendations about how to achieve that goal by 2025.  I had the privilege of chairing that Taskforce, and had the assistance of four other experienced people, one of whom had been a Labour Government Minister of Finance (David Caygill) and one of whom had been a member of the Australian Productivity Commission.  Over the next couple of years, the Taskforce produced two substantial reports.

I have no doubt that the Prime Minister would sincerely like to have seen living standards in New Zealand rise to be broadly similar to those in Australia.  Even a year after the 2008 election he was quoted in the Sunday Star Times as saying that “if we don’t close the gap with Australia then we will simply become a breeding ground and a giant educational facility for Australia”.

Well, what has happened in the seven years since that 2008 election?  At the moment, and for the first time in many years, slightly more New Zealanders are returning from Australia than are moving there.   The New Zealand economy has been growing a little faster than the Australian economy over the last year or so, probably at least in part a consequence of Chinese demand for iron ore and coal falling off even more quickly than Chinese demand for dairy products.  Both economies are now slowing, and there is some talk of recession, with that talk slightly louder in Australia than in New Zealand. 

So has the gap been closed?   Alas no.  Indeed, there is no clear sign that the gap has even been reduced over the last seven years.

The first report of the 2025 Taskforce, released in late 2009, estimated that at that time average Australian incomes were about 35% above those in New Zealand.  Of course, comparing living standards between countries is not an exact science, and some estimates suggested the gap was slightly less at that time, some suggested it was slightly more.  But 35% was a reasonable assessment.

The latest data for 2014 suggests that the gap has barely changed.  The US Conference Board, which makes estimates of real Gross Domestic Product per capita for a range of countries, has estimated that Australia’s GDP per capita last year was 49,636 “international dollars” (effectively US dollars converted at an exchange rate to reflect cost of living differences), while New Zealand’s GDP per capita was 37,173 “international dollars”.  On that basis, Australian living standards last year were, on average, 33.5% higher than those in New Zealand.

But why are fewer New Zealanders leaving for Australia and more returning if there has been no material change in the relative living standards of the two countries?  The answer probably lies in the sharp fall-off in job opportunities in Australia over the last couple of years, related in part to the sharp contraction in the Australian mining industry.  What is worrying is that when these short term cyclical influences disappear Australia will still seem a highly attractive place for New Zealanders to move to.  And that applies especially to those whom New Zealand dearly wants to retain, those with skills and initiative.

At the heart of New Zealand’s failure to close the gap with Australian living standards is our consistently slow growth in productivity, or output per person.  Indeed, productivity has increased more slowly in New Zealand than in almost any other developed country for decades.  This is what explains our fall down the so-called OECD ladder: where once we were among the countries with the very highest living standards in the world – in the top four or five in terms of income per head – we are now around 23rd among the members of the OECD, and probably around 30th in the world if we include in the comparison some affluent non-OECD countries, such as Singapore.  If we continue with our very poor record of productivity growth, we will continue to slide.  More and more New Zealanders may choose the higher standards of living elsewhere.

Of course, income per head is not the only factor which determines where people want to live.  Access to the beach, beautiful scenery, a temperate climate, low levels of corruption, uncrowded countryside – all these things play a huge part in what makes New Zealand a wonderful country to live in.  But material living standards also matter if we want to afford the best education system, a high quality healthcare system, good housing, and a welfare system which provides adequately for those unable to care for themselves.

The Government totally ignored the recommendations of the 2025 Taskforce.  Indeed, I can’t think of a single recommendation we made which the Government picked up and implemented.  Even had they implemented all of our recommendations catching Australia by 2025 would still have been a huge challenge.  It would have required us to consistently grow about 2% per annum faster than Australia for some 16 years.  We haven’t achieved that margin of growth above Australia in more than two or three years in the last four decades.

I would have been relaxed about the recommendations of the 2025 Taskforce being ignored if what the Government had done instead had worked.  Sadly, it has not, and the gap between the material living standards in our two countries remains huge.  We deserve better.

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