Two months ago, the 2025 Taskforce published its first report on how New Zealand could match Australia’s living standards by 2025. It evoked a wide variety of reactions. It attracted a lot of editorial support, including from The Dominion Post, and considerable support from economists and business groups. But in other circles it was grossly misrepresented or dismissed with the assertion that catching Australia was totally unrealistic given its size and mineral wealth, or not important anyway.
Well the first point to make is that the target of catching Australia by 2025 was not chosen by the Taskforce but by the Government, and reflects a long-standing National Party commitment to close the gap with Australia. The Prime Minister has reaffirmed that goal on a number of occasions.
Is it unrealistic? It is totally unrealistic if we continue on our present mediocre policy track. Matching Australian living standards by 2025 means that we need to exceed Australia’s growth rate over the next 16 years by 1.8% every year. In other words, if Australia grows at an average of 1.5% per capita we need to grow at an average of 3.3% per capita. No analyst or forecaster thinks that’s plausible with current policies.
So is the goal really achievable? New Zealand enjoyed living standards on a par with those in Australia for most of our history until the late sixties, and with growth-friendly policies the goal is certainly achievable. Over the period 1993 to 2006, 36 countries achieved growth averaging more than 3.3% per capita. That included countries such as Ireland, Hungary, Slovakia, South Korea and Singapore.
Is the goal important? Absolutely. Over the last decade, New Zealand has lost a net 260,000 citizens overseas, mostly to Australia – the equivalent of the entire population of Masterton, Gisborne, Whangarei, Nelson, Timaru and Invercargill. The difference in living standards is almost certainly the biggest factor in that exodus. If the gap between living standards here and those in Australia continues to widen, it will get more and more difficult to retain the people we need to provide the services we take as our birthright. Only last month, doctors warned that the removal of restrictions on where New Zealand-trained doctors could practise in Australia, coupled with the much higher salaries paid to doctors there, created a “threat to the whole medical profession in New Zealand”.
Perhaps the most contentious of the Taskforce’s recommendations was to reduce the level of government spending from its current level of around 36% of GDP to 29% of GDP by 2012/13. If that were done, we noted that the top personal tax rate, and the company and trust tax rates, could all be aligned not at 30% (the Government’s current medium-term objective) but at 20%, and we were convinced that such a top tax rate would have a dramatically positive effect on investment, employment and growth in New Zealand. There would be no need to increase GST, or introduce a land tax, or change the depreciation rate on rental houses to achieve that top tax rate.
The recommendation was dismissed by critics as ridiculously unrealistic or simply ideological. It was noted that most of the affluent countries of Western Europe have ratios of government spending to GDP which are higher than New Zealand’s.
Fair point, but those countries are already much wealthier than New Zealand, and grew wealthier at a time when their governments were rather smaller than they are now. We are seeking to grow much faster than they are because we are now markedly poorer than they, and the evidence is strong that sustained rapid growth with a high level of government spending is almost impossible. It is not an accident that three of the fastest growing countries in the OECD – Slovakia, South Korea and Australia itself – now have some of the lowest ratios of government spending to GDP in the OECD.
And was the recommendation to reduce government spending to 29% of GDP over three or four years so radical? Hardly, that was the ratio in 2004 and 2005, at the end of Labour’s second term in office. The increase to 36% was the result of a massive increase in low quality government spending over the last four years. And if the economy grows at a nominal rate of 5.5% per annum over the next few years – real growth of 3% and inflation of 2.5% – the ratio of government spending to GDP would reach 29% by 2013/14 with government spending simply held constant!
Of course, holding government spending constant is easier said than done. Getting back to 29% would almost certainly require scrapping some of the low quality programmes which the National Party attacked so vigorously in Opposition, such as the interest-free student loans programme. But if we are serious about improving our prospects, it is a realistic goal. It would enable a radical cut in income tax, strongly promoting investment and innovation without the need for any increase in other taxes.
The Taskforce was also confident that as much as a third of the gap between our living standards and those in Australia could be closed if our regulatory environment were world’s best practice.
The unanimous recommendations of the 2025 Taskforce were carefully thought out, and consistent with the advice of bodies such as the OECD. We don’t claim infallibility of course, but we are absolutely certain that current policies, or a little minor tinkering with current policies, won’t get us anywhere near the goal which Government has set. When the Government announces its policy programme next week, we hope it will signal a start on the sort of serious multi-year reform New Zealand so desperately needs.
Copyright © 2024 Don Brash.