Australian living standards by 2025?

Huljich Wealth Management newsletter. 12 July 2009

A few days after last year’s general election, the National Party signed a Confidence and Supply Agreement with the ACT Party and of course that was widely reported in the media.  Not so widely reported were some of the features of that Agreement.  To me, by far the most important aspect of that deal was agreement “on the concrete goal of closing the income gap with Australia by 2025”.

Well, the cynics might say, agreement to achieve something by 2025 means nothing at all in political terms.  By the time we reach 2025, there will have been at least five more general elections, and even dyed-in-the-wool National Party supporters recognise that there is at least a slim chance that the National/ACT Government may be defeated in one of those elections.

Remember how Helen Clark’s Government made a commitment to raise New Zealand’s living standards into the top half of all developed countries within 10 years, back when first elected in 1999 – and then quietly forgot that commitment when it became abundantly obvious that there was not the slightest chance of achieving that goal?  Indeed, during the nine year term of office of the last Government, New Zealand’s living standards didn’t improve at all relative to those in other developed countries, despite some of the best international conditions in a generation.

But the National/ACT Confidence and Supply Agreement not only commits the new Government to “closing the income gap with Australia by 2025”, it explicitly recognises that “achieving this goal will require significant improvements in New Zealand’s institutions and policies.  Their joint commitment to limited government – government limited to its proper role – and greater economic freedom will need to be consistently adhered to.  To that end they have agreed on the establishment of a high quality advisory group to investigate the reasons for the recent 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 fulfill National’s and ACT’s aspirations.”

And to make the Government’s commitment absolutely clear, the Agreement provides that the advisory group should “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.”  In other words, the Government agreed to be held accountable for progress towards the 2025 goal, year by year.

Astonishingly, when this Agreement was first signed, some media commentators made barely any mention of its contents, apparently regarding it as of no great significance.

Call me hopelessly optimistic if you like, but to me this Agreement is of enormous significance to all of us – not just to savers and investors but also to all New Zealanders.

As some of you will know, the Government announced in mid-July that I am to chair this advisory group.  At time of writing, the other members of the group have not yet been appointed and, even if they had been, it would clearly be inappropriate for me to anticipate what our first report will conclude.  But a few points can be made.

First, we know that as recently as the early 1970s New Zealand and Australia had very similar standards of living.

Second, we know that, while Australia has enormous natural wealth in terms of oil, gas, and minerals, a recent World Bank report listed New Zealand as second in the world (after Saudi Arabia and ahead of Australia) in terms of the wealth of our natural resources on a per capita basis.  Yes, Australia has iron ore, uranium, oil, gas, copper and much more besides.  But we have relatively rich farm land, considerable resources of coal and iron sands, an abundance of hydro and geothermal power, one of the largest salt-water fisheries in the world, and large amounts of (increasingly valuable) fresh water.

Third, even if Australian mineral resources were in some sense more valuable than our own abundant resources, we know by looking around the world that natural resources are absolutely no guarantee of national prosperity – and indeed some of the countries with the highest income levels have virtually no natural resources at all (Japan and Singapore come to mind).

Fourth, we know that the main determinants of economic prosperity relate to institutions and policies, which is no doubt why the National/ACT Agreement highlighted the importance of these.  There is no reason in principle therefore why New Zealand can not achieve Australian living standards by 2025.

But it will be an enormous challenge.

The Government has come to office at a time when the international environment is more difficult than at any time since the 1930s, with unemployment rapidly approaching 10% in many major countries.  Understandably, the immediate preoccupation has therefore been to ensure New Zealanders get through this situation with the absolute minimum of social and economic pain. 

What is reassuring is that, while very conscious of these immediate pressures, the Government is also making it clear that it has every intention of adopting policies designed to increase our growth rate and meet the target which they have set themselves.  The Government has made major progress on reforming the RMA (a piece of legislation which has been one of the biggest single obstacles to faster economic growth) and has made a major commitment to improving our roading network.  It has sensibly canned some of the most extravagant projects announced by the previous Government (most obviously the Waterview tunnel).  It has set up small groups to review and advise on the tax system, the electricity sector, and infrastructure.

A very encouraging start but, as the Prime Minister would be the first to acknowledge, there’s a long way to go.

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