Catching Up W Australia: Policies Must Match Goals

Catching Up With Australia: Policies Must Match Goals

The government came into office committed to raising New Zealand’s rate of economic growth. It said that lifting the average incomes of New Zealanders into the top half of the OECD range was its “top priority” goal.

The goal was widely applauded. Only economic growth, driven primarily by growth in productivity, can raise household incomes and support public spending. A recent poll indicated 96% of New Zealanders want higher incomes.

Earlier this year, however, journalist Colin James wrote that prime minister Helen Clark’s promise to get New Zealand back into the top half of the OECD income rankings had been “discarded”. He was not contradicted by the government.

Why was the promise discarded? Clearly because it is going to be broken. GDP growth in the last two calendar years averaged less than 2% and the outlook for the next two years is around 2% on average. Meanwhile the Australian economy is expected to grow at around 4% this year and next and the world economy is growing by over 5% a year.

Worse, labour productivity growth, which ran at 2.7% per annum in New Zealand in 1992-2000, slumped to 0.7% in the year to March 2006 and was probably close to zero in the latest March year.

Yet some commentators still talk of the economy doing well. The temporary stimulus from high government spending and dairy incomes should not blind them to the weak underlying growth trends and the inflation and balance of payments risks.

We must still hope that the government will recommit itself to its former goal and change policies that are clearly not working. Not to do so would surely be a fraud on the electorate. It is astonishing that New Zealand media do little to hold the government to account for seemingly discarding its “top priority” goal.

The same questions need to be asked of other parties. National has talked of having a more “aspirational” vision. It has focused on Australia as a benchmark. Australian wages and other incomes are around 30 percent higher than New Zealand’s on average. Over the past 15 years Australia has moved from a place below the OECD average income rankings to well above the average.

There is no reason why New Zealand cannot do as well as or better than Australia. The quality of a country’s institutions and policies largely determine its long-run economic performance.

Asked a couple of years ago why Australia was doing well, Ken Henry, secretary to the Australian Treasury, replied “good policies”. Australia’s endowment of natural resources is only a bonus. Until it implemented economic reforms in the 1980s, Australia was an under-performer like New Zealand. Both countries benefited enormously from similar moves to open up their economies, but Australia has continued in a reforming direction whereas New Zealand has backtracked.

Australia’s institutions and policies are generally more conducive to growth than the government’s and those which National has so far put forward.

As regards institutions, Australia does not suffer from an MMP electoral system (although its senate can be a handicap for a reforming government).

Australia’s fiscal policies are much more growth-oriented than New Zealand’s. Its ratio of total spending to GDP is around 34%, the second lowest in the OECD, compared to New Zealand’s ratio of 41%. The gap is even wider on the tax side with Australia’s total tax ratio being 35% of GDP and New Zealand’s 43% (almost on a par with Germany). Big government is a serious drag on growth.

Liberal and Labor parties at federal and state level in Australia have continued with privatisation initiatives in areas such as energy, transport and communications. They have also promoted a larger role for the private sector in health, education, roading and water supply. The evolution of climate change policies in Australia is measured. Welfare policies are more restrictive than in New Zealand. In employment law, Kevin Rudd’s Labor Party would water down the Howard government’s unfair dismissal legislation but would still go further than National’s 90-day probation period.

A possible change of government in the forthcoming federal election seems unlikely to change Australia’s broad directions. The main difference might be in industrial relations policy. However, Kevin Rudd embraces the Hawke-Keating reform legacy in Australia, whereas our Labour Party has turned its back on its predecessors.

There is plenty to criticise in Australian economic policies, but it is hard to find areas where they are not now in better shape than New Zealand’s. Political parties in New Zealand that aspire to the goal of matching Australian income levels must come up with programmes of substance that are capable of achieving that goal. They should not commit further frauds on the electorate.

Roger Kerr is the executive director of the New Zealand Business Roundtable.

ENDS

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