Income Gap with Australia Expected to Widen

Income Gap with Australia Expected to Widen

“Although wages in Australia are already some 30 percent higher than in New Zealand, a comparison of productivity growth trends in the two countries suggests that the income gap between them will increase even further under present policies”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

Productivity is a measure of how efficiently inputs (such as capital and labour) are used within the economy to produce outputs of goods and services.

Mr Kerr said that the publication by Statistics New Zealand of productivity data for the ‘former measured sector’ (which covers most of the business sector and around 63 percent of the economy) allowed comparisons with Australia to be made on a like-for-like basis.

As the attached charts showed, for the period 1992-2000 the average annual rates of growth of both labour productivity and multifactor productivity in New Zealand on a point-to-point basis outstripped the comparable growth rates in Australia.

(Multifactor productivity reflects improvements in knowledge, technology and innovation – the government’s so-called ‘economic transformation’ goals.) Mr Kerr said this strong performance reflected the gains from the economic reforms of the 1980s and early 1990s.

However, for the period 2000-2007 the position was reversed, with Australia doing better than New Zealand, even though Australia’s average productivity growth rates had declined relative to the 1990s.

Mr Kerr said a number of reasons for the decline in Australia had been advanced, including: that the Howard government had dropped the ball on economic reform, leaving a mediocre productivity legacy the entry of less productive workers into the workforce with high employment growth and falling unemployment, and high levels of capital investment (especially in mining) that was only just beginning to pay off.

“Treasury and International Monetary Fund research suggests that falling unemployment may have had a similar depressing effect on measured labour productivity growth in New Zealand in recent years. However, it is not clear whether that effect is greater than the effect in Australia, or greater than the effect 2
of rapidly falling unemployment in New Zealand after 1992, especially given the increase in graduates from tertiary education institutions since that time."

Mr Kerr said that, over the long term, productivity mattered because it was the key determinant of a country’s standard of living. (The other main factor was hours worked per labour force member, and recent data indicated that full-time employees in Australia worked slightly longer average weekly hours than full-time employees in New Zealand.) “Nevertheless, in looking at the relative economic performance of New Zealand and Australia, productivity data should not be viewed in isolation, since issues of measurement and interpretation arise."

A major factor inhibiting productivity and per capita income growth in New Zealand was the size of government.

“Government expenditure at all levels in Australia (federal, state and local) is estimated at 34 percent of GDP in the coming year (and the Rudd government is seeking to cut spending), compared to 43 percent for all levels of government in New Zealand, according to OECD figures."

The Business Roundtable had often pointed out that no comparable OECD country had achieved high rates of economic growth on a sustained basis with total government spending at over 40% of the economy.

“Moreover, while recent Australian governments can be criticised for their reform efforts, they have stayed on a path towards greater economic freedom, which facilitates entrepreneurship and growth”, Mr Kerr said.

“The 2008 Heritage Foundation/Wall Street Journal index of economic freedom ranks Australia in fourth place (after Hong Kong, Singapore and Ireland) and ahead of New Zealand, which is in sixth place and has fallen in absolute terms.

“By contrast, the 1996 index had New Zealand in fourth equal position while Australia ranked seventeenth equal."

Mr Kerr said it was well established in economic research that a country’s institutions and policies were the main determinants of productivity and income growth.

“Recent IMF research has concluded that Australia’s superior productivity performance is largely explained by its economic reforms, “particularly in the labor and product market areas”.1 It is therefore mystifying that recent productivity research by the New Zealand Treasury did not focus on the impact of New Zealand’s economic reforms on the productivity improvements of the 1990s, and the impact of policy reversals and increased government spending, taxation and regulation on the much lower productivity growth rates in the current decade."

“The story told in the attached charts is alarming”, Mr Kerr concluded. “On present policy settings, the income gap with Australia looks certain to widen and there is no likelihood that New Zealand will get back into the top half of the OECD income rankings."

1 Thierry Tressel, “Does Technological Diffusion Explain Australia’s Productivity?”, IMF Working Paper WP/08/4, January 2008.

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