Bold policies needed to close the gap with Australia

It’s great to have a goal. And closing the GDP per capita gap versus Australia by 2025 would be a great outcome. But goals without strategies inevitably lead to disappointment. New Zealanders are waiting for the government’s announcements of economic strategies to achieve the goal.

Alan Bollard has stated he does not think the goal is achievable. The government may have a different view but the opportunities being floated are not bold enough. Our calculations indicate that an annual GDP growth rate of 4-5% would be needed over the next 15 years to achieve the goal. In recent years Ireland is the only advanced economy that has achieved growth that strong. Ireland succeeded by the bold step of cutting corporate tax rates to 12.5% overall and 10% in some instances to attract foreign investment in technology based businesses.

The economic gap versus Australia emerged between 1970 and 1990. New Zealand’s economy was highly dependent on agricultural commodity exports so we were hit very hard by Britain’s entry to the European Union. Subsidies contributed to high debt levels that became unsustainable and forced the reforms of the 1980s. Those reforms may have been necessary but they did not stop our economy’s deterioration relative to Australia.

The GDP per capita gap with Australia has remained similar for the last 20 years. Today it is around NZ$20,000 per person per annum. Now Government has set the target to close the gap and there is an effort to identify policy changes that will contribute.

However, the effort lacks rigour as a strategy development process. Policies are being proposed based on sensible views that positive changes would have beneficial effects. For example, improving the effectiveness of government and reducing unnecessary regulation are easy to agree with as opportunities for economic improvement but will they make enough difference?

In 2007, Australia’s core government services were 19% of GDP, similar to New Zealand’s 17% of GDP. Further, analysis of 2000-2007 OECD data reveals a low correlation of total taxes as a proportion of GDP with growth in GDP per capita. The World Economic Forum rates the business constraint from regulation as similar for the two countries.