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Dr. Don Brash

Can we catch Australia by 2025? Yes we can, but…

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As most readers know, the 2025 Taskforce was set up as a result of the coalition deal between the National and ACT parties immediately after the 2008 election. That deal involved the Government committing to policies which would lift living standards in New Zealand to the Australian level by 2025, and setting up an advisory group both to advise how best to achieve that goal and to report on progress towards it on an annual basis. Those two latter roles are the responsibility of the 2025 Taskforce.

Some of the media commentary has implied that the latest report of the Taskforce, released last Wednesday, was solely my responsibility as chairman. But of course that is nonsense. There are four members of the Taskforce – David Caygill (who was not only Minister of Finance in the Labour Government of the eighties but was also Deputy Leader of the Labour Party in the nineties), Bryce Wilkinson (a Wellington-based economist), Judith Sloan (an economics professor at the University of Melbourne, and until recently a member of the Australian Productivity Commission) and I. And we had assistance from additional economic policy experts in the preparation of the report.

In our first report, issued last year, we judged that Australian incomes were on average 35% above those in New Zealand . That was only one of several estimates – some higher and a few lower – and none is perfect because of the difficulty of comparing incomes in different countries. This year, we did not try to quantify whether the gap had increased or decreased because some of the data was not available, but concluded that, because Australia has so far weathered the international financial crisis somewhat better than we have, it is very unlikely that the gap will have narrowed over the last year.

We judged that the Government has done several things this year which may lead to somewhat faster growth, notably the reduction in personal income tax rates, a start in reforming the RMA, the lifting of the moratorium on new aquaculture projects, some improvements in employment law, and the decision to establish a Productivity Commission.

But we also noted that there had been several retrograde steps, including an increase in the effective company tax rate (a reduction from 30% to 28% being somewhat more than offset by several other changes in corporate tax), an increase in the already high minimum wage rate (the second highest in the OECD relative to average incomes), a failure to make any impact on what is now a very large structural fiscal deficit, and an increasingly negative attitude towards foreign investment.

We did not attempt to measure the positives against the negatives, but had no difficult concluding that we do not yet have a policy framework in place which is even approximately commensurate with the task of overtaking Australia by 2025. Doing that would require us to grow 2% faster than Australia , on average, each year for the next 15 years. No commentator that I know of thinks we are on track to deliver such superior growth.

The Taskforce has been attacked by some critics for repeating the recommendations we made last year, focused on reducing government spending, reducing taxes, improving the rigour with which government spending is evaluated, and substantially improving the quality of regulation. But of course it would be extraordinary if, just 12 months on, we had all radically changed our view of what needs to be done.

But there were some new features in the report this year. We devoted several chapters of the report to responding to criticisms of our first report.

One of those criticisms was that we were simply advocating a repeat of the reforms of the late eighties and early nineties and since, it was argued, those had failed, our recommendations should be ignored. But we showed that the earlier reforms had delivered a dramatic improvement in productivity, and that productivity gains were greatest in those industries which had been subject to the most vigorous reform, including agriculture, transport and telecommunications.

Another criticism of our earlier report was that we had totally failed to take account of the latest thinking about the factors which drive economic growth. So we devoted a chapter to showing that what we were advocating was absolutely consistent with the latest economics literature.

Our report also dealt at some length with three other issues: privatisation, infrastructure investment, and foreign direct investment.

On privatisation we made the point that, whereas in the eighties and nineties the argument for privatisation was the urgent need to reduce government debt and eliminate the gross inefficiency which characterised many government-owned trading operations at that time, that is no longer the case. Government debt is rising strongly today, but it is still at a relatively low level compared with most other developed countries. And thanks to the State Owned Enterprises Act, most SOEs operate fairly efficiently. No, the argument for selling at least some shares in government-owned commercial operations is to harness the “dynamic efficiency gains” which would result from those companies being exposed to the challenges and stimulus of operating in the private sector. It was pointed out to us that Nokia, Finland ’s hugely successful mobile phone producer, would still be producing lumber and paper had it been operating in the government sector. Certainly it’s hard to imagine Mighty River Power deciding to sell its power stations to another company and branching out into the production of mobile phones (or indeed anything else).

On infrastructure, we certainly accept that government has a major role to play in building infrastructure. But we expressed grave concern that too often government embarks upon an enormously expensive infrastructure investment without rigorous cost-benefit analysis. The Minister of Finance has frequently pointed out the importance of investment projects meeting an appropriate hurdle rate of return, but it is not obvious to the outside observer that several of the very large projects currently being undertaken, or proposed, do meet a hurdle rate of return. Indeed, there is a strong suspicion that some very large projects fall a long way short of providing an appropriate rate of return. As a country, we simply can not afford to squander hundreds of millions of dollars of scarce capital on projects where the benefits will fall a long way short of the costs.

On foreign direct investment, we expressed concern that New Zealand has moved from having one of the most open and inviting attitudes to foreign investment just five years ago to having one of the least inviting attitudes today. In the most recent OECD survey of attitudes to foreign investment, New Zealand is ranked the sixth most restrictive in its attitude to foreign investment, with only China , Iceland , Russia , Indonesia and Mexico being more restrictive. Unfortunately, popular attitudes towards forei

gn investment are based on a high level of ignorance of the benefits of that investment, even when it “only” buys existing assets. What is ignored when a foreign company buys New Zealand assets is that that company often brings to New Zealand not just capital (the vendors of the existing assets have resources which they can deploy in new ventures) but also new technology and access to markets. As somebody who spent several years of my life studying the pros and cons of foreign direct investment, I am strongly of the view that it is actually very difficult to envisage circumstances where we are made worse off by foreigners investing in New Zealand . And if we are to have any chance of raising living standards in New Zealand to the Australian level by 2025, we simply can not afford to discourage foreign investment in New Zealand .

It is impossible to summarise a 150 page report in one short article, and for those who want to read the full report it can be found at http://www.2025taskforce.govt.nz/fromthetaskforce.htm. But our basic message was that there is no chance at all of our reaching Australian income levels by 2025 on our current track. Indeed, the OECD has recently projected that the gap will widen further to 42% by 2025, and we received advice that, if that’s what happens, we are likely to lose a net 410,000 New Zealanders across the Tasman over the next 15 years. If we are to avert that outcome, there is no time to waste.