New Zealand seems to have lost track of its reform agenda

NEW Zealanders are good at lots of things. Rugby, sailing, rowing, netball and film-making all spring to mind.

NEW Zealanders are good at lots of things. Rugby, sailing, rowing, netball and film-making all spring to mind.

 But running a national economy does not appear to be one of their strengths.

Interestingly, in the mid-1970s, the levels of average per-capita income in New Zealand and Australia were very similar. But today, the gap between the two countries is about 35 per cent.

In world terms, Australia is clearly in the top 10 and New Zealand is placed about 25, measured by real GDP per head.

What explains this gap? And how is it that the gap has become so much bigger over time?

Some commentators attribute New Zealand's poor economic performance to its small size and distance from markets. The trouble with this explanation is three-fold. New Zealand has always been small and distant and so these characteristics cannot explain the growing gap.

Secondly, judged by average distance to markets, Australia is in fact more distant than New Zealand, because Australia is New Zealand's largest trading partner. And finally, there are a number of small countries with very high per capita incomes -- Luxembourg, Norway, Singapore and Hong Kong are all examples.

Some commentators -- Philip McCann, for instance -- argue that, more recently, distance has become even more significant. New Zealand is also disadvantaged, they say, by the absence of any large cities and the associated benefits of agglomeration. Again this explanation runs into headwinds, with the obvious question being: why is distance now more important, rather than less important, given new technologies and lower communications costs? And Auckland, New Zealand's largest city, has in fact been growing at a faster pace than Sydney or Melbourne.

But even assuming that geography is part of the explanation for the income gap with Australia, this simply strengthens the case for superior public policies to offset this disadvantage.

One of the interesting differences between the two countries is the general take on the success of economic reforms.

In Australia, there is broad-based acknowledgement of the benefits of the reforms undertaken by the Hawke-Keating and Howard governments. These involved removing import protection, financial sector deregulation, privatisation and other pro-competition measures.

By contrast, in New Zealand, the reform efforts made by both Labour and National governments in the late 1980s and early 1990s are widely perceived as having failed the net benefit test, with the costs exceeding the benefits. In turn, this perception has fed into the approach adopted by all New Zealand governments since that time -- hesitant at best, and retrograde at worst.

The end result has been that New Zealand suffers from the consequences of an incomplete reform agenda. Public ownership remains prevalent, statutory marketing arrangements are still in place and the labour market has been re-regulated. There is even a single desk (monopoly) for the export of kiwi fruit.

The overall size of the public sector is considerably greater in New Zealand than in Australia. General government outlays as a percentage of GDP are around 45 per cent in New Zealand, some 10 percentage points higher than in Australia. Even if cyclical factors are taken into account, the relative size of the public sector in New Zealand is considerably larger than in Australia and has been growing particularly strongly since 2005, well before the GFC.

While there are exceptions, the higher the level of government activity in a country, the lower the rate of economic growth. And there is no example of a country with a public sector of equivalent size to NZ that has grown at the sustained rates needed to eliminate the per capita income gap between the two countries.

The age pension is not means-tested and there are plenty of examples of middle class welfare. University students are charged fees, albeit relatively modest ones, but there is no interest incurred on their repayment through an income-contingent loan arrangement similar to our HECS.

The government-owned freight rail had been sold to Australia's Toll Holdings, but the Clark government decided to buy it back to create KiwiRail. Rather than generate the predicted profits and economic benefits, KiwiRail has become an albatross around the neck of government.

Electricity generation and transmission remain in government hands and the New Zealand government is a substantial shareholder of Air New Zealand, having upped its equity stake when the airline got into financial difficulty.

While wishing to retain its "clean and green" reputation, the Resource Management Act has retarded development and dissuaded investment to an extent that is quite inconsistent with the objectives of that act. Examples abound of inordinate delays, incompetent local governments and bizarre decisions. Public-private partnerships are almost unheard of in New Zealand.

In addition to the firm belief in the failure of reforms undertaken in New Zealand is a pervading acceptance of the impossibility of catching up with Australia.

"Australia has lots of resources, so how can New Zealand compete?" is a common response. The obvious comeback is that the resources boom that Australia currently enjoys is less than a decade old and the gap between the two countries dates back at least 30 years. Moreover, there are many examples of resource-poor countries with high per-capita incomes.

Were it not for one consideration, this complacency might make sense for many New Zealanders. Their material positions are still relatively comfortable. And while the OECD is predicting that the gap between New Zealand and Australia will widen over the next decade, the gap between New Zealand and the OECD average is expected to narrow.

But the spanner in the works relates to the fact that New Zealand and Australia essentially have a common labour market. Trans-Tasman migration is completely unfettered. As a consequence of the income gap between the two countries, the flow of migrants is almost completely one-way, to the point that there are now about half a million New Zealanders living in Australia.

Recent data from the Australian Bureau of Statistics indicates that New Zealanders living in Australia are relatively skilled and have high employment rates, particularly in full-time jobs. It is becoming increasingly common for recent New Zealand university graduates to head straight to Australia to pursue their professional careers. And, of course, New Zealand's loss is Australia's gain.

The consequences for New Zealand of this flow of people are both economic and social. Economic in the sense that there is little return to New Zealand for the investment in its citizens' early years, and social in the sense that children (and grandchildren) live at a distance from their parents (grandparents) and possibly even barrack for the Wallabies!

The Key government has started modestly. An increase in the GST was offset by a very small net reduction in the corporate tax rate and a cut in income tax. Privatisation has been ruled out for this term. Having inherited an emissions trading scheme, considerable energy has been expended to water it down. More recently, the government was fully occupied trying to keep the filming of the Hobbit in New Zealand, the trade unions having tried to hijack this by acting on advice from an Australian trade union official.

But if the aim is to close the gap with Australia by 2025 -- and the taskforce of which I am a member will be recommending how to achieve this objective -- modest policy is not nearly good enough.

The receipt of a root-and-branch analysis of the reasons that the gap exists and is growing should now empower the government to act courageously, lest the annual flow of its citizens over the ditch increases further.

Professor Judith Sloan is an economist and company director. She is the only Australian member of New Zealand's 2025 Taskforce, chaired by Dr Don Brash. The second report of the taskforce was recently released.