11/30/2009

Answering the
$64,000 question

Context

• Established by the National and ACT

Confidence and Supply agreement
• “Our vision is to close the gap with Australia
by 2025” – Hon John Key, Prime Minister
Role:
• make recommendations
• report annually on progress

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 11/30/2009

Comparing our economic performance

The gap is wide and not closing NZ vs. Australia

3700
2300
69000
GDP per capita relative to OECD GDP per capita
capita, AU$ 2008

73
72
53500
51900
150 NZ US OECD Australia 150

51200
50700
46200
43000
38400
140 140

130 130

120 120

110 110

AUSTRALIA

Northern Territory
Tasmania
South Australia

New South Wales

NEW ZEALAND

Queensland
Victoria

Western Australia
ACT
100 100

90 90

80 80
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Source: Australian Bureau of Statistics and Statistics New Zealand

How big is the gap?

Others have caught up We need to get started

GDP p
per capita,
p , constant prices,
p , PPP GDP p
per capita,
p , US$,
$, PPP,, constant prices,
p , 2008
30000 $45,000
$40,000 Actual Forecast
25000
20000 $35,000
15000 $30,000

10000 $25,000

5000 $20,000
Korea New Zealand Slovenia
0 $15,000
1980 1984 1988 1992 1996 2000 2004 2008 1990 2009 2025
New Zealand Baseline GDP/capita
Source: OECD and Statistics NZ Australian GDP/capita New Zealand 'Catch-Up’ GDP/capita

The $64,000 question: For an average family of four, the

gap is around $64,000 per year.
Catching up means per-capita growth of 1.8% p.a. more
than Australia. If we don’t start now, it will get much harder.

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Why does it matter?

Migration and income appear related Whangarei

Net outflow of NZ citizens to Australia,
Australia GDP per capita

1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007
-10000 -20
Gisborne

0 -10

0 Masterton
Nelson
10000
10
20000
20
30000 30 Timaru

40000 40
Number Net outflow to Australia % Invercargill
% gap between NZ and Australia GDP per capita (right axis)

• People migrate for many reasons – not just higher wages

• As the gap has widened, so has net migration of NZ citizens
• Current outflow is comparable to Ireland during 1950s-1980s

Causes

• Myths:
y Size;; minerals;; investment in housing;
g; past
p
reforms; New Zealand’s monetary policy
• Primary cause: Poor policy choices by governments
over long periods (notwithstanding intervals of
outstanding reform)
• E.g. over the last decade, New Zealand has:
• Increased EMTRs
• Increased subsidies and concessions
• Increased state ownership in business
• Imposed heavier regulation on the labour market

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 11/30/2009

What we are not recommending

• We heard proposals but do not recommend:

• Increased government funding for R&D
• Picking winning sectors, industries or firms
• Compulsory private saving
• New or enhanced government financial institutions
• Changing the exchange rate regime
• Typically these address symptoms – our focus is
on getting the overall economic environment right

What we are recommending

• “Governments cannot make businesses ‘upp their g

game’.
They can only make it easier and more worthwhile”
– submission from EMA Northern

• Governments can remove obstacles and sharpen

incentives:
• Government as spender
• Government as tax-collector
• Government as owner of significant assets
• Government as law-maker/regulator

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 11/30/2009

Government as spender

Spending has grown progressively

Government operating expenditure as percentage of GDP
%
45

Source: Long Term Statistical Series

40
35

and David Rea (various series)

30
25
20
15
10
5
0
1876 1888 1900 1912 1924 1936 1948 1960 1972 1984 1996 2008

• Government spending was reduced relative to GDP in the late 1980s and 1990s
• Spending has accelerated over the last 6years, crowding out private sector
activity and the opportunity to reduce taxes
• Core Crown expenses are now 36% of GDP, up from 29% in 2004/05
• Recommendation: Reduce Core Crown expenditure to 2004/05 levels as a
share of GDP within three years, then cap in real terms per capita

Government as spender (2)

• We also recommend further extensive reform

of government services, for example:
• Welfare: Significant reform – get people back to
work, utilise skills, reduce costs
• NZ superannuation: Significant reform – increase
working population, reduce costs
• Health: Funder-provider split, fewer universal
subsidies – increase value from health system
• Education: Governance reform in schools, tertiary
institutions – increase value from education system

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 11/30/2009

Government as tax-collector

We tax more heavily than Australia

Total tax revenue as a p
percentage
g of GDP
40

35

30

Source: OECD
25 Australia New Zealand

20
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

• Total tax take: Relatively high, discourages enterprise and investment

• EMTRs: Discourage participation by working families, reduce rewards
• Tax on capital income: Particularly distortionary, discourages investment
• Many options if government spending is reduced as recommended, for example:
• Align top rates for income / business / trust at 20%
• Dual tax system: Labour income (e.g. around 25%) and capital income (e.g. around 12.5%)
• Reform Working for Families
• Cost: $7 billion, funded by spending reductions to 2004/05 levels.

Government as owner of assets

6.0
Public ownership is increasing
50
5.0 OECD Index of the extent of p
public ownership
p

4.0

3.0

2.0

1.0
Australia New Zealand United Kingdom
0.0
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

• Government is often not a good owner:

• Commercial assets often perform poorly
• Investment in non-commercial assets often has little regard to cost-benefit analysis
• Recommendations:
• Sell all commercial assets where there is a competitive market
• Wind up New Zealand Super Fund and use proceeds to repay debt
• Subject all new investments to rigorous transparent cost-benefit and regulatory tests
• Allow exploration for, and potentially mining of, minerals on Crown land

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 11/30/2009

Government as law-maker/regulator

Estimate:
st ate New Zealand is middle-of-the-pack
OECD Prod
Product
ct Market Reg
Regulation
lation Inde
Index, 2008

1/
Up to 3 of the income gap 2.50
could be closed if NZ adopted
OECD best practice
2.00
Recommendations:
• Consistent application of the 1.50

principles in the Regulatory

Responsibility Bill 1.00

• Further reform of RMA;

labour law; water rights; 0.50
tariffs; overseas
investment; producer boards
0.00

Norway

Turkey
Spain
Japan

Finland
Australia

Switzerland

France
Korea
Luxembourg

Mexico

Poland
New Zealand
Denmark

Hungary

Italy

Czech Republic
Canada

Iceland

Sweden
Germany
Austria

Portugal
United States

Netherlands
United Kingdom

Belgium
• Establish a New Zealand

Source: OECD
Productivity Commission

Way forward

• We believe that the policies we are recommending

will give us every chance of closing the gap

• This will require determined consistent political

leadership over successive governments

• We hope that this report will be the start of a

considered public conversation about how to close
the gap

• Over time, this could create a path forward