CATCHING AUSTRALIA? YES WE CAN!

Many commentators doubt the feasibility of the government’s goal of catching up to Australia’s income levels by 2025.  The 2025 Taskforce in its last report stated:

To close the gap by 2025 New Zealand’s GDP will need to grow two percent faster on average than Australian GDP every year, that is, at around four percent per annum.

That is certainly a challenging goal, but in my view it is feasible given outstanding economic management. I prefer to put the question the other way round:  If New Zealand adopted the kind of economic framework of Hong Kong and Singapore (fully open economies, high levels of economic freedom, low taxes etc) why wouldn’t we achieve the goal?

Support for this position comes from this blog by John Taylor, a highly respected US economist with impeccable credentials.  Now at Stanford University, he was a former high-ranking official in the US Treasury and a member of the Council of Economic Advisers.  He is known for the ‘Taylor rule’ which central banks (including our Reserve Bank) use in setting monetary policy.

In the blog Professor Taylor responds to sceptics of the 5% economic growth target put forward by Republican presidential candidate Tim Pawlenty.  He writes that, as stated by Pawlenty:

“5% growth is not some pie-in-the-sky number.” One way to see why is by dissecting the number into its two parts using basic economics. As we teach in Economics 1, economic growth equals employment growth plus productivity growth.

Then he says:

First, look at employment growth. Given the dismal jobs situation, that’s the highest priority. Currently the percentage of the working-age population (age 16 and over) that is actually working is very low at 58.4 percent. In the year 2000 it reached 64.7 percent, so that is at least a feasible number. Raising the employment-to-population ratio to 64.7 means an employment increase of 10.8 percent (64.7-58.4/58.4 = .108) or about 1 percent per year over 10 years, even without any growth of the population. Adding in about 1 percent for population growth (from Census projections), gives employment growth of 2 percent per year.

New Zealand labour force participation rates are relatively high but there is ample scope to increase them, for example by reducing welfare rolls, altering employment laws (eg minimum youth rates) and facilitating the ongoing employment of older workers.

On productivity, Taylor writes:

Since the productivity resurgence began around 1996, productivity growth in the United States has averaged 2.7 percent according to the Bureau of Labor Statistics. So numbers in that range are not pie in the sky. As Harvard economist Dale  Jorgenson and his colleagues have shown, the IT revolution is part of the explanation for the productivity growth, and, if not stifled, is likely to continue, as is pretty clear to me as I sit a few hundred yards from Facebook and other high-tech firms.

In New Zealand, labour productivity growth rates for the measured sector of the economy in the 1992-2000 period were in the 2.5 – 3% range.

And the upshot:

Now if we add the 2.7 percent productivity growth to the 2 percent employment growth, we get 4.7 percent economic growth, which is within reaching distance of – or simply rounds up to – the 5 percent target set by Governor Pawlenty.

Taylor concludes by sketching the policies needed to achieve the goal:

You can see how the types of pro-growth policies in the Pawlenty plan would work toward the goal by reducing spending growth enough to balance the budget without tax increases and thereby remove threats of a debt crisis; by lowering marginal tax rates to spur hiring and job growth; by scaling back unnecessary new regulations which impede private investment and higher productivity, and by restoring sound monetary policy to remove uncertainty about inflation or another financial crisis.

This is consistent with the thrust of the 2025 Taskforce’s recommendations.

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8 thoughts on “CATCHING AUSTRALIA? YES WE CAN!

  1. Roger; the only way to create political pressure on the government to adopt these sorts of reforms is to get the general public to believe them, especially around election time.

    With that in mind, would it be wise to get big name, respected economists from a big name universities to write a similar article to this, but on New Zealand catching Australia. It’s all very well having the 2025 taskforce and the BRT, but they/you are regarded as biased by the general public. It is much harder to ignore a Harvard Professor for example.

    • Yes indeed. See an article of mine that will be up on the website on Friday.

      And yes to your suggestion. I’ve done that many times, and arranged visits. Don’t assume they’re a king hit though.

  2. I don’t think this is an debate to be won with facts, howver credible the commentator. New Zealanders are a timid lot (contrary to their own opinion of themselves) and invariably choose security over success both personally and nationally. I am convinced that things will have to get a lot worse in this country (and they will) before New Zealanders will choose the bolder economic policies that are needed if we are to reverse our 50 year decline from #2 or 3 in the OECD to around #30.

    This may be a pessimistic view but with the only political party supporting the 2025 Taskforce’s recommendations sitting at 2% in the polls, there isn’t much reason to be optimistic.

  3. I think it could be partially won by some facts. The bulk of the debate in NZ is from a position of ignorance. I think the politicians assume and also like the fact that most people can’t be bothered trying to understand. The series of graphs that Roger has picked up from the budget and discussed here, have not been discussed in the main papers as far as I can tell. They need to be explained in simple terms otherwise the ongoing response of those who have anything to say will always be that the govenment needs to fix it by spending or taxing more.

  4. Anyone who wants to Catch Australia can do this much, much more easily: It’s only $218 NZD to fly from Auckland to Sydney on Sunday.

    Anyone left in NZ by definition doesn’t want to catch Aussie

    And: please stop touting Sinapore with huge compulsory superannuation funds, the state controlling directly or indirectly over 60% of the nominally “private” economy as an example of “Freedom”.

    Hell – if Cullen thought he could have added on another 30% compulsory social security insurance tax (Singapore style) he sure would have!

      • For a start, I put absolutely no reliance e.g. on Heritage foundation reports which rate Singapore at #2 and NZ at #4. You could equally argue that NZ – with its current, Clarkist, “communism by stealth” policy settings, “consistently rates above” the UK, US, Switzerland and Israel.

        I think you (and Roger) are being dangerously disingenuous in making Singapore – with most real estate controlled by the Housing Development Board, massive compulsory contributions to the Central Provident Fund, not to mention Temasek – state control of 60%+ of the economy – as an example for a freer NZ.

        I could understand if Hellen or Cullen were making those arguments – indeed with the Cullen Fund & KiwiStealer, Cullen did more than anyone (probably since Muldoon) in leading NZ down a Singaporean road.

      • But the substantial point remains.

        Anyone in NZ who “really wants to catch Australia” has already caught a plane.

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