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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