From: Foundation for Economic Growth

Other Countries
Why are Aussies Richer?
By Phil Scott
Jul 2, 2004, 18:00

One of the things about which we all seem to agree is that it is better to have an economy that is growing at 4% to 5% rather than one growing at 1% or 2%. The reason for this is that when our growth is slower than, say Australia’s, our standard of living falls behind and we become less wealthy than the average Australian.

Since the 1970s this has been happening to us very slowly so we don’t notice much difference from one year to the next. But for the last 30 years, slower growth in New Zealand has now put us in the position where the average Australian earns 33% more each week and the person on the unemployment benefit gets 25% more each week. This is not because we are not working as hard as the average Australian; it is just that our efforts are being misdirected.

This problem is exacerbated because Kiwis are driven by normal incentives to chase a higher standard of living, to earn more and have a better life style. So the obvious solution for the average enterprising kiwi is to go to Australia and “get stuck in”. This boosts the Australian economy and diminishes ours. This effect makes our problems of slow growth even worse. New Zealand is becoming a nursery for Australia which can attract the brightest and the best New Zealand has to offer. Australian Universities are now poaching our brightest school achievers! Contrary to what Muldoon famously quipped this raises the IQ of Australia and it also lowers the IQ of New Zealand.

This is why it is most important to get our growth rate up to a steady state that is higher than Australia so that we can compete on a more even footing. Everyone seems to agree with this rather simple analysis and this Labour Government has as its stated aim to get New Zealand’s standard of living up to the “top half of the OECD”. In world rankings we are now (2004) number 35 and Australia is at number 19.

Unfortunately, actions speak louder than words. Lack of action and wrong actions are taking our growth rate of 3.5% or so in recent years down to around 2%. We will continue the downward spiral and lose ground even faster to Australia.

There is no doubt that economic leadership must come from our politicians and their advisors in Treasury. Business is the economy – no business means no economy (think of New Zealand 300 years ago) – but how do politicians get businesses to generate more business? If politicians make it more difficult to run a business with labour laws and resource management restraining laws and increased taxes then people opt to follow the greatest incentives. How can I make the most money with the least work? Or, how can I work in such a way to keep most of it for me rather than the taxman? All people go where the incentives point the way. Make business more difficult and people adjust their actions to suit, and the result is that less business is transacted and the economic growth rate goes down another notch.

But this means of course that we are once again starting to fall off the pace and Australia looks to be the better option to many smart young hard-working people who want the good life – and why shouldn’t they?

If we look at the difference between average earnings in New Zealand and those in Australia in terms of Purchasing Power Parity (PPP) we are getting $NZ44,000 and Aussies are getting $NZ57,000. If the Aussies continue to grow at 1% faster then we do then in 10 years they will be 44% better off and in twenty years they will be 59% better off.

So we must reverse the trend. If we don’t then in the next 30 years Australia will march ahead as it has done in the last 30 years so that our remaining grandchildren will see Aussies earning 66% more on average. (I say remaining grandchildren because the energetic will be off to Sydney as soon as possible.)

The question is “How do we reverse the trend?”

The interesting thing is that governments all around the world have been asking this question very seriously over the last 20 or 30 years and are starting to develop a consensus of opinion. In fact it is even better than that because governments have been trying out their ideas and are starting to learn which policies increase growth rates and which policies slow growth down. We do not need to argue in a political furore or an academic hot house – we can look at what other countries have done, what they are trying to do and we can see what the results are. Remember that it may take 5 or 10 years for high level government policies to work their way through an economy and show results. We will be looking at what other countries are doing in more detail in other essays but in the meantime we can list some successful policies that are tried and true.

Supposing that our country has sound institutions that are free of corruption, has laws that respect individual property rights and has the rule of law applied equally to all citizens then we could adopt some of the following successful policies:

1. Education is paramount. It is the key to innovation so every child must be encouraged to fulfil their potential,

2. Large governments are a drag on the economy and optimum growth rates are obtained where the government sector is kept within the range of 15% to 25% of GDP,

3. A low flat tax rate provides much higher growth than a high and regressive rate. Russia is flat 13%, Hong Kong has flat 15% and other countries are adopting this policy,

4. A free and open labour market which encourages entrepreneurs to try new businesses and to expand existing ones,

5. Welfare reforms which make work much more desirable and accessible,

6. As few regulations and restrictions to innovation as possible,

7. A direct democratic electoral system. We have electoral problems because MMP does not provide for direct responsibility of politicians to citizens and leads to muddled decisions which do not promote growth,

8. Privatisation – take businesses out of politicians’ hands and let business people run them to benefit customers and themselves. (Also on the other side of this same coin keep business people out of politics and leave politicians and their economic advisors to run the country),

9. Limit the extent to which local bodies can engage in other than core activities,

10. Reform the Resource Management Act. It has become a monster of inaction to such an extent that our government is considering legislating its way around it. What about the rest of the community?

11. Pursue free trade and phase out tariffs.

It is only by following tried and true policies that we will increase our growth rate. We must speak with one voice to our politicians, “What is your growth plan?” “Why doesn’t it address the 11 points above?” “When will you have a viable plan which will see us catching up with Australia?”

Write to your local politician and ask for their growth plan!

Do it now!!!!!

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