In its two reports to date, the ‘2025 Taskforce’ has provided estimates of the income gap between New Zealand and Australia.
Its base measure of the gap is real GDP per capita in purchasing power parity terms.
In its first Report, the Taskforce put the income gap at 35% for 2008.
OECD projections in a table in its second Report last November suggested that the gap would be 38% in 2010.
Official figures now available support this projection. They show a 2.8% fall in real GDP per capita for New Zealand and a 0.3% rise for Australia since 2008.
This deterioration should not come as a surprise.
As a New Zealand Treasury officer noted at an Australian conference recently, “Before the global recession hit in late 2008, New Zealand’s economy was already in poor shape. Our average annual growth was less than 1% in the years leading up to the 2008 global financial crisis and we went into recession several months earlier, before just about every other developed economy.”
It is too early to criticise the Government for not closing the gap. Not only did it inherit a weak and unbalanced economy but it has also had to contend with the global financial crisis and now the Christchurch Earthquake.
Meanwhile, the Australian economy has been robust and is growing strongly; nevertheless, the fact that no turnaround in sight is ominous.
With each passing year, the task of closing the gap by 2025 becomes harder and the implications dire.
As the Taskforce noted, “Based on current projections of the income gap and its impact on emigration, a net 412,000 New Zealanders could leave New Zealand over the next 15 years.”
Two Strategies
There are two main strategies for closing the gap: increasing workforce participation and increasing productivity.
The Taskforce noted that raising the age of eligibility for New Zealand Superannuation could make a material contribution. It also advocated reducing labour market barriers to employment and reform of the welfare system to reduce the numbers on benefits.
However, productivity improvements must do most of the heavy lifting.
Statistics New Zealand updated (in March) its productivity series on the so-called ‘measured’ sector, which now accounts for around 80% of the economy, excluding mainly Government Administration, Defence, Health and Education.
For the year to March 2010, labour productivity grew by 3.7%, but this was due to the fall in labour input (hours worked) being greater than the fall in output (GDP). For similar reasons, multifactor productivity – a measure of the efficiency of producing goods and services in the economy – grew by 1.5%.
But what matters much more is not the outcome for a single year but the result over an economic cycle or at least several years.
The statistical data highlighted the fact that despite the strong increase in 2010, the growth rate for labour productivity over the 2006-2010 period (not a complete cycle) was lower than any of the completed cycles going back to 1978. The same is true of multifactor productivity.
Rise and fall
Essentially the story is that productivity growth improved dramatically in the economic reform period (labour productivity was in the 2.5-3% range in the three cycles during 1985-2000) but slumped thereafter.
Moreover, the gains were greatest in the industries where reforms were most comprehensive, in particular Agriculture, Transport and Communications.
The picture was much the same in Australia, which implemented similar reforms, although New Zealand outperformed Australia in these industries and did better overall in the measured sector for a period.
However, as the Taskforce noted, “New Zealand’s outperformance was essentially all over by 1995”, even though Australia’s productivity growth has also fallen back in the past decade.
Disbanding the 2025 Taskforce, as has been mooted, and perhaps the ambitious goal of catching Australia, is a worrying sign that the Government may be thinking of throwing in the towel.
Roger Kerr is the Executive Director of the New Zealand Business Roundtable based in Wellington. Email: rkerr@nzbr.org.nz Website: www.nzbr.org.nz
