Answering The $64,000 Question

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

1

11/30/2009

NZ vs. Australia

GDP per capita relative to OECD

GDP per capita capita, AU$ 2008

US

OECD

Australia

150

140

140

130

130

120

120

110

110

100

100

90

90

80

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

NEW ZEALAND Tasmania South Australia Queensland Victoria New South Wales AUSTRALIA ACT Northern Territory Western Australia

NZ

150

38400 43000 46200 50700 51200 51900 53500

The gap is wide and not closing

69000 72 2300 73 3700

Comparing our economic performance

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

25000

$40,000

20000

$35,000

15000

$30,000

5000 1980

Forecast

$25,000

10000

0

Actual

Korea 1984

1988

Source: OECD and Statistics NZ

1992

New Zealand 1996

2000

Slovenia 2004

2008

$20,000 $15,000 1990 Australian GDP/capita

2009

2025

New Zealand Baseline 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.

2

11/30/2009

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

-10

0

0

10000

Nelson

Masterton

10 20000

20

30000

30

40000 Number

40 %

Net outflow to Australia

Timaru

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

3

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 ‘up p 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

4

11/30/2009

Government as spender Spending has grown progressively Source: Long Term Statistical Series and David Rea (various series)

Government operating expenditure as percentage of GDP

% 45 40 35 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

5

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

Australia

25

New Zealand

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

Source: OECD

30

• 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

6

11/30/2009

Government as law-maker/regulator Estimate: st ate 1/

Up to 3 of the income gap could be closed if NZ adopted OECD best practice

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

2.50

2.00

Recommendations:

• Establish a New Zealand Productivity Commission

1.00

0.50

0.00 Source: OECD

• Further reform of RMA; labour law; water rights; tariffs; overseas investment; producer boards

1.50

United States United Kingdom Canada Netherlands Iceland Denmark Spain Japan Norway Finland Australia New Zealand Switzerland Hungary Sweden Germany Austria Italy Belgium Portugal France Korea Luxembourg Czech Republic Mexico Turkey Poland

• Consistent application of the principles in the Regulatory Responsibility Bill

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

7