Late last November, the 2025 Taskforce issued its first report. As readers may recall, the Taskforce was set up by Government as a result of the coalition deal between the National and ACT Parties after the 2008 election. That deal involved the Government committing itself to adopt policies to raise living standards in New Zealand to equal those in Australia by 2025 and – perhaps more significantly given the tendency for many governments to make grandiose promises which they have little intention of delivering on – to establish an advisory group both to make recommendations about how best to achieve that goal and to report annually on progress towards it. I chair that Taskforce, with David Caygill (who needs no introduction), Jeremy Moon (CEO of Icebreaker), Judith Sloan (of the Australian Productivity Commission) and Bryce Wilkinson (a Wellington economist) making up the other members.
Reaction to that first report has been mixed.
On the positive side, the dailies in all four main cities were very positive. And every business lobby group was enthusiastic. There has been widespread recognition, at least among those groups, that to raise our living standards to those of Australia by 2025 will require that growth in per capita incomes will need to double as compared with our past record – and that there isn’t the slightest chance of achieving that increase in our growth rate under “business as usual” policies.
But there was also plenty of negative commentary, some of it of the throw-away variety (as when left-wing commentator Matt McCarten named me the runner-up (to Hone Harawira) for his F*** You Award in the Herald on Sunday).
Among the more lengthy negative commentaries was one by Garth George in the New Zealand Herald. He claimed that the “biggest absurdity” in the report was the proposition that New Zealand could and should catch up with Australia . He argued that “there is just no comparison between the two countries”, with Australia having five times our population, 32 times our land area, and huge resources of minerals. Well, those were factual statements about Australia , but they ignored some important facts which he would have been aware of had he read the report.
First, there is no correlation between living standards and population – if there were, India would be super-rich and Singapore would be poor.
Second, there is no correlation between living standards and land area – if there were, Russia would be super-rich and Finland would be poor.
Third, there is no correlation between living standards and mineral wealth – if there were, the Congo would be super-rich and Japan would be poor.
In any event, a recent World Bank study showed that, in per capita terms, New Zealand has more natural resources (not all of them mineral resources) than almost any other country in the world.
Garth George accused the Taskforce of recommending a whole range of things which we did not recommend. For example, he accused us of recommending a flat personal income tax, and noted that if such a tax were established a whole range of low income people would have to pay more tax. But whatever the merits of a flat tax, the Taskforce did not recommend such a tax. What we did say was that, if core government spending were cut to the same fraction of GDP that it was in both 2004 and 2005 (29%), the top personal rate, the company tax rate, and the trust tax rate could comfortably be aligned at 20%. Under such a tax structure, all those earning above $14,000 a year would pay less income tax, while nobody would pay more income tax.
Nobody seriously argues that government was vastly too small in New Zealand in 2004 and 2005 (the end of the Labour Government’s second term in office), so why the ridiculous reaction when the Taskforce suggests reducing government spending to that level?
Mr George also suggested that we recommended abolishing subsidised doctor visits, and implied that we are advocating an American approach to healthcare. This is again utter nonsense. We suggested targeting subsidies for doctor’s visits at those who need them, either because they have low incomes or have chronic health problems.
He suggested that we favoured removing subsidies for early childhood education. Again, not true. What we said was that those subsidies – which have trebled in cost from $400 million a year to $1.2 billion a year over the last five years – should be focused on those who need them.
In many ways more disappointing than Garth George’s ignorant ranting was the reaction of one of New Zealand ’s best economic journalists, Brian Fallow. His article in the New Zealand Herald on 10 December dismissing the report of the 2025 Taskforce as “1980s thinking”, under the headline “Old prescription unlikely to fix new ills”, missed the boat completely and demonstrated that he was in some respects out of touch with mainstream professional opinion.
In his article, he cited at length the work of the economic geographer Philip McCann. McCann has argued that since the 1980s the world has changed profoundly – China has abandoned communism, India has abandoned autarky and the Soviet empire has collapsed. McCann accepts that over the past century transport costs have fallen by some 95%, while telecommunication costs have fallen by that much in just three decades. This has provided a huge advantage to “the geographical dispersion of activities which are not particularly knowledge-intensive and do not add a lot of value”. By contrast, what McCann calls “spatial transaction costs” have, he argues, become more important for knowledge-intensive high value-added activities because of the premium attached to face-to-face contact.
He argues that the increased importance of “spatial transaction costs” means that economic growth and globalisation over the past 20 years have favoured large urban centres in almost every country (large and small). But he goes on to argue that an implication of this is that, within the Australasian region, Sydney and possibly Melbourne are growing in wealth and size at the expense of the periphery – which in this case, he asserts, includes New Zealand . The further implication is that at this stage in the development of the world economy there are factors which drive us inevitably to have incomes lower than those in Australia .
Professor McCann is a serious researcher, and deserves to be heard respectfully. It is probably true that large urban centres attract a disproportionate share of a country’s innovation and entrepreneurship.
But one implication of his argument is that small countries, and especially those which are distant from world markets, are inevitably doomed to grow more slowly than larger more densely populated countries – and that simply does not seem to be borne out by the facts. Over the last 20 years during which Professor McCann claims the world has changed, small countries tended to perform a bit better than large countries – even New Zealand has grown slightly faster than the OECD average over that period.
Compared with large countries like France, Italy and Japan – all countries with large conurbations – New Zealand has also done better, increasing from 82% of the simple average of the incomes of those three countries in 1989 to 87% in 2007.
Moreover, if geography were really an important part of the story, no one would have predicted Australia ’s impressive performance relative to the rest of the developed world in the last couple of decades.
Professor McCann and Brian Fallow also suggested that in the brave new world after 1989 capital is likely to be flowing out of New Zealand to places like Australia . In fact, of course, it is well-established that capital is flowing into New Zealand , especially from Australia . Thus, we have one of the largest current account deficits around – and, by definition, one might expect us to be running surpluses if capital were leaving New Zealand for ever better opportunities abroad.
The report of the 2025 Taskforce acknowledged that smallness and distance may indeed be impediments to our growth. But let’s suppose for the moment that our size and location have become a much more important barrier to the development of knowledge-intensive industries in the “periphery” than they were prior to 1989. Do we have to wait until the global economy changes, until, as Brian Fallow suggests, we get the benefit of our “combination of ample rainfall, temperate climate and skilled farmers” as the world’s population climbs and more and more people move into income brackets which enable them to afford the foods of affluence?
Or are there things we can do to actively lift our living standards? The 2025 Taskforce is in no doubt about the answer to that question. Distance is what it is. Our population is what it is. But we don’t need to have a company tax rate which is now well above the average of other OECD countries. We don’t need to discourage people who have dependent children with effective marginal tax rates of well over 50%. We don’t need to hobble our businesses with needless red-tape. We don’t need to inflate the cost of housing by tightly constraining the supply of residential land. Our government doesn’t need to squander capital in low-yielding but politically-popular projects. And we don’t need a size of government that is materially larger than that in Australia .
Yes, Australia and other developed countries also do some of these dopey things. But the Government has set a goal not just of holding our position on the OECD ladder – a position which has us well below the average of other developed countries – but of catching up with Australia by 2025. We won’t do that with policies which are merely as good as the average of other developed countries; we will only do that with much better policies. If distance is a significant impediment to our growth, that simply means that our policies have to be of absolutely top quality. Right now, they are not, and in recent years they have gone backwards in several important areas even as other countries have continued to reform. This slippage is totally omitted from Brian Fallow’s account.
Do we need 1980s thinking? Of course, where it is still relevant; absolutely not where it isn’t.
Part of my own frustration about the reaction to the 2025 report is that much of it was based on the view that this was all Don Brash’s work, that none of the other members of the Taskforce had anything to do with it. Of course, that was not the case. I obviously played a role in the report, and I hope a constructive one. But the recommendations in the report were unanimously supported by the five members of the Taskforce – including by David Caygill, who was not only for a time the Finance Minister of the Labour Government of the eighties but also the Deputy Leader of the Labour Party under Helen Clark in the nineties.
The Government’s reaction to the report could at best be described as lukewarm. Perhaps this is because, as Jane Clifton wrote in commenting on the report in the Listener of 12 December, “we’re all a bit spoilt. Successive governments have heaped benefits upon us – subsidised childcare and medicine, student loans, family tax credits, income top-ups, pension guarantees and night classes, all underpinned by a provident welfare system. Despite mounting evidence that we can no longer afford these things, we simply won’t part with them. We will see off any government that tries to take them off us.”
Well, that’s as may be. The good news is that the Government remains committed to having us reach Australian living standards by 2025. The 2025 Taskforce makes no claim to infallibility, though its recommendations are entirely consistent with those made by successive OECD reports on New Zealand . The one thing which is absolutely clear is that neither present policies, nor a few minor tinkerings here and there, will get us to the goal the Government has adopted.
Don Brash
Chairman of the 2025 Taskforce