New Zealand's economy, like Australia's, has been weathering the international downturn tolerably well. Indeed, since the end of the Asian crisis in December 1998, output has expanded by 15per cent in New Zealand, compared with 12per cent in Australia, according to the New Zealand government's December 2002 economic and fiscal update.

Economic growth in New Zealand last year seems likely to have been about 4per cent.

What's more, unemployment fell to 4.9per cent of the labour force in the December quarter, and inflation is within the Reserve Bank's 1per cent to 3per cent target range, albeit at the high end of it.

The government's budget is still showing an operating surplus, which looks solid going forward. Last year, Moody's Investors Service upgraded New Zealand's foreign currency credit rating to Aaa, the same as Australia's.

Taking a longer-term perspective, the New Zealand economy grew by 3.2per cent a year on average in the decade to 2003, according to International Monetary Fund figures. This was much better than Japan (1per cent) and Germany (1.6per cent), but behind Australia's average annual growth of 4per cent.

Like Australia, New Zealand has benefited from market-oriented economic policy reforms. In New Zealand's case, this occurred in two waves: 1984-88 under a Labour government, and 1990-91 under a National government.

Over the past couple of years, the economy has also received a boost from favourable weather conditions, good commodity prices, relatively easy monetary conditions and a low dollar.

Economic activity now appears to be slowing, with New Zealand perhaps three to six months behind Australia's stage in the business cycle. Forecasters are picking growth of around 3per cent or below for the year ahead.

Despite much rhetoric about "the failed policies of the past", the present Labour-led coalition government, which came into office in late 1999 and was re-elected in 2002, has made marginal rather than fundamental changes to the economic framework. This appears to reflect a general public consensus - perhaps grudging in some quarters - that the reforms were necessary and overdue.

But the government has done little to build on the earlier foundations, continuing the apathy of National-led governments after Ruth Richardson was dropped as finance minister in 1993.

As a result, its declared goal of returning New Zealand to the top half of the Organisation for Economic Co-operation and Development's income ladder - a place now occupied again by Australia - lacks credibility.

The key difference between the two countries is perhaps that Australia has been a more consistent reformer, and that its overall economic policy settings are superior to New Zealand's. As a consequence, it looks set to continue outperforming New Zealand.Indeed, there is a risk that New Zealand's performance will weaken over the medium term.

Among recent government policies are an increase in the planned share of government spending in the economy; the rise in the top personal tax rate to 39per cent; partial re-regulation of the labour market and network industries; a freeze on tariff reductions; re-nationalisation of some businesses and a policy of no further privatisations; and ratification of the Kyoto Protocol. These are all bad for growth.

The changes do not immediately threaten New Zealand's generally sound economic framework, but are heading in the wrong direction. They risk weakening, not strengthening, the economy's performance over time.

There is no reason why New Zealand cannot do a lot better: Ireland, a country with a similar population, achieved average economic growth of 8per cent a year in the past decade. Any disadvantages of size and location are relatively minor. It's hard to see why New Zealand is any less well placed than, say, Western Australia in geographical terms.

What seems to count most for economic performance is a country's institutions and policies. The business community is telling the government that, contrary to the situation in the 1980s and 1990s, its general policy direction is at variance with that of Australia and other more successful OECD countries.

To improve its economic performance, the basic requirements for New Zealand are smaller government, lower taxes, less regulation of businesses and the labour market, more restrictive welfare policies and more private sector involvement in health and education.

Many New Zealanders have been worried that the country has been drifting apart from Australia, on economic as well as other issues.

Remedying this drift is not primarily a matter of deepening the Closer Economic Relations agreement. CER has been valuable for both countries, especially New Zealand, as part of the process of opening up our economies to the world.

Making progress on outstanding issues would be helpful, but is not fundamental.

The value of each country to one another as trading, investment and business partners will be much more dependent on the domestic policy decisions that will determine their future performance, as well as on their engagements with major countries like the United States and the international economy at large.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz