Two years ago, many speakers at a foreign policy conference in Dunedin argued that Australia and New Zealand were growing apart. Since then we have seen further divergences over foreign policy, the Kyoto Protocol on global warming, and economic policy.

Average incomes in Australia are already some 30 percent higher than in New Zealand . There is a risk that the gap will widen.

Over a century ago, both countries had open economies, governments that were small by today’s standards, and wealth based on the development of resource and land-based industries.

The similarities continued through the early 1900s, when both nations became more inward-looking. Tariffs were imposed, followed by import quotas. Labour markets were regulated and centralised wage-fixing was introduced. State ownership of industries broadened – the Australian government even owned fish and chip shops – and the welfare system expanded.

By the middle of the century, the terms ‘fortress Australia ’ and ‘fortress New Zealand ’ were being used widely. Both countries slipped down the international league tables. We suffered more than our neighbour because bad policies had been taken further on this side of the Tasman, and Australian governments made earlier efforts to reverse the slide.

Change came to both countries in the mid-1980s, with the Hawke government in Australia , and the Lange-Douglas administration here. The programmes of fiscal and monetary stabilisation and structural reform were very similar.

A key difference was that after Paul Keating and then John Howard took over from Bob Hawke, Australian governments largely continued the reforms. Australia has enjoyed the benefits that can only come from a long period of a relatively consistent, coherent and credible growth strategy. In comparison, New Zealand benefited from just two sporadic bursts of reform, under Lange-Douglas and Bolger-Richardson. Both periods were cut short by the prime minister of the day.

Productivity improvements in both countries significantly improved their economic growth rates. But Australia has had the edge: whereas New Zealand has stabilised its fall in the international rankings of per capita incomes, Australia has climbed back into the top half of the OECD.

Gary Banks, chairman of Australia ’s federal Productivity Commission, said recently that the “main cause of our improved economic performance over the past decade has been (rational) economic reform”. He pointed out that if the productivity brought by those reforms had not taken place, “Australian households would have been around AU$7000 worse off on average by now”.

Mr Banks likened the reforms to “removing the lead from our saddlebags”. Compare that to the misleading sloganeering by some local politicians and commentators about the “failed policies of the 1980s and 1990s”.

Before the reforms, unwitting governments in both Australia and New Zealand systematically undermined their economies’ productive potential by distorting price signals and protecting producers from competition. As Mr Banks noted, it should not be surprising that the reversal of these policies “has yielded the benefits that economic theory would anticipate”.

Australia ’s productivity surge was not produced on the backs of workers through increased ‘work intensity’. “Increased productivity – through working ‘smarter’ – is the friend, not the enemy, of the work/life tradeoff”, Mr Banks observed.

The OECD recently said Australia ’s “commitment to reform… is something that other countries could learn from”. What lessons could New Zealand draw?

Total government spending – the overall tax burden – is considerably lower in Australia than New Zealand as a proportion of the economy. We cannot achieve sustained four percent plus growth rates (as advocated by most of our political parties) without removing some fiscal lead from our own saddlebags.

Australia has been one of the world’s most active privatisers in recent years, whereas – uniquely in the OECD – New Zealand has halted privatisation and moved in the opposite direction. Similarly, our neighbour is well ahead of us in operating infrastructure industries like roading and water on a commercial basis.

Australia relies on private funding in provision of health and education to a greater extent than New Zealand , and its welfare arrangements are generally tighter and relatively less costly than those here.

Australia is by no means perfect. It badly needs more labour market reform to lower its unemployment rate. Its high marginal tax rate is absurd. However, New Zealand must not just strive to match Australia , but needs superior policies to offset our disadvantages of size and location.

Prime minister John Howard – and for that matter many Labor state premiers – keep telling Australians that reform must continue to keep pace with the rest of the world and ensure all Australians benefit.

A typical Australian comment is that you “need only look across the Tasman to New Zealand to see what happens when you open up an economy, and then retreat”.

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