NZ needs better public policies and institutions if it is to close the income gap with Australia

By Bryce Wilkinson*

Five years ago the 2025 Taskforce assessed the income gap with Australia to be 35%, or about $16,000 in dollars of the day for every man, woman and child.

Some readers may recall that the National-led government's goal on taking office in 2008 was to close that gap by 2025.

Readers with longer memories may recall that the earlier Labour government's prime economic goal was to lift New Zealand income per capita into the top half of the member countries of the Organisation for Economic Cooperation and Development (OECD), and maintain it there.

In 2001, the Prime Minister's indicated timetable for achieving that goal was 2011.

There are several official measures of national average income per capita, and all have their strengths and weaknesses. GDP per capita is the most widely used indicator internationally. A widely-accepted authority for producing international comparisons of GDP per capita is the Paris-based secretariat of the OECD.

Even with such an agreed measure there are many difficulties with making such international comparisons. Adjusting for exchange rate volatility is a major point of difficulty.

There is no agreement about the best way of doing this, so different organisations publish conceptually different measures. The OECD uses adjustment factors based on its measures of purchasing power parity exchange rates. That is a major topic in its own right.

In addition, different countries may be using different measures for GDP per capita because they are using older or later versions of the United Nations guidance manuals for compiling national income statistics. GDP may be measured from the income side or the spending side of the national accounts, and the differences can be substantial. In addition original estimates can be revised, sometimes substantially.

So how are GDP per capita outcomes tracking relative to such goals?

The OECD's latest estimates for 2001 put New Zealand's current price GDP per capita in purchasing power parity terms at 87% of the 34-member OECD average and in 22nd slot.

Its latest available current price currency-adjusted estimates are for the calendar year 2012. They put New Zealand's GDP per capita barely ahead at 88% of the OECD average and in 20th position. Israel had slipped below New Zealand by 2008 and Spain's severe recession since 2008 has put its GDP per capita below New Zealand's (and indeed below its own GDP per capita in 2008).

No change

What about the gap with Australia?

On the basis of the latest official estimates for GDP per capita in Australia and New Zealand and the OECD's latest purchasing power parity exchange rates, the gap in 2008 was 34% (rather than the 35% figure that applied at the time of the 2025 Taskforce's report). The gap in 2012 remains at 34%. (For technocrats, this gap is based on income measured in constant $2000 prices to make it consistent with the 2025 Taskforce's estimates. GDP is measured on the expenditure side.) In New Zealand dollar terms the gap in 2008 was fractionally less than $15,000 using the latest estimates and is now narrowly above $15,000.

In short, given measurement difficulties, it is reasonable to conclude that the income per capita gap between Australia and New Zealand has not changed significantly between 2008 and 2012. This indicates a need for a far greater focus on growth-friendly policies and arrangements if the gap is to be closed.

To be fair, Australia had the 6th highest real GDP per capita growth rate in purchasing power parity terms amongst the 24 OECD member countries during this period. New Zealand did pretty well, recording the 8th highest.

Australia and New Zealand's strong relative growth performance since 2008 reflects in part Europe's economic distress. Real GDP per capita on the OECD's measure was actually lower in 2012 than in 2008 for 17 of the 34 OECD member countries, including the United Kingdom. Real GDP per capita in the USA in 2012 was barely higher than in 2008. (The cumulative increase was 4.1% for Australia and 4.0% for New Zealand.)

What are the prospects like?

What are the prospects for closing such gaps looking ahead? The latest International Monetary Fund World Economic Outlook forecasts real GDP per capita for most countries in the world out to 2019. New Zealand's real GDP per capita is forecast to grow at an average annual rate of only 0.2% per annum between 2013 and 2019, compared to 0.7% per annum for Australia.

Even so, New Zealand's forecast growth rate is the 11th highest amongst member countries of the OECD, implying more progress towards getting back into the top half in due course. To be in the top half of the OECD in 2012 we would have needed to have a higher income per capita that Japan. Japan's assessed currency-adjusted current price GDP per capita was 10% higher than New Zealand's in 2012.

It is clear that getting New Zealand's GDP per capita into the top half of the OECD is an easier goal than is closing the gap with Australia.

The bottom line conclusion is no surprise. New Zealand has a good chance of outperforming many European member countries of the OECD given their debt problems, but it needs to find significantly better public policies and institutions if it is to close the income gap with Australia materially, let alone eliminate it. Forthcoming reports from the New Zealand Initiative will promote some options.

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*Dr Bryce Wilkinson is a Senior Fellow at the New Zealand Initiative, which contributes a weekly column for interest.co.nz.

Disclosure: The writer was a member of the 2025 Taskforce and wrote an article on this topic "New Zealand's Economic Growth Prospects: Too much snake oil" that was published by the NZIER in November 2005.