NZ Institute thumbs down Key's agenda

I'm not sure what kept Rick Boven from speaking his mind earlier, when Key delivered his state of the nation speech. Perhaps he was clever to stay out of the fray and get coverage for it later on RadioNZ. I spoke about it on my Kiwi FM radio show this morning too.

Whatever the case, Boven’s criticism of the government's agenda to catch Aussies by 2025 is spot-on and stinging. In addressing the gap, which started in the 1970s and now stands at $20,000 per head, the government's modest approach “lacks rigour”:

For example, improving the effectiveness of government and reducing unnecessary regulation are easy to agree with as opportunities for economic improvement—but will they make enough difference? In 2007, Australia’s core government services were 19 percent of GDP, similar to New Zealand’s 17 percent of GDP. Further, analysis of 2000–2007 OECD data reveals a low correlation of total taxes as a proportion of GDP with growth in GDP per capita. The World Economic Forum rates the business constraint from regulation as similar for the two countries.

Reducing red tape is insufficient. At the heart of the matter is the productivity gap; in every industry, including agriculture, Australia has greater produtivity than New Zealand. That squares with what an IBM study reported last week. What creates productivity: investment in technology, innovation, education and in growing businesses.

Our initial estimates indicate that a substantial portion, around 40 percent, of the GDP per capita gap can be explained by two factors: differences in the capital intensity of the productive economy, and differences in innovation and business sophistication. Australia has more productive capital per worker and is more innovative.

We know enough about the economic development of advanced economies to understand that capital and innovation matter a lot. We also know that Australia has vigorous policies to promote savings and so their capital formation is strong while ours is much weaker. Innovation has been systematically encouraged in Australia for around 30 years; here for only about ten years.

Surely the most promising way to close the gap is to go after opportunities like these.

We know that New Zealand’s tax settings have encouraged investment in residential housing but our productive economy has been starved of capital. We know New Zealand is unusual in not having either compulsory savings or strong tax breaks to encourage savings. We know our businesses are not well-equipped to convert our inventiveness to international business success. And almost all countries provide strong incentives and assistance for innovation but New Zealand’s are weaker.

Boven is correct. The heart of the matter is not being addressed by this government and the growth required to catch Australia will not be delivered by its tinkering.

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