Australians are no bigger and no smarter than New Zealanders, but seriously better off

Kiwis have become used to finishing behind Australia in sporting contests, but the most serious gap between the two countries is the level of wealth. Thanks to 16 years of uninterrupted growth, Australians now enjoy incomes a third higher than their New Zealand cousins.

This massive income gap explains why 40,000 New Zealanders (that’s an average of 769 a week) moved across the Tasman for good last year. Former Kiwi Prime Minister Rob Muldoon once joked that this emigration raised the average IQ of both countries, but the problem is deadly serious. Why does this gap persist?

Many of the popular explanations are overrated. Australia’s mining boom, for example, has only contributed a small amount towards economic growth and in any event, New Zealand has enjoyed a similar boom with commodity prices for farmers.

The impact of size and distance is also over-rated, because Australia has not suddenly grown bigger. Nor is it because Australians are smarter; in fact both countries have similar levels of education and skills.

The one anomaly that stands out over the last 30 years is the different economic policies pursued. Taken as a sum total, Australians have more limited government (in both size and scope) when compared to their Kiwi neighbours over this period.

This may come as a surprise to Australian readers who remember hearing about New Zealand as a laissez-faire market paradise during the 1990s. But as Martin Wolf wrote in the Financial Times recently, the Kiwi reforms “were radical only by the standard of New Zealand’s incompetent past.”

It is worth remembering just how incompetent New Zealand’s past was. By 1984 the country was known as “Poland of the South Pacific” thanks to a command and control economy. Taxes, inflation, interest rates and public debt were skyrocketing, and the country was close to bankrupt. It took nine years of painful reform before a recovery finally began.

By this stage the gap with Australia had become firmly established, and has continued to grow. Not helping New Zealand’s cause has been a rejection of further reform and a deliberate increase in tax and regulation since 2000.

Perhaps the biggest policy difference between the countries is the level of tax. Australians pay 31% of GDP in tax compared to 37% in New Zealand, and the difference in direction is stark. Labour Prime Minister Helen Clark increased taxes in 2000 and has spent the last seven years fighting tooth and nail against tax cuts, despite huge budget surpluses.

Meanwhile, once the next round of Australian tax cuts are implemented a worker on the average wage will be paying twice as much tax in New Zealand as they would across the Tasman, which will only add to the tide of migration.

Arguably this clear sense of direction in Australia – even with a change of government – contributes to the bullishness of the economy. Various surveys consistently show higher levels of consumer, business and investment confidence in Australia.

Australia is benefiting from a comparatively stronger consensus around policies for growth. As a recent immigrant, I found it startling to hear Kevin Rudd boast he is an ‘economic conservative’ and praise the benefits of reform. It is startling because over in New Zealand Helen Clark dismisses reform as the “failed policies of the past” and insists that free market policies have never worked.

If Kevin Rudd ever moved to New Zealand, he’d be dismissed as a free-market extremist.

Of course, none of this is to say Australia is perfect – not by a long shot. But the New Zealand experience clearly shows that good policies, rather than good luck, matters for prosperity.

Phil Rennie is a Policy Analyst with the New Zealand Policy Unit of the Centre for Independent Studies. His paper “Why is Australia so much richer than New Zealand?” is available