Why Australia is much richer than NZ

Why are Australians so much richer than New Zealanders? It’s almost an embarrassing question to ask because kiwis don’t like admitting superiority to Aussies at anything, be it sport or economic policy.

Australians now enjoy average incomes a third higher than New Zealanders, which works out to around $12,000 a year per person. This pay difference covers all occupations, from lawyers and accountants right down to dump truck drivers, who can just about double their pay by shifting from Auckland to Sydney. It is a remarkable difference given that both countries enjoyed similar levels of income up until the 1970s.

Trying to solve this mystery is a bit like trying to solve a murder-mystery. We need to round up the likely suspects, interrogate them and look for enough clues to satisfy the judge and jury.

Many of the popular explanations are overrated. Australia’s mining boom, for example, is only a small part of the economy, and in any event New Zealand has enjoyed a similar boom with commodity prices for farmers. Surprisingly, New Zealand actually exports more as a share of its economy than does Australia.

The impact of size and distance is also overrated. Over the last 30 years the world has become a smaller place thanks to a major drop in transport costs and a boom in communication technologies. In addition, the world’s economic centre of gravity is shifting to Asia which will benefit both countries.

Unlike Australia, New Zealand does not have a compulsory super scheme and concerns have been expressed over a low level of savings. Yet the relationship between savings and growth (if indeed New Zealand does have a savings problem) is still highly contentious. There is little evidence to show that New Zealand firms are hampered by a lack of access to finance.

There is also little evidence to suggest New Zealanders are somehow ‘dumber’ than Australians, because both countries have similar levels of education and skills.

After considering all these options, the most likely culprit remains government policy. Taken as a sum total over the last 30 years, Australia has enjoyed a more hands-off government than New Zealand, and the results are clear.

This may come as a surprise to Australian readers who remember hearing about New Zealand as a laissez-faire market paradise in the 1990s, but the reality is most major reforms stopped in 1993 and a reversal has begun in recent years. As Martin Wolf wrote in the Financial Times recently, New Zealand 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. From 1975 to 1984 the Muldoon government increased protectionism through export subsidies, import controls, high progressive taxation, price and wage controls and large government debt. An enormous public works programme known as ‘Think Big’ was intended to make New Zealand self-sufficient in energy, but was an expensive disaster.

By 1984 New Zealand was of the brink of bankruptcy, and it took nine painful years of reform before the economy began to grow again. Since then New Zealand’s economic performance has greatly improved, with an average growth rate of 3.4% from 1992 to 2005 compared to 3.75% in Australia over the same period.

Yet this improvement has been nowhere near fast enough to close the gap, and the current government’s policies are not helping New Zealand catch up.

Most international surveys of the business environment rank New Zealand and Australia about the same, but the direction of policy is just as important as the static picture. In recent years the government has introduced complicated new laws governing energy, telecommunications, accident compensation, savings, climate change, employment and holiday law. All of these things have increased investor uncertainty at a time when Australia has been consistently opening up their economy.

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. The government 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. This is most evident in the different language used by political leaders.

Kevin Rudd, for example, calls himself an “economic conservative” and praises the reforms of Hawke and Keating as laying the foundation for Australia’s prosperity. According to the new Prime Minister, “if you cease reforming this economy, you start to strangle long-term productivity growth. We don’t intend to do that.”

Compare this with his Labor counterpart Helen Clark, who insists that free market policies have never worked in New Zealand and dismisses reform as “failed policies of the past”. Clearly, if Kevin Rudd was a New Zealander, he’d be considered a free market extremist.

From all of this come some clear lessons for New Zealand.

Firstly, there is no point being fatalistic. There are many prosperous countries around the world that face similar problems of isolation, small size and a lack of natural resources.

Higher growth requires a national commitment and a clear understanding of policies that work. Governments can’t create growth by themselves, but they can help by making the entrepreneurial environment as fertile as possible.

Of course, none of this is to say Australia is perfect – not by a long shot. But the comparative 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 at www.cis.org.au