Why is Australia so much richer than New Zealand?

Why are Australians so much richer than New Zealanders? It’s almost an embarrassing question to ask because we don’t like admitting superiority to the 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 is a massive difference and helps explains why 40,000 kiwis moved across the Tasman for good last year.

A strong economy doesn’t just mean more money in the pocket – it also means a country can afford to tackle social and environmental problems. This is why Australia outperforms New Zealand on a wide range of social indicators, including life expectancy, infant mortality, income inequality and even suicide rates.

The remarkable thing about this gap is that it didn’t exist until the 1970s. Bad policies from the Muldoon era can explain why we fell behind in the first place, but since then we have struggled to catch up. Despite our free market reforms of the 1980s and 90s, Australia has grown faster and the gap remains stubborn. So why is there such a big difference?

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 over-rated. Over the last 30 years the world has become a much smaller place thanks to cheaper airfares and new technology, which allow new ideas and products to reach our shores much faster.

Instead, the most convincing and widely accepted reason for New Zealand’s underperformance is a lower level of labour productivity. In plain English, this means that for every hour worked the average Aussie creates a third more ‘stuff’ than a Kiwi worker.

This of course only deepens the mystery. Like Sherlock Holmes (or CSI) we have to keep asking ‘why’ this productivity gap persists, and eliminate all the suspects.

It’s certainly not because New Zealanders are lazy, because we have more people employed and work about the same number of hours as Australians do. And we’re not dumber, because our education levels are about the same.

It’s also hard to find any evidence that New Zealanders have a vastly different culture or mindset to Australians. In fact, international surveys of values show that we actually rate economic growth and higher wages more importantly than Australians do.

After considering all of these possible reasons, the major missing link seems to be government policies. In particular, tax and regulation have a major impact on growth by making life more difficult for entrepreneurs. Every extra cost imposed on employers makes it harder to hire staff and less rewarding to invest in new machinery, tools and technology.

Most surveys rank New Zealand and Australia about the same for ease of doing business, but the direction of policy is just as important as the static picture. In recent years New Zealand has introduced complicated new laws governing energy, telecommunications, ACC, Kiwisaver, climate change, employment and holiday law. All of these things increase investor uncertainty at a time when Australia has been consistently opening up their economy.

Perhaps the single biggest policy difference between the countries is the level of tax. New Zealand is now the highest-taxed English speaking country in the OECD with taxation making up 37% of the entire economy, whereas Australia is at 31%. Australians have had five years in a row of tax cuts, and once the next round is implemented (under a Labour government) a worker on the average wage will be paying twice as much tax in New Zealand as they would across the Tasman.

All of this undermines the myth that New Zealand is some kind of laboratory for free market reforms. That may have been case 20 years ago, but what was once considered radical is now standard practice. Australian policy has caught up and overtaken us, without stopping for a tea break.

This is most obvious in the language used by new Labour Prime Minister Kevin Rudd. He calls himself an “economic conservative” and is proud of Australia’s historical reforms, which he says are the basis of prosperity. He is promising large tax cuts, a tighter rein on government spending and a continuation of economic reform. By contrast, Helen Clark dismisses similar ideas in New Zealand as “failed policies of the past”.

Therefore, it isn’t by accident that Australia is enjoying such good times – it’s from a national commitment to growth and a realistic view on what actually works. Australians recognise that politicians can’t create growth by themselves, but through good policies they can make the entrepreneurial environment as fertile as possible.

Australians may call themselves ‘the lucky country’, but in the modern world economy it’s clear you make your own luck.

Phil Rennie is a Policy Analyst with the Centre for Independent Studies. His paper “Why is Australia so much richer than New Zealand?” is available at www.cis.org.nz