Friday, February 5, 2010

Mike Butler: Between rich and poor

While the 2025 taskforce shows a widening gap between living standards of New Zealand and Australia over 40 years, this blog shows where New Zealand and Australia sit between the world’s richest and poorest nations in terms of per capita gross domestic product (GDP).

The 2025 taskforce, headed by former National Party leader and Reserve Bank Governor Don Brash, produced a report entitled “Answering the $64,000 question: Closing the income gap with Australia by 2025”.

The report shows that average Australian incomes are around 35 percent higher than those in New Zealand, which means a gap of $64,000 for a family of four.


While New Zealand sports people are regularly compared with those of other nations, financial or economic comparisons are less common, resulting in the belief that this country is among the best of all nations.

According to GDP at purchasing power parity per capita data from the International Monetary Fund for 2009, New Zealand is ranked 27th on a list of 166 nations – which is still in the top 16 percent.

GDP at purchasing power parity per capita gives the value of all final goods and services produced within a nation in a given year divided by the average (or mid-year) population for the same year.

The best-known purchasing power parity exchange rate is the "international dollar", which is a hypothetical unit of currency that has the same purchasing power as the United States dollar.

According to the IMF data, the top nation was Luxembourg with a GDP per capita (ppp) of $78,559. The United States was fourth at $46,716, Australia 13th at $35,677, the United Kingdom 15th at $35,445, and New Zealand 27th at $27,027.

The bottom-ranked nation, coming at 166th, was the Democratic Republic of Congo, at $328. The People’s Republic of China was listed at 89th with $5962.

New Zealand is sliding down the list. As the 2025 taskforce report noted:
“High living standards in New Zealand in the past were no flash in the pan. For 100 years, incomes in New Zealand – and Australia – were among the very highest in the world. But from the second half of the 1960s, a marked deterioration began to become increasingly apparent. Today, once-poor Asian countries such as Korea and Taiwan are moving ahead of us, and recently the first of the former Communist countries of eastern Europe passed us.”

New Zealand’s per capita GDP is about one third that of Luxembourg’s, and nearly half that of the United States. The gap becomes apparent when any traveler from New Zealand spends hard-earned Kiwi dollars in the United States.

The country with the highest per capita GDP, Luxembourg, is a small, landlocked country bordered by Belgium, France and Germany. Luxembourg has a population of under half a million people in an area of approximately 2586 square kilometres.

Luxembourg's stable, high-income economy features moderate growth, low inflation, and low unemployment. The industrial sector, which was based on steel manufacturing until the 1960s, has diversified into chemicals, rubber, and other products, while growth in the financial sector has more than compensated for the decline in steel. Luxembourg is the world's second largest investment fund center (after the USA), the most important private banking center in the Eurozone, and Europe's leading center for reinsurance companies.

The country with the lowest per capita GDP, the Democratic Republic of Congo, known until 1997 as Zaire, is the third largest country by area in Africa, has a population more than 68 million, and is the 18th most populous nation in the world.

The economy of the Democratic Republic of the Congo has declined drastically since the mid-1980s. The two recent conflicts (the First and Second Congo Wars), which began in 1996, have dramatically reduced national output and government revenue, have increased external debt, and have resulted in deaths of more than five million people from war, and associated famine and disease.

The Congo is the world's largest producer of cobalt ore, and a major producer of copper and industrial diamonds. It has significant deposits of tantalum, which is used in the fabrication of electronic components in computers and mobile phones.

The Democratic Republic of Congo shows that size, a large population, and mineral wealth does not necessarily add up to high per capita GDP. Some commentators criticised the 2025 report by saying that it is absurd to think New Zealand can and should catch up with Australia because that country has “five times our population, 32 times our land area, and huge resources of minerals”. Such criticism is somewhat na├»ve.

Luxembourg shows that a small population on a small land area can create large wealth by intelligent use of resources that may not even be located there.

The government has two reports on the table tackling the economic problem with different tools.

The 2025 taskforce report could be called the “reign in government spending report”.

It recommends that if Government operating spending as a share of GDP should be reduced by 2012/13 to 29 percent, the same share as in 2004 and 2005, this would allow the maximum personal tax rate, and the company and trust tax rates, all to be reduced to 20 percent.

The Tax Working Group report could be called “the raise GST and tax property investors harder report”.

That report also recommends aligning the top tax rates, but says this could be funded by a higher GST rate and a land tax.

Prime Minister John Key’s out-of-hand rejection of the 2025 taskforce report and his commitment to study the Tax Working Group report hints at the direction he could take. If so, he has opted to tax and spend, thus committing New Zealand to a further slide down the GDP per capita league tables.

Sources
Data derived from World Economic Outlook Database-October 2009, International Monetary Fund. Accessed on February 4, 2010.

Answering the $64,000 question: Closing the income gap with Australia by 2025 First Report and Recommendations - 2025 Taskforce. http://www.2025taskforce.govt.nz/firstreport/index.htm

A Tax System for New Zealand’s Future. http://www.victoria.ac.nz/sacl/cagtr/pdf/tax-report-website.pdf

1 comment:

Anonymous said...

This article is an excellent analysis of why the government should adopt the main thrust of the 2025 Taskforce and reduce spending down to 29% of GDP. The problem is that National's polling would indicate that such a move would be unpopular with the public who wouldn't like to see cutbacks. So what do we do? How can this government be encouraged to do what is right rather than just what is popular?

Any ideas anyone?