Sunday, April 23, 2023

Don Brash: Australia our closest frenemy

The announcement over the weekend that Australia has decided to allow New Zealanders who have lived in Australia for four years to acquire Australian citizenship has been greeted with mixed emotions in New Zealand.

On the one hand, a great many people have welcomed the new policy with enthusiasm – it makes it easier for New Zealanders who have lived in Australia for many years, but who have been denied many of the benefits of Australian citizenship, to acquire those benefits. And it makes it easier for New Zealanders who are finding it tough in New Zealand at the moment to contemplate moving across the Tasman.

On the other hand, that added attraction of moving to Australia makes it still more difficult to hang onto the staff which New Zealand employers so desperately need. And those employers are not just, or perhaps even mainly, in the private sector but also in the public sector, where both the health system and the education sector are desperately short of qualified staff. The Prime Minister may have publicly welcomed the change in Australian policy but he will be acutely aware of those negative implications.

Of course, the danger of our losing competent people to Australia has been with us for many years. When I was doing my doctoral thesis in Canberra in the ‘sixties, my closest colleague was studying the flow of people between our two countries in the last few decades of the nineteenth century.

At that time the flows of people tended to be cyclical – sometimes with net flows to Australia and sometimes the reverse – because income levels were broadly similar in the two countries. In 1900, the best estimates available suggest that per capita incomes were slightly higher in New Zealand than in Australia. As recently as the early ‘seventies, Australian and New Zealand income levels were broadly similar. But over the last four or five decades, Australian real incomes have gradually increased relative to income levels in New Zealand.

It’s been convenient for successive governments in New Zealand to imply that the relatively better Australian performance has been a result of Australian mineral wealth, and certainly at times that has helped Australia greatly. But the underlying problem is that over decades Australian growth in productivity – growth in output per hour worked – has been superior to that in New Zealand.

Perhaps fortunately for us, Australia’s productivity growth has not been stellar compared with, say, the countries of East Asia, but it has been better than ours, and that has resulted in real incomes in Australia now being markedly higher than in New Zealand.

As far back as 2009, when the 2025 Taskforce (which had been charged by the Key Government to recommend policies which could close the gap in real incomes between New Zealand and Australia, and which I chaired) reported its findings, the gap in real income was about $16,000 per person per year. The gap is bigger now.

And yet New Zealand has many natural advantages. It regularly comes close to the top when countries are ranked according to the ease of starting a business, or by absence of corruption. It has a rich endowment of natural resources, and has more water per capita than all but two other countries in the world – and of course it is our super-abundant water which explains our comparative advantage in exporting things which require vast amounts of water – meat, dairy, logs, fruit, wine, etc.

Yes, we also have some big negatives as a place to live, perhaps the most obvious being the extreme unaffordability of houses relative to incomes (still, despite the recent fall in house prices). But that is true in the major cities of Australia also, particularly in Sydney and Melbourne.

We seem intent on destroying one of the world oldest democracies as fast as we can by creating two classes of citizenship based on ethnicity – absolutely nuts, and if the present Government wins the next election that destruction may prove irreversible short of serious civil strife. But Australia too, though some decades behind us in that respect, also seems determined to create a constitutionally preferred status for Aborigines and Torres Strait Islanders.

But with growth in productivity (output per hour work) continuing to be persistently higher in Australia than in New Zealand, the gap in living standards continues to grow.

There is no single policy change that would rectify that problem, as the 2025 Taskforce concluded more than a decade ago. In my own view, there are four policy areas which need major reform.

First, our education system is failing, and failing more seriously as every year passes. Truancy rates are far too high and basic literacy and numeracy are far too low. Too many teenagers emerge from taxpayer-funded schools barely able to read, write or do basic arithmetic – and therefore essentially almost unemployable.

Second, our planning laws are a nightmare, something recognized by successive governments almost since the Resource Management Act was passed in 1991. Governments have been tinkering with that law in an attempt to improve it ever since. The current Government, to their credit, recognized that a complete rewrite of the RMA was required, but alas the three laws they have proposed in its place promise to make the situation much worse while giving effective veto power to those with some Maori ancestry.

Third, our tax system, while admirably simple in many respects, does much to encourage speculation in real estate and little to encourage investment in productivity-enhancing capital.

Fourth, we have a legal and regulatory regime which goes out of its way to discourage foreign investment in New Zealand. Indeed, the OECD judges that our policy towards inwards foreign investment is one of the most hostile among all developed countries. For a country which loves spending but doesn’t have much of a taste for saving – so that we have a persistent tendency to spend more than we earn, resulting in balance of payments deficits in every year since 1974 – a policy which discourages inward foreign investment is a policy we can ill afford.

Of course, none of these policy changes will be achieved unless we have a government which takes reducing the gap with Australia seriously. Clearly, the current Government does not take that goal seriously.

Unless we soon do have such a government, New Zealand is at serious risk of drifting off in the direction of irrelevance, perhaps a nice place to retire to (though even that is not a given), where our children and grandchildren come to visit during school holidays.

Dr Don Brash, Former Governor of the Reserve Bank and Leader of the New Zealand National Party from 2003 to 2006 and ACT in 2011.


Anonymous said...

And where is that government going to come from? A brand new set of intelligent, sensible, grounded capable committed politicians wanting to maintain a democracy and enhance what used to be a great little country? The best people to do the job. Remind me- who are these hypothetical people?

Anonymous said...

Dead right, Don. My son, an honours graduate, has been living in Australia for about six years, so this is great news for him, although it's not entirely all a one-way street as they do have capital gains issues. Still, if I were his age I'd be there in a blink of an eye and I expect now many will find the better money and lifestyle a huge attraction. With our current Government doing its best to divide and ruin our nation on just about every front, it's very sad and we will have to do a great deal better if we want to avoid a bankrupt banana republic with go-getters all gone and a remaining population of illiterate/innumerate young, struggling beneficiaries, and superannuitants. I hope the likes of Ardern and Hipkins are happy with their achievements.

Anonymous said...

I think Don has missed the mark in a couple of respects.

Firstly, he says, "Our tax system, while admirably simple in many respects, does much to encourage speculation in real estate and little to encourage investment in productivity-enhancing capital."

I don't agree. Tax legislation is discriminatory against residential property investors (eg Brightline test and interest non-deductibility). Commercial property does not have any tax advantages that those investing in a business don't have. eg a person can buy a business, trade at a loss while building up top-line revenue then sell it for a tax-free capital gain based on projected earnings. This is what VC companies do and have been doing for a long-time.

Secondly, Don overrates the importance of capital. Traditional economics is based on capital and labour - ie the capitalist using cheap labour to create wealth. That's old-school economics. Capital is now much less relevant. Innovation and entrepreneurship are far more important as wealth drivers - Singapore is acutely aware of that hence its innovation in food technologies.

Few people understand what is required to excel either individually or as a nation, least of all politicians. The best solution is therefore to minimise political intrusion into the lives of individuals. They won't because politicians prosper when others are dependent on them.