By the ditch divided

BY JENNIFER CURTIN AND MARK BROATCH

YOU EARN more there. You pay less tax. The health and education systems seem to be better. It's always sunny. The people are friendlier. The restaurants are cheaper. You earn more.

Australia is our benchmark, our talisman. We compare our wealth, our confidence, our sporting prowess, and have been doing so for every decade since we chose not to enter the Australian federation in the late 1800s.

On cue for the end of the Noughties, the first report of the Brash 2025 Taskforce was released at the end of 2009. A political promise made by National to Act, the taskforce made a total of 48 policy recommendations that the authors said would close the income gap between Australia and New Zealand in the next 16 years.

The report quickly attracted harsh criticism from several economists and business journalists, including the claim of arbitrariness on which factors they chose to focus on in making their recommendations. Most tellingly, several noted that Australia had followed few of the prescriptions the doctor was calling for, for example, privatisation, slashing government spending, using Super funds to reduce debt, and cutting the minimum wage. One central Brash policy plank, deregulating labour relations, got the previously untouchable incumbent across the ditch, the canny conservative PM John Howard, booted out. Only the taskforce's idea of tax reform, bolstered by a report just out from another taskforce (focusing on growth) and one due across the Tasman (apparently to focus on jobs), was given much favourable air time.

The John Key-led government quickly distanced itself from the Brash report, Finance Minister Bill English saying much of it was "too radical" and Key's comments reflected what many academics have noted for years: that Australia's more incremental approach to reform in the 1980s and 1990s has meant they are now in much better shape.

"In that regard I am not convinced that absolutely radical big-bang reform is the right way to go," Key said. Certainly few other countries were suggesting gutting state spending in the wake of a massive worldwide recession or that cutting the minimum wage would somehow result in a richer society.

For as long as disparities exist, we will continue to compare our society and economy with Australia's, but all comparison, statistical or otherwise, involves subjectivity and choice.

For example, is income the only way of measuring how well off, on average, we are compared with Australians? Given that New Zealand regularly tops lists of the best places to live, are we not better off in the measures that count now, and will count more in potentially harsher economic and climatic futures?

The recent update of a book by Australian professor of government Rod Tiffen and Sydney Morning Herald economics editor Ross Gittins, titled How Australia Compares (Cambridge University Press), lets us probe beyond the obvious, often hackneyed comparisons to take an in-depth look at how quality of living, economic prosperity and the like in NZ compares to Australia. The book examines how Australia underperforms or betters the rest of the world. Though we are not their benchmark, New Zealand, being a member of the OECD and other global trade bodies, is included in the 329 statistical tables ranking a selection of 18 OECD countries over the past 20-30 years.

In their introduction the authors note Australians engage in the same kinds of comparisons and rueful claims, such as Australia is "always 10 years behind America". Yet this is the same country that lures thousands of Kiwis each year.

WHAT WE EARN

It is true that our income per person is significantly lower than that of Australia and, of the 18 countries compared in the Tiffen and Gittins book, we are bottom. GDP (gross domestic product) per capita is the standard way of measuring the average material standard of living, and is the indicator used by the Brash report, although such a statistic tells us nothing about how income is distributed and GDP is a crude indicator (for instance, people working longer with less leisure time will increase GDP).

What we also know from Tiffen and Gittins is that this income "gap" appeared between 1973 and 1998; over the same period economic growth on average was only 0.67% compared with 1.9% in Australia. New Zealand experienced many external and internal "shocks" and reforms over those decades: the oil crisis, stagflation, Muldoonism followed by rapid deregulation of the economy under Rogernomics and of the labour market under Ruth Richardson, so-called Ruthanasia.

Elsewhere, Gittins has argued that although both countries began deregulating the labour market in the late 1980s, our more radical Employment Contracts Act (1991) kept wages lower but did not lead to productivity increases. This, he argues, contributed significantly to the opening of the income gap between the two countries.

Indeed, Howard's government passing of Work Choices in 2006, their equivalent to our Employment Contracts Act, appalled Australian voters and the issue was a key factor in Kevin Rudd's election win in 2007. It is important to remember, moreover, when comparing the minimum wage, that Australia's was not set through legislation. Rather trade unions, business and government presented their case for wage increases at a tribunal which decided what their economy could afford. This regulatory system has ensured their minimum wage increased over time in line with economic growth. Here, minimum wage increases depend on the persuasion and interests of the government of the day. A large increase was mooted and kicked for touch earlier this month (it ended up a 25c per hour increase to $12.75; Australia's is $A14.31).

Tiffen and Gittins suggest that if you want to summarise in two words why some countries have ended up better off the past quarter of a century, it would be "productivity improvement" or output per worker or per hour of work. Australia's productivity gains since 1991 have been considerably higher than ours and some of this can be attributed to their focus on micro- as well as macro-economic reform and investment in worker training schemes that complemented the deregulation of their labour market.

However, in the noughties, Tiffens and Gittins' data suggest we have kept pace with Australia on economic growth; our inflation rate rises have been lower, on average, than theirs since the late 1980s, and our average long-term interest rates have been no more than half a percent higher than Australia's since 1990. Yes, the average current account balance for the period 2000-07 was higher, though this has not always been the case.

TAX AND MIGRATION

As workers, on average we do pay more in personal income tax and GST than our Australian counterparts, the book suggests. Yet while the proportion of personal income tax taken was 4% higher here in 2005, the proportion of tax taken from the corporate sector is virtually the same. Australia generates less tax from goods and services (4% less) but they make employers pay a payroll tax (worth 5% of the tax take) and their country earns 5% more through property taxes (capital gains and stamp duty). In other words, the stats back up the surveys: our tax system appears to be more business- and investment-friendly than theirs – we generated 23% of our tax take from business and property tax, compared with 33% in Australia.

And our future tax base is continuing to grow. While many Kiwis leave our shores, a good proportion return, people from overseas migrate here (including Australians) and we have a good fertility rate compared with Australia. New Zealand women on average have two babies each, compared with 1.8 in Australia. In 1970 we were having three babies each – something Australians gave up on in the 1950s. Why does it matter? Future generations help financially support our ageing society, and while the planet may be overpopulated, New Zealand is not.

Our net migration rate – the difference between those coming in and those leaving – is not that different to Australia's. Their net intake is 5.8 compared with ours of 5.3. In other words, a good number of people are leaving Australia as well – Tiffen and Gittins suggest there are now over one million Australians residing long-term in other countries, roughly the same number of New Zealanders estimated to live overseas. However, almost a quarter of our highly skilled workers reside outside the country, higher than all other countries and a stark comparison with Australia's figure of about 3%. But this may be the inevitable result of Kiwis' extraordinary willingness and ability – educated, multi-tasking, English-speaking – to temporarily relocate where the global economy pays them best in the most specialised and well-paid jobs.

So how do we compare with Australia in terms of what our respective governments spend the tax dollar on? Overall, both Australia and New Zealand spend below the statistical average on health care, 8.7% and 8% of GDP respectively, we utilise private health care funding a lot less, and we are half as likely to visit a doctor compared with Australia (several possibilities arise: doctors may be more affordable or accessible – there are 2.8 doctors per 1000 people in Australia compared with 2.3 here and their state-funded Medicare system keeps doctors' prices low – although our newly introduced PHO system is making our prices more competitive. Or perhaps we are more healthy? We consume less tobacco, and eat less fat and more fruit and vegetables than Australians according to Tiffen and Gittins, and other surveys find them higher in the global obesity index).

SAVINGS AND FOREIGN INVESTMENT

We lag behind Australia in terms of gross national savings (by 5%). This is hardly surprising, given that Australia has had compulsory national superannuation for a much longer period (and at the higher rate) than New Zealand.

In recent years our economy has become more open and attractive to foreign investment. Our inflow of foreign direct investment has quintupled since 1971, and in per-capita terms we have been as attractive as Australia over this period. More interestingly, however, is how we compare with Australia in terms of outflow of foreign investment: that is, those funds that go overseas to establish or buy businesses in other countries. In the 2000s, for every $US2 that came into Australia, $US1 went out again. In New Zealand, in the decade to 2006, more foreign investment has come in than has left. We are, after all, an efficient country in which to do business: we have one of the most open, unprotected economies.

And of course, size matters: we are a very small country, which has an impact economically in terms of economies of scale, particularly given our distance from large key markets.

R&D AND PRODUCTIVITY

As Rod Oram has pointed out (Sunday Star-Times, December 6, 2009), our businesses tend to be smaller and this has an impact on investment in research and development by business, a factor that matters to increasing productivity, and by association, reducing the income gap. In 2005, not only was our R&D investment less than Australia's, most of ours was being undertaken by small firms (46.2%). However, in another way, we seem to punch above our weight: between 2002 and 2004, 20% of our SMEs had introduced new product innovations, compared with only 7% of Australian SMEs. Our large firms also performed well, with 27% generating new product innovations, compared with only 12% of Australian large firms. In 2007, the Australian government committed $1.4 billion over 10 years to fund Australian industry R&D projects and extended eligibility for the premium 175% tax concessions. Here, the National-led government's removal of the tax credit for industry R&D represents at best an ambivalence towards state-supported research and development.

PRIMARY INDUSTRY

Agriculture remains both our biggest boon and bane. We are one of the food bowls of the world, though economists view our dependence on agriculture as an economic negative. Our exports as a percentage of GDP were 29% in 2005, compared with 18% in Australia, and ours are commodity-dominated which makes us susceptible to currency fluctuations.

Yet we export close to the same percentage of high-technology exports as Australia; and while we sit lower than Australia in terms of industry's share of the economy (24% compared with 28%) we have a larger percentage in manufacturing (15% compared with 11%). It might be desirable to have a more diverse economy, but being a food producer in an age where food policy is becoming the next big thing is hardly cause for doom and gloom.

It remains a fact that we will never compare with Australia on mineral resources and the economic advantages that extractive industries bring to an economy (despite the Brash report's desire, backed this month by expat businessman Sir Douglas Myers, to see the growth of mining developments on or under Crown land). But dependence on extractive industries has an environmental downside: 91% of Australia's electricity generation is derived from fossil fuels (coal and gas), compared with our 1%. And while China and the US produce more greenhouses gases in absolute terms, per capita Australia produces more tonnes of CO2 equivalents per year (30.9) than its OECD counterparts, as well as China and India. New Zealand cannot afford to be smug here – we also produce a significant amount of CO2 equivalents (23 tonnes per capita).

EDUCATION AND OLD AGE

We spend more on education: 6.7% of GDP in 2005 – most of which goes to public education (3.7% of our government funds go to private institutions). By contrast, in Australia over 20% of the government's education funds are directed to private schools – suggesting as a taxpayer in Australia you are more likely to fund the education needs of the better-off. More of our four-year-olds are in kindergarten (95% compared with 65%) and more young people are in tertiary education (38% compared with 33% in Australia in 2006). We, like Australia, are not huge spenders on welfare (less than 20% of our GDP), well below many of our European counterparts. Indeed, all the English-speaking countries are ranked towards the bottom on this indicator – less surprising given our liberal, rather than social democratic leanings.

We are much better than most countries at ensuring our old people are not living in poverty. According to Tiffen and Gittins, in the mid-2000s only 2% of retired Kiwis had incomes less than half the median income, compared with 27% in Australia. This contrasts with our very poor record on child poverty – 15% of our children are living in relative poverty, compared with 12% in Australia and less than 6% in the Scandinavian countries. Here, in the mid-2000s 30% of single parent working families were in poverty compared with only 6% in Australia.

How do we explain these gaps in welfare? Susan St John and Alison McClelland in the Australian Journal of Political Science (2006) argue New Zealand's historical preference for a more universal system of welfare, compared with Australia, produced more comprehensive and enviable accident compensation and retirement schemes – with much of the latter retained. However, cuts to other benefits in the 1990s meant low-income families fared poorly compared with their Australian counterparts.

Indeed, while we were cutting income support, the Australian government of the 1980s and early 1990s poured funds into labour market programmes, health and child care, as well as income supplements for low-wage and out-of-work families. Cuts to some of these policies occurred under Howard's government, but overall, by 2001, net social expenditure the Australian government still committed more funds per capita to welfare than we did. Working for Families has, on the other hand, had a positive impact for relieving child poverty among working families since 2005, though critics point out beneficiaries do not get all the payments.

That Australia is a federal nation matters to this story. They have state governments (which control health and education, and often of a different political persuasion to the federal government). This can ensure an element of balance and moderation in policy delivery that we do not experience here. In addition, their upper house acts as a check on government power – the speed with which Roger Douglas and Ruth Richardson (and John Key last year) were able to pass their legislation would not be possible in Australia, even under urgency.

OTHER GAPS

Despite the claim we need to get people off welfare and into work, the income gap is not due to any lack of desire to work on the part of New Zealanders. Our labour force participation rates were slightly higher than Australia's between 2000-06. In 2007, 82% of Kiwi men aged 55-64 were in the labour market compared with 67.8% in Australia. Similarly, the labour force participation rate of 55-64-year-old New Zealand women was 19 percentage points higher than their Australian counterparts (64% compared with 45%). On average, Kiwis worked about 50 more hours per year than Australians.

Looking at work from the other side of the equation, we see a similar kind of picture. The average unemployment rate for each decade since 1980 puts our rates consistently lower than those of Australia – 4.5% compared with 7.2% between 1980 and 1989; 7.9 versus 8.6 between 1990 and 1999 and 4.2 compared with 5.5 since 2000. Long-term unemployment in Australia was at 15.5% in 2007 compared with 5.7% in New Zealand – and ours was the lowest long-term unemployment rate among the 18 OECD countries in the study. Although Australia is now 5.5% compared with our 5.6%, historically it has been easier to find a job in this country.

So while we are behind Australia on income and state investment in its people, we are ahead in other areas – we have an efficient economy, plenty of food and water, and our old people fare well. Our broadband is faster and costs less. We drank less alcohol (in 2002), our divorce rates are lower, and we last on average 13 years in our marriages compared with eight years in Australia. We are proud of our nuclear-free status. Moreover, and this is worth emphasising, we regularly reach the top 10 of surveys of the best places to live, the preferred countries to emigrate to, the least corrupt and, perhaps most important of all, the happiest populations.

We could still do better. We could improve our productivity by investment rather than working longer hours, the government leading the way. We could reduce our relative poverty rates. We might wish to improve our wealth, as long as it also did us some good as a society. But there is much that we are doing right, or that is good about living in New Zealand. While the flow to Oz continues, it is increasing the other way. Some 14,500 Australians (two-thirds of whom were once New Zealanders) came to live here in 2009, the highest since 1999.

Statistics are only as useful as their context. We are not the same as Australia, geographically, demographically, historically or politically, and these factors matter to policy development. And while we may personally be better off across the Tasman, for many the grass – what's left of it – may only appear greener.

Dr Jennifer Curtin is a senior lecturer in comparative politics and public policy at the University of Auckland and spent 13 years researching and teaching in Australia. Mark Broatch is assistant editor at the Sunday Star-Times.

- © Fairfax NZ News