What happens if we don't take action soon?
New Zealand and the rest of the advanced world have just come through a fairly significant recession. The recession has been considerably milder in New Zealand and Australia than in many other parts of the OECD, but the path GDP takes in various countries over the next few years is still very much an open question.
It is clear, however, that on the current set of policies and institutions no credible analyst or forecaster, here or abroad, believes that the gap - be it to Australia or to the wider OECD grouping of countries - is likely to close sustainably. That view is reflected in the most recent International Monetary Fund projections for the two countries out to 2014. Locally, the Treasury has recently advised the government that, in its assessment “there is nothing in the current projections or set of policies that suggests material progress is likely in reversing the large per capita income gap that exists between New Zealand and the average of its OECD peers, or, most notably, Australia” [86]. We understand that the OECD itself has recently undertaken a scenario exercise in which the gap between New Zealand and Australia widens further over coming years, although we have not been exposed to the reasoning that justifies that scenario.
A significant portion of New Zealand's economic growth in the last decade has taken forms that reflected unsustainably large increases in consumption spending, associated with unsustainably high asset prices, all financed by very large increases in overseas borrowing. There are serious questions about whether even current private sector levels of debt are sustainable. New Zealand already has among the very highest levels of external indebtedness among longstanding OECD countries (though nowhere near as high as crisis-ravaged Iceland). At these sorts of levels, credit rating agencies tend to start asking serious questions and it is not clear whether an underperforming economy can sustain even current levels of debt. Whether or not current debt levels can be sustained, it seems most unlikely that growth over the next 10-15 years can be financed by further increases in our indebtedness. In the same paper cited above the Treasury notes that the ongoing large macroeconomic imbalances and vulnerabilities are among the factors that pose a risk that the gap to other OECD countries will widen further[87].
- Figure 29: Net external liabilities (percent of GDP)
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- Source: Reserve Bank of New Zealand
On current policies it is clear that the income gap remains large, is most unlikely tol narrow to any material extent, and there is a material risk that the gap could widen further over the years ahead.
If the income gap were to start widening again, migration from New Zealand could also increase materially further. More and more people are heard asking themselves “why do I stay?”. A new generation, that has known only an underperforming New Zealand, might conclude that there is no good reason to hope that New Zealand will ever be able to offer them the sort of incomes and opportunities they see over the Tasman or when working abroad in Europe, Asia, or North America. The intangible barriers to leaving New Zealand are continuing to fall - travel and communications costs drop ever lower, so it is easier to keep ties to New Zealand even while settling overseas.
Relatively poor countries rarely pay even skilled professionals what those people could earn in richer countries. However, migration opportunities are generally better for relatively more skilled people and this is likely to be reflected in wide income disparities between those who can migrate and those who can't. The situation is a little different in New Zealand, because our unskilled people can also freely migrate to Australia. New Zealanders have a strong sense of the importance of the well-being of the relatively less well-off. In the short-run, the lot of the less skilled, less mobile, and less fortunate can be improved by redistributing the existing pie, but the long-term living standards of the immobile elderly, the least skilled and the least well-off are primarily determined by how well the institutional environment and policy framework enable the country to lift its overall economic performance. Sometimes people talk rather condescendingly about the need to reform to keep our “brightest and best”. That isn't our case at all: reform is vital for all of us, and perhaps for the poorest and least able most of all.
There is nothing inevitable about continuing economic decline. But that comforting thought is no cause for complacency, because there is also nothing pre-ordained about New Zealand avoiding further decline. The examples of once-wealthy South American countries, such as Argentina and Uruguay, should be salutary. In 1950, they too were about 30 percent poorer than countries like Australia, much as we are now, but still materially better off than many of the major European countries. Now, Argentina and Uruguay are no longer remotely first world countries. The deeper the economic hole, the harder it becomes to climb out - and partly because it can become harder to avoid self-reinforcing cycles of poor policy. New Zealand simply cannot afford a further protracted period of delay in acting to reverse decades of economic underperformance. Nor can it afford further diversions down the path of “smart growth” strategies that have, in various guises, been tried numerous times before, and have failed.
The rate of “catch-up” required to match Australian living standards is towards the upper end of what could be achieved. If there are further delays in taking substantial steps to seriously address the problem, the implied rate of convergence will rapidly become impossible. If the income gap widens even further over the next few years the 2025 goal will become ever more difficult.. Change involves risk, but for New Zealand now probably the bigger risks lie with not changing much at all. Our journey towards Australia needs to start now.
