I’m with the Governor

The Herald reports:

Prime Minister John Key has vowed to stick with his goal of closing the income gap with Australia, despite an embarrassing dismissal by the Reserve Bank Governor who said there was no chance of it happening.

Speaking on TVNZ’s Q+A programme yesterday, Alan Bollard said Australia had been “blessed by God sprinkling minerals” and had handled its economy well. He said New Zealand would do better to make the most of the “crumbs that come off the Australian table”.

He said it was up to the Government what its own goals were, but he did not believe catching up with Australia was possible.

However, Australia’s success was good news for New Zealand and the real challenge was in working out how to capitalise on it.

The Governor is quite right that it is not practical to think we can close the gap with Australia by 2025 – quite simply the gap is just far too large.

However I think we can aspire to something more ambitious than making the most of the crumbs that come our way from Australia.

Even if the gap is not closed by 2025, we do want a very strong focus on higher levels of economic growth so the gap gets smaller, or at least doesn’t grow as quickly.

There are effectively six scenarios going forward, from worst to best:

  1. NZ growth rate in next 15 years is even lower than for last 15 years, meaning gap between Australia grows even faster than previously.
  2. NZ growth rate in next 15 years is the same as last 15 years, so the gap grows as fast as previously.
  3. NZ growth rate in next 15 years is higher than the last 15 years, but still not as fast as Australia, so the gap continues to grow – but slower than before.
  4. NZ growth rate rate in next 15 years matches that of Australia, so the gap remains relatively constant.
  5. NZ growth rate in next 15 years is higher than that of Australia, but not high enough to close the gap by 2025, so the gap closes but is not gone by 2025.
  6. NZ growth rate in next 15 years is so much higher than Australia’s that the gap is closed by 2025.

Now like the Governor, I don’t think No 6 is realistic. We are starting too far behind. But personally I’d be pretty delighted with either No 5 or No 4 – both would be absolutely major achievements. Even No 3 would be better than the status quo.

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