One of the government’s top priorities was to return New Zealand incomes to the top half of the OECD rankings.
In response to this goal, the Treasury showed that “to reach the median OECD income per capita would require an unprecedented increase in the average annual rate of economic growth” and considered that New Zealand’s ranking was likely to slip further.
New Zealand’s ranking indeed fell from 20th highest income per capita in the OECD in 1999 to 21st by 2004 and 22nd by 2006.
That growth promise, which seemed to have been discarded in the light of New Zealand’s performance, was this week revived in the Labour Party’s election campaign.
How likely is this goal to be achieved?
In 2007, New Zealand’s GDP averaged $US26,600 per capita in purchasing power parity terms, ranking 22 out of 30 OECD countries.
Six out of the eight countries that rank below New Zealand were admitted during 1994-2000. Among older members, New Zealand only outperforms Portugal and Turkey.
Ranking the lowest in the top half of the OECD is Finland, with average income of $US35,300 per capita.
Over 2000-2007, New Zealand’s real GDP per capita grew at 2.1% per year, while the average growth rate for the rest of the OECD was 2.4% (or 1.8% if weighted by population).
If each country continued to grow at its average growth rate for the period 2000-2007, New Zealand would only reach the middle rung of the OECD ladder in 2170.
In the last three years, New Zealand’s growth performance was poorer than the rest of the OECD (1.5% vs 3.0% per year). If these growth rates were sustained, New Zealand would drop to 24th place in 2010 and continue to fall further later on.
Assuming that other countries maintain their average performance of the period 2000-2007, New Zealand’s GDP per capita will need to grow at 4.6% per year in the next decade to reach the top half of the OECD. That would mean an average growth rate of 5.9% in total GDP, assuming a population growth rate of 1.27% (average rate for 2000-2007).
A growth rate in GDP per capita of 7.4% is required for the goal to be achieved in five years. Since 1970, there has not been a single year when New Zealand recorded growth of at least 7.4%, let alone five years in a row. The highest average rates over 5- and 10-year periods were respectively 2.9% (1992-1997) and 2.6% (1992-2000).
Future growth prospects are not very positive, given labour productivity growth has been heading south since 2000.
It is striking to note that based on 2000-07 growth rates, China would have overtaken New Zealand by 2030 and would pass the median OECD country in 2034, when New Zealand would sit at 26th place.
This is far from being impossible. It was not long ago that countries such as Singapore, Hong Kong, Spain and Greece were much poorer than New Zealand. They have now surpassed New Zealand thanks to sound pro-growth policies.
Interest-free student loans, raising the top marginal tax rate and not indexing tax brackets to inflation, high effective marginal tax rates (through Working for Families), the Employment Relations Act, KiwiSaver, re-nationalisation of ACC and the railways, the Emissions Trading Scheme, and increasing government spending and regulation are some of the many growth-retarding policies that have been introduced in the last nine years.
Proposed policies such as universal student allowances, Home Ownership on the Public Estate, and more government spending are more of the same in this direction.
Getting back to the top half of the OECD is a commendable goal, but its achievement is highly unlikely under current policy settings. It would be a good thing if the need for substantial changes to policy settings informed public debate during this general election period.
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