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A Month Can Be a Very Long Time

by Dr Don Brash

DISCLAIMER: Any opinions expressed or statements made in this article are those of the contributors and/or advertisers, and do not necessarily represent the views of the publisher, staff or management of elocal Limited. While every effort has been made to ensure the accuracy of the information presented, the publishers assume no responsibility for any errors or omissions, or for any consequences thereof.

It’s hard to believe that when I signed off my article for the March edition of Elocal, on 11 February, I didn’t mention the words ‘pandemic’, ‘coronavirus’, or ‘Covid-19’. In the four or five weeks since, the media – and I mean all the media – have talked about almost nothing else.

What I write now, for publication at the beginning of April, could also be totally blind-sided by events over the next two weeks. At the moment, it appears as if Covid-19 may have a serious effect on the health of many New Zealanders, may well overwhelm the capacity of the health system to care for those who require intensive care, and may therefore force doctors and nurses to make extremely difficult decisions, allowing some people to die because there is simply not enough of the right equipment to keep them alive. These are the kind of awful dilemmas which normally face doctors only in times of war.

Whatever the effects of the disease on the health of our citizens – and perhaps the worst effects may yet be avoided by taking sufficiently draconian measures to shut the country off from the rest of the world and potentially embarking on the kind of vigorously enforced quarantine arrangements which seem to have been so successful in a country like Singapore – it is already very clear that the economic consequences will be very serious indeed, for months and potentially for years.

There is a high degree of consensus among economists that this year will see a recession in New Zealand, and almost certainly in much of the rest of the world also. As at time of writing, financial markets are signaling that very clearly. Even with vigorous action by both the Government and the Reserve Bank – almost certainly more vigorous than announced to date – we’re in for a rocky time and almost inevitably severe financial stress for a great many companies, large and small, and of course for their thousands of staff.

But since these events are moving so quickly and what I write will not be published for two more weeks, I’m going to stick with what I suggested I would write about this month, part of a series of major issues which should be relevant to the forthcoming election.

Last month I talked about the ridiculous price of housing in our major cities. This month I want to write about the pathetic rate at which real income per head has grown in New Zealand over many years, indeed over almost the entire period since the Second World War.

At the beginning of the ‘fifties, New Zealand’s real income per head was some 25% above the average in the OECD group of developed countries, so perhaps it’s not surprising that our growth rate that decade was the third lowest in the OECD – when you start ahead of the pack, it’s sometimes hard to hold your relative position as laggards can grow quickly by simply copying the technology developed in more advanced countries.

In the ‘sixties, when our initial income per head was about average for the OECD, our growth rate was the lowest in the OECD.

And from the early ‘seventies until the mid-‘eighties, when our initial income was already some 20% below the OECD average, our growth rate was the second lowest, and only 0.1% above the lowest.

It would be great to think that the reforms of the late ‘eighties and early ‘nineties changed all that, and initially there was a sharp increase in productivity – output per person employed.

But since 1995, our productivity growth – measured as real income per hour worked – has been the seventh lowest among the 36 countries of the OECD. Under both National-led and Labour-led Governments, our productivity growth – and it is productivity growth which alone can drive sustainable improvement in real incomes – has been poor.

Governments have talked up the growth in total income (GDP), boldly noting that our total growth has often been better than that in most other developed countries. But the boast has been totally deceptive because what is relevant to ordinary New Zealanders is not the growth in total income but the growth in real income per head. What has kept our aggregate growth numbers looking semi-respectable is the fact that we’ve often had quite high population growth, driven by a very high rate of immigration.

And this is a serious problem. I well recall hearing one of my Parliamentary colleagues ask Michael Cullen, then the Labour Government’s Minister of Finance, why Australia spent much more on highways than New Zealand did, even allowing for the difference in the population of the two countries. Michael Cullen replied that actually Australia spends more on almost everything than New Zealand does – Australia is a wealthier country than we are. I couldn’t fault his answer.

At about the same time, there was a political row about the fact that Pharmac was not funding Herceptin, an expensive drug that can help with some forms of breast cancer. I’m not proud of the fact that, as Leader of the National Party (then in Opposition of course), I joined in the chorus of those demanding that Pharmac fund that drug, pointing out that Australia already funded it. Again, the harsh reality was that Australia, being a much wealthier country in terms of income per head, could afford to fund all kinds of drugs that New Zealand could not afford to fund – and they could afford to pay their teachers, and their police, and their nurses more for the same reason.

Successive Prime Ministers have promised to fix the problem. I think I remember Jenny Shipley proposing to increase our growth rate to 5% per annum. Helen Clark promised to get New Zealand back into the top half of the OECD.

In 2008, John Key promised to narrow the by-then-enormous gap between living standards in New Zealand and those in Australia by 2025 – and he set up the 2025 Taskforce to advise his Government on how to do that. I was privileged to chair that Taskforce. John Key never discussed the recommendations of the Taskforce with me, did not implement those recommendations, and had no other cunning plan to begin to narrow the gap with Australia – which is virtually unchanged from what it was in 2008 when he became Prime Minister.

If we aspire to retain developed country living standards, so that we can buy the same drugs that richer countries can afford and can pay our teachers and nurses what they can now earn in more affluent countries, we need to see much faster growth in income per head than we’ve seen in many decades.

Unfortunately, there is not the slightest sign that either of our major political parties has any idea how to achieve that – or if they do (and certainly some Members of Parliament definitely do understand the scale of the challenge), they don’t yet have the courage to tell us how they propose to do it.

Dr Don Brash is an economist and former Member of Parliament. He served as the Governor of the Reserve Bank of New Zealand from 1988 to 2002.

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elocal Digital Edition – April 2020 (#229)

elocal Digital Edition
April 2020 (#229)

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