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National Affairs

The land of the long white mirage


21 August 2013

Tony Abbott and Joe Hockey think that New Zealand’s economic policies have worked well. They’re wrong, writes John Quiggin


Surplus at a cost: shadow treasurer Joe Hockey and opposition leader Tony Abbott campaigning in Launceston on 15 August.
Alan Porritt/ AAP

Surplus at a cost: shadow treasurer Joe Hockey and opposition leader Tony Abbott campaigning in Launceston on 15 August.
Alan Porritt/ AAP

IN AN election campaign hinging on economic issues, the Coalition has to deal with the inconvenient fact that, despite Labor’s “irresponsible” fiscal policies, on most measures the Australian economy is the strongest in the developed world.

The Coalition has argued that Australia’s success under Labor is primarily due to luck, most notably the continued strength of the mining boom. But this leaves it open to an obvious question. When the boom is over, and the next global recession comes, what would an Abbott government do differently? The answer, it seems, is that it would emulate New Zealand.

Coalition leaders, and other opponents of fiscal stimulus, frequently point to the fact that New Zealand undertook much less fiscal stimulus during the GFC than Australia did and is projected to return to surplus much earlier. In 2010, for example, Tony Abbott said:

There are other countries which have chosen a different path and there’s no evidence that their response has been any less effective than ours. For instance, in New Zealand they have tried to reform their way through the global financial crisis under the new government’s leadership and they seem to be doing pretty well.

More recently, responding to the 2013–14 budget, shadow treasurer Joe Hockey commented:

How can the Australian treasurer insist that the government’s budget of deficits, higher unemployment and slower economic growth is unavoidable when New Zealand has been able to deliver an earlier surplus without a major resources industry and a strong New Zealand dollar?

Hockey’s statement implies, entirely falsely, that New Zealand has performed better on the relevant measures of unemployment and economic growth. In fact, as will be shown below, New Zealand’s pursuit of budget surplus has come at the expense of employment and growth.

Abbott’s and Hockey’s remarks reflect a consistent pattern over the past thirty years. During most of this period New Zealand has favoured free-market economic policies. Advocates of these policies have consistently predicted superior economic outcomes. In the early 1990s, for example, the late P.P. McGuinness suggested that New Zealand “shows every sign of being on the brink of overtaking Australia perhaps before the centenary of Federation in terms of living standards and economic performance.”

The reality has been entirely different. For most of the twentieth century, income per person in New Zealand grew in parallel with Australia. According to the Penn World Tables, income per person in New Zealand was within 10 per cent of the Australian level for most of the period from 1950 to 1970. Since the 1970s, New Zealand has declined greatly relative to Australia. On the latest Penn figures, income per person is about 70 per cent of the Australian level.

In recent decades the free-market managers of the NZ economy have made a series of disastrous errors in macroeconomic policy, with the result that since 1984 New Zealand has had five recessions while Australia has only had one.

The key periods are:

• The 1980s (Rogernomics) period, when New Zealand undertook radical microeconomic reform and pursued classical macroeconomic policies, then referred to as monetarism, with the aim of reducing inflation. By contrast, for most of the 1980s, Australian policy was centred on the Accord between the Labor government and the unions. In New Zealand, the result was a pair of recessions encompassing most of the period from 1987 to 1991. Australia’s 1989–91 recession was not as severe.

• The 1997 Asian financial crisis, when the Reserve Bank of New Zealand resisted depreciating the NZ dollar on the view that this would be inflationary. The Australian dollar was allowed to fall freely, matching the depreciation of our Asian trading partners.

• The GFC, during which the Australian government implemented a large and sustained stimulus while New Zealand undertook a limited stimulus and sought a more rapid return to surplus.

The results speak for themselves. Whereas Australia has consistently outperformed the OECD average over the past thirty years, New Zealand’s rate of economic growth has been among the lowest in the developed world. NZ income per person is now 30 per cent below the Australian level. When two countries have access to the same technology, comparable education systems, free labour and capital movements and so on, standard economic theory suggests that any initial differences in income levels should gradually even out. Instead, the gap between Australia and New Zealand has widened since the GFC.

A variety of explanations, or excuses, have been offered for New Zealand’s sharp deterioration in economic performance. Among the excuses, the most popular is to claim that New Zealand’s problems can be explained by the loss of agricultural markets arising from Britain’s entry into the (then) European Economic Community. Along with the oil shock of 1973, and the immediate macro responses (a failed attempt by Labour to stave off adjustment, followed by a sharp contraction under the Muldoon National government), this helps to explain New Zealand’s relative decline up to 1984, when the Lange government started the reform process.

But this explanation fails for at least three reasons:

• The shock wasn’t nearly big enough to explain a sustained 30 per cent divergence in GDP per person. Agriculture was only about 12 per cent of GDP at the start of the process, and is only about 8 per cent now.

• The loss of market access was temporary, and the restoration of access coincided with the reform period. The EU butter mountain reached its maximum height in 1986 and has since disappeared. New Zealand is now the main exporter of lamb to the European Union as a whole, not just Britain, and in addition has an export wine industry that didn’t exist in 1970.

• Even the most sclerotic economy shouldn’t take forty years to adjust to a terms-of-trade shock, and the whole point of the reforms was to make the economy flexible enough to deal with such challenges.

Macroeconomic mistakes cannot explain the entire deterioration in New Zealand’s relative performance, but the gap is too large to be explained by terms-of-trade effects, or by mismanaged micreconomic policies. Anyone who could seriously propose New Zealand as an economic model should not be entrusted with the management of our economy. •

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