Catching up with Australia

We all carry these little ready reckoners in our heads to put most things in context. Sometimes, though, we don’t have the reckoners to hand when we need them. The other day, when I was browsing through the stuff on the 2025 Taskforce website — the group led by Don Brash that aims to get us back to level pegging with Australia in terms of income per head — I quickly realised I had no ready reckoner for income per head. I had only the foggiest notion of what New Zealand’s track record might look like, let alone how other countries might have been doing. Is 1% growth in income per head good, bad or indifferent? I didn’t have any clear view. I had a vague image of New Zealand being rather behind the international pack, but that was it.

So, to equip both you and me with a quick gauge of what good growth in income per head looks like, here’s what I’ve learned since.

First, while we all can tell whether a GDP growth number for the whole economy is good or bad, it’s much less clear on a per capita basis (which is the important thing as far as measuring living standards goes). In recent years, the population has been growing by around 35,000 a year through ‘natural increase’ (births less deaths), plus or minus net migration. We gained 38,000 people in 2002; we lost 11,000 people in 2000. Averaging things out over the past 15 years, the population has grown by 1.2% a year. So next time you see GDP growth, take off 1.2% to see if we’ve actually made any progress in terms of income per head.

Second, to get a sighter on whether the number you’ve now got is better or worse than usual, or to compare with other countries, our long run performance is growth in income per head of 1.4% per year. And I mean really long run: that number spans 1950 to 2008, and comes from the excellent ‘Total Economy Database’ maintained by the Conference Board and the University of Groningen’s Growth and Development Centre.

As it happens, my vague impression of us being relatively poor at growing income per head was correct. Among developed economies, we were actually bottom of the class. The next nearest was Switzerland with 1.8%. Australia, the Brits, the US, all had 2.1% to 2.2%. And Asia, as you might have guessed, did a whole order of magnitude better again — Hong Kong, Japan and Singapore around the 4.5% mark, South Korea and Taiwan around 5.5%.

You might feel that 1.4% a year compared with Australia’s 2.1% isn’t such a big deal. But over time it compounds heavily. At those rates it would take Australia 34 years to double its standard of living, but it would take us 51.

Our weak long term performance is dragged down by one period in particular: the early 70s through the early 90s, when the loss of the UK market, the oil price shocks, our inept policy responses, and the cost of fixing things to put us back on track took a large toll. Between 1973 and 1992, the period of the shocks and the reforms, our growth in income per head was only 0.5% a year. Australia and Britain’s was 1.6% a year.

Arguably, we have got our act together in recent years. Between 1992 and 2008 we’ve been doing 2% a year. That’s still not quite as good as Australia (2.4%) but it’s getting within cooee. Of course, to catch someone you’re going to have to run faster than them, not just match their pace. Currently we’re running at around 70% of Australia's income per head; a gap that big is going to take a sustained period of outperformance to close. At a minimum, though, the gap isn’t widening as fast as it was, and we’re actually gaining on some other developed countries. Our recent performance puts us on roughly level pegging with Canada (2.1%) and the US (1.9%) and better than a lot of continental Europe (France and Germany did 1.3% and 1.4% respectively, Italy 1.1%).

When you spend a while with the likes of these GDP databases one other lesson leaps out at you: how much policy matters. We lost the plot in the 70s and early 80s and it cost us a lot to fix. When you look more widely, you find that similarly placed economies have made different policy choices, and they have had massive consequences for good or ill. It means that the higher living standards in Australia are not predetermined, but also that if we’re going to catch Australia our policy choices are going to have to be better than theirs.

A free disclosure statement is available on request