Hi,

My impression is that they have confused estimated changes in the level of economic activity and growth in economic activity.

A change in the structure of the tax system may well lead to more people trading, or trading in more efficient ways. For a period of time this would boost the growth rate as the impact of the change flows through the economy. But in the long-run, the growth in the “frontier” of the economy is unlikely to be as heavily influenced by such policies – this has more to do with growth in population, and the rate of technological progress. This is what makes their comments pretty much ridiculous.

Even if I was to be charitable, and state that they didn’t mean the long-term, they are implying that our productivity/income difference with a country like Australia is virtually all down to different tax policies and the RMA. This ignores the literature that discusses our distance to market, small scale, and the fact our GDP is measured a tad differently to Aussie. As a result, even the charitable reading leaves me feeling cold.

Hi Matt – I was wondering if you could elaborate a bit on your criticism of the 5% figure for us laypeople. Is the problem that the results from the academic literature are more ambiguous than ACT have implied or that they have applied the findings incorrectly? Is it actually possible to accurately estimate the effects of the policies they advocate (and if so what would be your guess at the overall impact of these policies?) Thanks

On distance I’m not sure Australia is the same distance from its value chain per se. Their export mix is fairly different to ours after all. However, it is an issue for them – and quite why they are one of the richest countries in the world alludes me, this is a very good question to ask.

WIth regards to the income and productivity gaps – I have a relatively unpopular view. Namely that there are measurement problems. It is hard to look at the fact that the series dropped like a stone in 1984-96 (relative to more gradual declines prior and post this small period), when there was a massive change in both labour market and GDP measurement, and not think that there is something fishy going on.

http://www.productivity.govt.nz/sites/default/files/NZPC-NZ-Australia-productivity-working-paper-2013-02.pdf

Descriptively though, the above piece shows that there are a variety of drivers of what has happened and that the relative productivity gap with Australia has been expanding relatively gradually but persistently. What this means is a hard question. Wrt to taxation, the producitivity commission report did indicate to me that the high level of capital taxation is a contributor – but in a world of increasing specialisation, lack of scale may well come with an increasing penalty!

On distance, Australia and NZ suffer equally from the burden of distance: 10% of GDP.

Auckland is closer to LA than is Sydney or Melbourne. How do the Australians put bread in the shops I do not know? So far away from LA; huge distances between their cities.

Distance explains none of the Trans-Tasman income gap, nor why that gap suddenly emerged between 1974 and 1992, nor why NZ TFP dropped by 30% between 1974 and 1980, nor why the Trans-Tasman income gap stopped widening after 1992.