How Do We Close The Gap?

The New Zealand Institute has said that (shock! gasp!) we’re not doing enough to close the gap with Australia.

But the radical policies pursued by Don Brash are not the answer. The 2025 Taskforce thinks the way to increase productivity is to slash taxes and cut government spending across the board.

The NZ Institute’s Rick Boven says the Government’s effort to identify policy changes “lacks rigor as a strategy development process”. That’s polite language for “there’s not a shred of evidence anything they are proposing will make a blind bit of difference”. He points to the fact that government spending as a percentage of GDP is actually higher in Australia (19% as opposed to our 17%). And OECD data shows there is a low correlation of total taxes as a proportion of GDP with per-capita GDP growth.

Boven says tax breaks that are focused on encouraging innovation (an example would be the R&D tax credit scrapped by National) can be useful. But the answer is not just to slash taxes and walk away in the hope that something will magically spring up.

So what should we be doing? Boven is right that we should be focusing on innovation, and on finding ways to commercialise our inventions. I have posted a number of articles on why we are so lousy at commercialising innovation. Much of it resides in “national culture” issues and the number-8 wire myth. But we’re also woefully undercapitalised. There isn’t the money to invest in new ventures and new technologies. Most people with cash will put it into property, because of the tax benefits, and because real estate is seen as a safe investment. The finance company fiasco has not helped investor confidence either. Perhaps investor confidence would return if a few of the shysters running those companies went to prison for long stretches.

The only way we will close the gap with Australia (assuming we don’t discover massive gold and diamond reserves underneath the conservation estate) is by improving worker productivity. Slashing taxes won’t make a difference unless tax cuts are accompanied by incentives for business owners to put their money into ways to improve productivity. Here are a few measures that might help:

• Reintroduce the R&D tax credit.
• Continue to focus on discouraging real estate speculation. The Government is making cautious moves in this direction, but has been relatively timid to date.
• Bring new regulation to the finance markets, to encourage investor confidence, make it harder for the shysters to thrive, and make it easier for small start-ups to get cash in. I’m not even sure what needs to be done here, but we appear to have the balance all wrong. When a finance company can rip investors off and the directors just walk away, while a small start-up that wants to raise a modest amount is burdened with a lot of securities regulation, something has to be fixed.
• Introduce incentives to save, and maybe even introduce a compulsory savings scheme. These issues aren’t even on the radar. Why isn’t there a debate on these issues?
• Australia effectively has only one CRI – the CSIRO. We have eight. Do we need so many? They compete against each other for funding. The Government likes competition, but if scientists are so busy competing for resources, their output may be adversely affected. There may also be potential benefits in centralising the commercialisation activities of the CRIs into one department.

There’s nothing particularly radical in the above list, and Australia has already done many of these things. If we want to have the income Australians have we could start by looking at what they have done.

Is enough being done? Some tentative moves are being made towards reforming the CRI sector and discouraging real estate investment, but they are feeble ones, and the appointment of Don Brash to the 2025 Taskforce (even if the Government has already ruled out many of his proposals) suggests this regime lacks the imagination necessary to make significant changes.