Published in the DominionPost on 29 May 2007

In its early days, the Labour led government talked about leading New Zealand back to the top half of the OECD in living standards.

How many times was the term 'living standards' (or standard of living) mentioned in Dr Cullen's budget? Not once.

The government used to talk about the innovation society and the knowledge economy. Innovation gets two mentions, both of them innocuous. The 'knowledge economy' is not mentioned.

"Prosperity"? One reference - to KiwiSaver and future retirees.

Growth is used seven times, but never given as a goal or objective.

Last year Ministers were talking up the new agenda of economic transformation. SOEs Minister Trevor Mallard was proposing that the government's own businesses could lead the way.

Now boosting savings is being touted as the way forward, and much of the budget publicity and analysis has centered on Kiwisaver and compulsory funding.

Certainly saving more will cut consumption and boost investment, but any reduction in demand for imports is not going to remove the current account deficit of $14.4 billion (December 2006 figures) very quickly.

More savings will also boost the pool of investment capital available. But that won't happen quickly either. Contributions to Kiwisaver start at one percent and move to a top rate of four percent, while Australians are paying nine percent already.

So where are the policies that would take us forward to a better and more prosperous future?

Is moving New Zealand's standard of living back into the top half of the OECD even a goal of government policy any longer? Arguably not. The phrase was not mentioned in Dr Cullen's budget.

"In 1999, we were 20th in the OECD. Now we are 22nd, competing with the likes of Portugal, Hungary and the Czech Republic," National's leader John Key told an audience in the Hutt Valley last week.

Thanks to the Treasury we know the cost of our failure to keep up with Australia. The difference in earnings between the average Kiwi worker and the average Australian worker is at least $12 500 a year.

In a speech to manufacturers in Canterbury in 2004 the head of the Treasury, John Whitehead said, "New Zealand and Australia were level-pegging economically speaking in the mid 1970s. If our annual GDP per capita growth had been one percent better than it was, we would now be better off than Australia.

"To cut it another way: if we had only performed the same as Australia since then, the average New Zealander would now have about another 240 dollars per week in their pocket."

Over the period of the Labour government, "wages have risen twice as fast in Australia compared with New Zealand, and Australia has cut taxes regularly over the last nine years. The real wage differential, which was 20% in 1999, is now 35%, Mr Key told his audience.

Each week 615 people are leaving to live overseas - mainly to Australia - and fewer are returning, according to the Department of Labour's report on permanent and long term migration issued last week. The figure of 615 is up from a weekly average of 578 last year.

The recent OECD report on New Zealand pinpointed "a large external deficit, very low household saving and still-strong inflation pressures indicat(ing) an unbalanced growth pattern."

New Zealand's rate of productivity growth is one of the worst in the OECD, a performance labeled 'lacklustre' in the latest report.

Dr Cullen mentions 'productivity' five times. A total of $155 million is allocated in two areas for market development and R&D initiatives. There's nothing assigned or signaled to improve labour productivity, even though this was the one thing that all the political parties and all the business representatives could agree on at pre-election policy conference convened by Business New Zealand in 2005.

Another issue that the budget does not fully address is the housing market. Prices are 17% higher than they would otherwise be because high marginal rates of personal income tax are encouraging middle class investors to buy up rental properties, according to the Westpac Bank.

Although the rents don't cover outgoings, the loss can be deducted from other income. The bank's economists say both the buyer and the tenant "gain at the expense of the taxman."

Dr Cullen accepts that there is a link between the tax system and housing prices, but he says there is no political consensus on what to do about it. However IRD is getting more money to police the rules more vigourously.