In last Thursday’s post, we established that in terms of buying power in New Zealand dollars, Australians were able to spend about $13,000 a year more than New Zealanders in 2005. However, just over half of that went either into capital investment or on government spending on things like defence and R & D. That means it didn’t flow through directly to individual households.

So in terms of actual consumption by households, the gap between New Zealand and Australia was just under $6,000 per person a year. That’s 22% more spending by the average Australian compared to the average New Zealander.

To turn that into terms that are even easier to relate to, that comes to an extra $113 a week for each person. In this post, I’ll have a look at what Australians did with their extra $113 a week.

As you’ll see, it didn’t primarily go on the sort of consumer products that one might have expected. In fact, a lot of it went into health and education. This raises some different, and in some ways more troubling, issues for New Zealand as we contemplate what we’re ‘missing out on’ and how to achieve Australian levels of prosperity.

First, a few points to note about this analysis:

• It looks at what’s called ‘Actual Individual Consumption’, which puts together what households spend directly on themselves with what the government spends on their own behalf on things like health and education;
• It is expressed in buying power in New Zealand dollars — this involves turning Australian currency into NZ dollars but also adjusting for the different price levels in the two countries (the price levels for Actual Individual Consumption are estimated to be approximately the same overall, but they are somewhat different for specific spending areas); and
• It is based on the OECD’s most recent Purchasing Power Parity Benchmark results so the data is all from 2005.

On that basis, then, let’s have a look at where the proceeds of Australia’s greater prosperity were going.

As you can see from the graph above, they didn’t really go into food, drink, restaurants, hotels, clothing and footwear. Between them, these only accounted for $6 or 5% of the gap. Specifically:

• Australians spent nearly $3 a week less in buying power terms on food and non-alcoholic beverages than AustraliansNew Zealanders;
• They spent almost the same amount on alcohol and tobacco (in nominal terms, Australians did actually spend slightly more, but that’s because alcohol and tobacco is slightly more expensive there on average);
• Australians spend about $4 a week (12%) more on restaurants and hotels in buying power terms; and
• They spend nearly $5 a week more on clothing and footwear, which is a not-inconsiderable 25% more than New Zealanders (it worth noting that in nominal terms they spent only $NZ1 a week more — in other words, most of this gain comes from clothing and footwear being on average 17% less expensive in Australia).

There are a few nice advantages there, but they don’t really amount to a vast difference between the two countries. Let’s therefore look at another four categories:

Areas like household goods, recreation and transport account for $16 a week, a somewhat larger, though still modest, portion of the gap (14%). Specifically:

• Australians spent nearly $7.50 a week more on household furnishings, equipment and maintenance, which is a significant 26% difference from New Zealanders’ spending;
• They spent $1 a week more on communication; and
• Australians spent around $3.50 a week more extra on each of recreation and culture and transport (in both cases, relatively modest differences of 6% more than New Zealanders).

Now let’s turn to two somewhat difficult-to-interpret categories that between them account for just over a quarter of the gap:

Miscellaneous goods and services accounted for nearly $19 of the gap. This category comprises: personal care; prostitution; personal effects not elsewhere classified; social protection; insurance; financial services not elsewhere classified; and other services not elsewhere classified. Clearly, it will be important to get a better understanding of how these various components contribute to that $19 difference.

Net purchases abroad is for both countries a negative item. This category is an adjustment item to remove the consumption in the other categories that was contributed by non-residents making purchases in the domestic market, and to add in the purchases of goods and services that resident households made while travelling abroad. Apparently, for both Australia and New Zealand the former was larger than the latter, but this more the case in New Zealand (to the scale of $12 a week). It will be a matter of interest to discover whether this primarily reflects more tourist purchases in New Zealand or more purchases by Australians travelling overseas.

Combined, all of the ten categories outlined so far accounted for less than half of the gap. Where then is the majority of it coming from? It is from these three categories:

Accommodation, health and education between them account for $61 or 54% of the gap between what New Zealanders spent each week and what Australians spent.

It is worth reiterating two points here. Firstly, all of these categories compare the buying power of Australians to the buying power of New Zealanders, so (unless there is some flaw in the ‘purchasing power parity’ indexation) these differences do not reflect these areas of expenditure being more expensive in Australia than New Zealand.

Secondly, they reflect spending by both government and households in each of these categories — for instance, in the tertiary education area both government tuition subsidies and student tuition fees would be included. So the balance between public and private spending in the two countries makes no difference to these figures.

Looking at each of these three categories in turn:

• Australians spent a bit over $25 a week more on housing, water, electricity, gas and other fuels than New Zealanders — this is a difference of 27%. As noted above, this is not because this category of expenditure is more expensive in Australia (in fact it is 5% cheaper on average) — instead it reflects Australians using more energy and/or having more or better housing.
• They spent about $14 a week more on health — apparently health prices are higher in Australia than they are here, but that has been factored in, and with that taken into account Australians spent 26% more per person on health (without the adjustment, it’s 40% more).
• Australian spent just over $21 more on education than New Zealanders, which is a massive 55% difference in per person spending. Again, this does not reflect price differences (education price levels are about the same in both countries).

I would argue that these are unexpected and significant results. We have been talking a lot in this country about Australia being more prosperous than us, yet it turns out that for the most part  Australians are not making use of their additional income for what we’d generally think of as ‘consumer purchases’.

Yes, they do spend a bit more than us on clothes and household furnishings and maybe overseas holidays. But as we saw last post, nearly half of the overall gap is being ploughed back into capital investment and now we see that about a third of the ‘consumption’ portion is going on what appears to be more and/or better health and education.

There is still quite a bit of further investigation needed in this project. For instance, what’s the balance between housing and energy, and does this imply higher rates of homeownership? And what’s the balance between public and private health and education, and between different areas within these categories (e.g. early childhood, school, tertiary)?

Nevertheless, I think we can draw some tentative conclusions.

The good news is that our relative lack of prosperity isn’t impacting that heavily on our consumer lifestyle yet, at least not compared to Australia.

But the bad news is that we’re investing less on our health, on our education and on our physical infrastructure.

And the medium and long-term impacts of that for our comparative wellbeing and prosperity are likely to be far more significant than if Australia was simply using its additional income to go shopping.

Source: OECD data

This post begins to report on some analysis I’ve been undertaking recently on the nature of the gap between New Zealand and Australia.

A key initial task of the Progressive Path to Prosperity topic in Policy Progress’s work programme is Identifying the Problem. I don’t want us to just bemoan things like New Zealand’s low rate of productivity growth and declining per capita GDP. We should aim to understand the nature and scale of the problem, and what it means in practical terms for New Zealanders. This has been a recurring theme of my posts on this topic to date.

One particular naïve question I’ve been asking in this regard is whether we’re really as poor as the statistics from places like the OECD seem to indicate.

Or to put it another way: what are the things that fall within the gap? By “the gap” I mean the difference in GDP per capita between ourselves and rich countries. What is it that their additional productiveness affords them that we don’t have? Because at a casual glance it’s not obvious that the actual standard of living in New Zealand is all that different from countries like Australia and the United Kingdom.

So, I’ve decided to make a study of this.

The results so far suggest that this could be a useful avenue to pursue, and might be able to form the centre-piece for a report on ‘identifying the problem’. This is likely to be the first Policy Progress report on a work progamme topic. (There are one or two commissioned reports that might come out first, however.)

The approach I’ve taken is to use detailed SourceOECD data on the 2005 Purchasing Power Parity Benchmark results to disaggregate the components of what’s known as ‘final expenditure’ — in other words, what a country spends its income on.

I’ve started with Australia, because our societies are quite similar and because a preoccupation with ‘catching Australia’ in terms of economic prosperity has become something of a national pastime.

As you can see in the graph at the top of this post, New Zealand’s GDP per capita at the time this data was collected was $37,700. Australia’s GDP per capita converted into New Zealand dollars was $49,400. However, once exchange rates were taken into account, price levels in New Zealand were on average slightly higher than in Australia, so the buying power of Australia’s GDP per capita was slightly higher than that at $NZ50,300.

That means the effective gap between the two countries was $12,600.

Next, let’s look at what additional expenditure that gap represents. In order to do that, we’ll have to disaggregate into categories of final expenditure. Each of these has its own price level relativity which, because the OECD purchasing power parity method is not exactly additive, recalculates the total gap to $13,000 (the difference does not have a substantial impact on the findings however).

The main categories of final expenditure used in the OECD’s System of National Accounts are:

• Actual individual consumption: this includes not only the actual amount people spend on goods and serrvices themselves (“household consumption expenditure”) but also government spending on things that directly benefit households, such as healthcare and education (“individual consumption of general government”);
• Collective consumption: this covers government activities that are not attributable uniquely to households, including expenditure on Parliaments, foreign affairs, defence, environmental protection and government R&D activities;
• Gross fixed capital formation: this is investment by businesses, households (primarily the purchase of dwellings) and government (e.g. in roading);
• Change in stocks: the difference between additions to and withdrawals from inventories;
• Net exports: exports minus imports.

The graph below shows the way in which the gap between Australia and New Zealand is composed of these categories.

Source: OECD data

The last two categories are inconsequential. Of the others, the smallest is “collective consumption”. Nevertheless, this still accounts for just over a tenth of the gap in apparent ‘prosperity’ between Australia and New Zealand. Moreover, it reflects Australia spending 54% more per capita in buying power terms on “collective consumption” than New Zealand does. Where that additional spending is going will require further investigation, but it is likely that defence will be an important component.

Perhaps the most striking feature of the composition of the gap is that 45%, almost half, of it goes on “gross fixed capital formation”. This reflects Australia spending 66% more per capita in buying power terms on investment than New Zealand does. It also reflects a recurring theme about New Zealand’s capital stock and GFCF being much lower than other countries. And, of course, this can be a self-reinforcing cycle, as greater investment tends to lead to greater productivity, which in turn produces more income, some of which can then be invested, and so on.

“Actual individual consumption” also accounts for 45% of the gap, but in this case it reflects only a 22% higher amount per capita in Australia than in New Zealand.

So, while we might have imagined that Australia’s greater wealth as a country manifests itself in more luxury and leisure, to a considerable extent it is actually being invested to create further productive capacity (and potentially increase the gap in the future).

Nevertheless, there is still a considerable ‘consumption dividend’, amounting to nearly $NZ6,000 per person per year. In Tuesday’s post, I’ll discuss what this is being spent on. (The answers may surprise you.)