The first Taskforce 2025 report shows that Don Brash and the other members of the review team are out of touch with reality.

They believe that "the market" will close the economic gap between us and Australia yet many of our markets are hopelessly ineffective.

Australia has surged ahead of us in recent years because its markets, particularly the Australian Stock Exchange and other capital markets, are robust and growing while we are struggling because our capital markets are deficient.

One of the best ways to look at this issue is to consider New Zealand as a large field with our prosperity dependent on how we divide up this area and how much is set aside for productive use.

The central argument of the Brash Taskforce, and of most business groups, is that the Government occupies too much of the field. The State is too big and it crowds out the productive sector.

Brash argues that the New Zealand Government occupies 36 per cent of the field because this is the Government expenditure to GDP ratio. The Government spending/GDP ratio in 2004 was 29 per cent.

The Taskforce wants to reduce the size of government and increase the amount of space available for the productive sector. This will be achieved by substantially reducing taxes and government expenditure as well as privatising existing State-owned organisations.

Privatisation is based on the concept that privately owned companies are more innovative and productive than State-owned ones and when an enterprise moves to the private sector it reduces the amount of space the State occupies on our field.

The Taskforce's recommendations are a repeat of the strategies adopted by Finance Minister Roger Douglas in the 1980s. Douglas privatised companies and attempted to cut government expenditure. He also reduced subsidies that had allowed inefficient private sector companies to keep going.

The main problems with this approach were that the new private sector owners milked the privatised assets for their own benefit and Douglas got rid of the old and inefficient companies, particularly manufacturers, but the market failed to create sufficient new and innovative companies to replace them.

The market failed then and it will again because we don't have the seeds to start up new enterprises and the fertilisers to encourage their growth. Thus the empty space vacated by the State and old and inefficient business is not being repopulated by new and enterprising productive organisations.

The seeds and fertilisers of a modern capitalist society are savings, particularly savings channelled into equity investments.

The latest managed funds statistics, which are in the accompanying table, show how Australia has a substantial amount of seeds and fertilisers to spread on its field whereas we have a huge shortage of these essential ingredients for economic growth.

At the end of September Australia had A$1.3 trillion ($1.6 trillion) of managed funds while we had just $61 billion. On a per capita basis this represented A$59,050 in Australia compared with just $14,200 here.

Since the end of 2004, which is the mid-point of a financial year used by Brash to make a number of his transtasman comparisons, the trend has been as follows:

Managed funds in Australia have risen from A$855 billion to A$1.3 trillion.

New Zealand managed funds have increased from $54 billion to just $61 billion.

One of the most potent seeds in an economy is domestic equity and Australians have A$752 billion allocated to this asset class, through either managed funds or held in their own name, compared with just $18 billion in New Zealand.

Since the end of 2004 the amount invested in domestic equities has risen and fallen as follows:

Australians' investment in domestic equities has increased from A$569 billion to $752 billion.

New Zealanders' investment in domestic equities has shrunk from $23 billion to just $18 billion.

Equity fuels an economy and debt is the instrument that leverages this equity. Capital markets, one of the main markets extolled by Don Brash and his Taskforce, do not make a meaningful contribution to the New Zealand economy because there is insufficient equity to make them work.

This is due to a combination of factors including the 1987 sharemarket crash, an inadequate capital markets regulatory regime, our poor savings record and a number of dreadful investor experiences, particularly in the non-listed sector in recent years.

Our deepest capital market, the foreign exchange market, actually works against our productive sector and the economy because our dollar is consistently too high.

One of the biggest problems with our imaginary field is that the residential housing sector is taking up more and more space. There are a number of reasons for this including:

Residential housing is the ideal investment in a country that is short of equity because the purchase of this asset is mainly funded by debt.

New Zealanders feel much safer in bricks and mortar because our capital markets are poorly regulated.

There are a number of tax advantages in relation to housing, mainly in terms of no capital gains tax and the ability to take full advantage of the loss attributing qualifying company regime.

According to the net capital stock figures in the national accounts, which give a rough estimate of how our field is populated in terms of asset values, residential housing now takes up 49 per cent of our space compared with 46 per cent in 2002, 41 per cent in 1992, 37 per cent in 1982 and 35 per cent in 1972.

General government's occupancy has fallen from 37 per cent to 23 per cent over the same period while the productive sector's share of the field has nudged up from 28 per cent to 29 per cent.

In Australia, based on the same net capital stock figures, housing occupies 40 per cent of the country's field, general government 12 per cent and the productive sector 48 per cent.

Thus if we put the two imaginary fields side by side, Australia would be dominated by a vibrant productive sector whereas our field is chock-a-block with residential housing.

The clear reason for this is that our markets, mainly our savings and capital markets, are not working yet Brash and his team believe that these markets will make an important contribution to our economic salvation.

The problem with the Brash Taskforce is that it is dominated by individuals who have an ideological, rather than a practical approach towards economic issues.

They are so ideologically driven that they want to abolish the NZ Superannuation Fund and remove the KiwiSaver subsidies even though these two initiatives make a vital contribution to our tiny equity pool.

The Taskforce believe that "the market" will solve all our problems when it is patently obvious that many of our markets are incapable of fulfilling this role.

This is clear from the managed funds statistics and a number of recent developments.

New Zealanders have 43.5 per cent of their managed funds invested overseas, compared with only 17 per cent by Australians, because we believe that overseas capital markets are safer and offer better opportunities.

In the past two weeks the Synlait Milk and DNZ Property Fund IPOs have been pulled, the former because of a lack of individual investor support and the latter because of concerns over governance and related party transactions.

If our capital markets can't supply the equity to allow innovative companies such as Synlait Milk to grow then "the market" will not solve our economic problems unless it is substantially strengthened.

* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.