Don Brash. Photo / Herald on Sunday

Don Brash. Photo / Herald on Sunday

The central theme of the Brash report on catching up with Australia is that the Government should get out of the way and release the power of the market.

The 147-page report says the Government has a crucial role in setting "the rules of the game" - the laws, institutions and policies within which business can thrive.

But it says the New Zealand Government spends too much, owns too much of the economic cake and interferes too much with private decisions to invest capital, hire workers and start businesses.

The argument is not easy, because the report acknowledges that "New Zealand's current level of Government spending appears not to be too different from that of the average OECD country", and that New Zealand actually rates better than Australia on the world "economic freedom" index.

But it argues that we have slipped so far down the income ranks that we don't have the luxury that a rich country like Sweden has to spend much of its income on public services, or that Australia has to adopt regulatory practices that are "well short of world's best practice".

"Other than Argentina and Uruguay, probably no advanced country has tumbled further down the international league tables in the past 100 years," it says.

"Evidence suggests that countries that increase the size of government as they decline economically will struggle to reverse the economic decline.

"Successful fast economic transformations - themselves relatively few in number - have multiple dimensions, but typically one part of the story is either a low or substantially shrinking size of the state."

It cites Singapore and Hong Kong as success stories that had low state spending throughout their transition, and Ireland and Slovakia as cases where state spending was cut.

In New Zealand, the report says core state spending rose from 29 per cent of national income in 2004 to 36 per cent this year, mainly because of the former Labour Government's policies such as higher family support payments, childcare subsidies, cheaper doctors' fees, KiwiSaver and the scrapping of interest on student loans.

It says spending should be cut back to 29 per cent of national income in the next three years, for four reasons:

First, because taxes discourage people from working and investing.

Second, because state spending is often inefficient because it is "not subject to the same rigorous scrutiny that people and firms give to spending their own money".