Key Points:

Australia and New Zealand's response to the worldwide economic downturn reflects our respective national characteristics.

The Australians have adopted a big, bold and aggressive approach to the crisis, whereas we have taken a more cautious and conservative stance.

Only time will tell which is the better response but based on previous major downturns, particularly in the 1930s, the big and bold approach has brought the best results.

The first point to note is that official Government economic forecasts for the March 2009 and March 2010 years, which are compiled by the Treasury, have changed dramatically since December 2007 (see table).

The GDP growth forecast for the March 2009 year has fallen from 2.3 per cent to 0.3 per cent and for the March 2010 year from 2.8 per cent to 0.8 per cent.

The latest forecasts, which were released on December 18 last, are still more optimistic than current predictions by ANZ Bank, Bank of New Zealand and Westpac economists.

Treasury forecasts also look high in relation to actual GDP growth figures for the first three quarters of the 2008 calendar year.

Unemployment is the other important statistic. The Treasury has raised its March 2009-2010 year projection from 3.9 per cent to 6.4 per cent. Once again bank economists have taken a more negative approach, although this week's December 2008 quarter unemployment figures indicate that bank economists may be too pessimistic.

The seasonally adjusted unemployment rate for the December quarter rose to 4.6 per cent from 4.2 per cent in the previous period and compares with a long-term low of just 3.4 per cent in the December 2007 quarter. Although the domestic economy is struggling, an additional 19,400 new jobs were created over the past 12 months but the total number of unemployed increased by 26,600 - from 72,800 to 99,400 - over the same period.

The New Zealand Government's first major response to the current crisis was in the 2008 Budget, which was delivered by former Finance Minister Dr Michael Cullen.

Dr Cullen announced personal tax cuts from October 1, 2008, from April 1, 2010 and from April 1, 2011 which would cost $1.5 billion in the June 2009 year and $2.3 billion, $3.1 billion and $3.8 billion in the following three years. As New Zealand's annual GDP is $179 billion these tax cuts represent about 0.8 per cent of GDP in the June 2009 year.

Shortly after the new Government was elected it replaced the 2010 and 2011 cuts with reductions from April 1, 2009, April 1, 2010 and April 1, 2011.

The net additional cost of these replacement tax cuts is difficult to work out because the new Finance Minister Bill English doesn't want to give the impression that he is fiscally irresponsible so he has netted off cost figures.

Based on his public releases, and after taking into account $3.5 billion of cost savings from changes made to the KiwiSaver scheme and a $1.3 billion reduction in R&D tax credits, the total amount of fiscal stimulus from National's tax cuts appears to be no different from the previous Government's proposals.

Thus the total stimulus from the tax cuts is probably no more than $3.8 billion, or 2.1 per cent of GDP, in the two years ended June 2010.

There is additional fiscal stimulus in the form of infrastructure spending and other programmes but these are not easily quantifiable.

Unfortunately Government financial and economic disclosures are becoming increasingly like finance company prospectus and company annual reports, the more information they contain the less easy they are to understand.

Australian Prime Minister Kevin Rudd announced his first fiscal stimulus in early October. The main components of this A$10.2 billion ($12.9 billion) package were a A$1000 Christmas bonus for each child in low and middle-income families, a $1400 bonus for pensioners living alone and $2100 for pensioner couples. These bonuses were paid on December 8.

The impact has been immediate as indicated by Australian December retail trade data released this week. Total seasonally adjusted sales for the month were 3.8 per cent higher than November, the biggest monthly gain since June 2000.

This is in complete contrast to New Zealand as reflected by dismal sales figures released by Briscoe and Hallenstein Glasson this week.

On Tuesday the Australian Government announced another major fiscal stimulus, this time for A$41.5 billion, with the three major items being A$14.7 billion for school buildings, A$12.7 billion in the form of one off payments to families and farmers and A$6.6 billion for public housing.

Most of the one-off bonuses to families and farmers will be paid in the next few months with Government officials estimating that 8.8 million households will receive some kind of benefit.

In the two years to June 2010 Australian fiscal stimulus will comprise the A$10.2 billion announced in October and A$30.2 billion of the A$41.5 billion announced this week.

That is A$40.4 billion or 3.5 per cent of the Australian GDP compared with our fiscal stimulus of A$3.8 billion or 2.1 per cent of GDP over the same period.

These may not be the final figures but based on current information our transtasman neighbours are planning to take the direct and aggressive route to the try line while we have a slow moving maul with little idea who is carrying the ball and which way the maul will move next. There are two other notable features of the Australian approach.

The Australian Government is distributing one-off cash bonuses. Many economists believe that this has a more positive impact in the current environment than $10-a-week tax cuts or infrastructure projects that may take years to get off the ground.

Australian initiatives are mainly directed at low-income individuals and families because they are far more likely to spend additional income.

By contrast, the National Government's revised tax cuts are more beneficial to the well-off who have a greater propensity to save rather than spend.

These fiscal stimulus programmes are extremely important because the international economic situation continues to deteriorate, only governments have the resources to lead any meaningful rescue and the main lesson from the 1930s is that governments have to take bold initiatives when their economy is faced with a serious economic downturn.

Sweden, which is generally considered to have come out of the 1930s depression more quickly and in better shape than most other countries, is a good example of proactive economic management.

Swedish unemployment rose from around 12 per cent in 1930 to 34 per cent in 1934. The new Social Democratic Government introduced a number of radical policies from 1933 onwards, including a reduction in taxes for the lower paid, an increase in the minimum wage, other assistance to the poor and major infrastructure projects.

This led to an immediate revival of the Swedish economy, with exports exceeding pre-depression levels by 1935, real wages and production output achieving the same result by 1936 and unemployment almost totally disappearing by the end of the decade.

The full "Swedish model" - which had the Government playing a major role in the economy - may not be appropriate for New Zealand but the Australian Government's approach to the current downturn makes our response to the economic crisis look extremely cautious and conservative.

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