Transtasman comparisons off the rugby field

By DAVID PLANK*

This will be a year in which clashes between New Zealand and Australia are foremost in the minds of many of us.

I am, of course, talking mainly about the clashes on the rugby field (including Saturday night at Eden Park). But with both governments publishing budgets within days of each other, financial market commentators will be interested in the fiscal clashes.

Firstly, it should be acknowledged that the fiscal positions of both governments look very strong. Both are running fiscal surpluses and debt levels are low. In the troubling global economic environment it should be comforting that both governments appear to have considerable fiscal policy flexibility should it be required.

Turning to the economic and fiscal forecasts, New Zealand is expected to grow more slowly than Australia over the next few years. GDP is forecast by the New Zealand Treasury to grow 2.1 per cent in 2003/04 and 3.5 per cent in 2004/05 (June years). This compares with forecast Australian growth of 3.25 per cent and 3.5 per cent for those two years respectively. Despite NZ's slower overall growth, however, Michael Cullen expects to deliver bigger surpluses than Peter Costello.

Cullen is forecasting surpluses of 2.8 per cent and 3.2 per cent of GDP in 2003/04 and 2004/05 respectively against Costello's forecast for a surplus of 0.1 per cent in 2003/04 and a deficit of 0.1 per cent in 2004/05.

I don't want to get too caught up in comparing forecasts, however. Budgets should be more about the medium-term fiscal and economic strategy than the forecasts, especially since the forecasts will inevitably be revised over the next few years. In contrast, the overall fiscal and economic strategy should be more permanent.

It appears that a considerable divergence of approach to these matters is evolving. Having reached a debt level the Australian Government sees as low enough, the focus in Canberra has swung from reducing debt to reducing the size of the surplus. This switch has enabled Costello to deliver modest personal income tax cuts in Tuesday's Budget.

While the cuts are small, they represent an important signal about the direction of policy. Namely, the Australian Government will look to reduce tax rather than continue to run large surpluses. Indeed, the cash surpluses are so small that there must be a chance they disappear over the next year or two and even move into deficit.

Is this a problem? No, in my view, given the very small debt position of the Australian Government. Deficits are an inevitable part of a strategy that attempts to run broadly balanced budgets.

The New Zealand Government appears to have a different focus. Tax cuts do not rate a mention in its Budget, even though a large surplus is being delivered as growth slows.

Part of the reason is the Government's Superannuation Fund. As well, New Zealand's debt position is not as healthy as Australia's, so perhaps that demands a more prudent approach. But with such large forecast surpluses there is scope for more imagination on the fiscal front.

The Budget suggests the Government wishes to think of ways to spend these funds itself rather than return them to households. This is to be expected given the ideological foundation of the Government, though the Australian Labor Party seems to have no hang-ups about calling for tax cuts.

* David Plank is Fixed Interest Strategist, Deutsche Bank NZ