Dialogue: Backdrops differ between Budgets

By DAVID PLANK*

It can't be often that a New Zealand Budget is delivered just days after the Australian Budget.

Certainly, I can't recall such an occasion, though admittedly, it is not something I have focused on before.

Now, however, I'm in the position of being one of the few people in Sydney who is even aware the New Zealand Budget was delivered this week.

In looking at the two documents, some interesting thoughts come immediately to mind.

First, there is a sharp contrast in the political backdrop. The Labour/Alliance Budget is the second in a three-year term of a Government riding high in the polls. There is little political need for the Government to parcel out a bunch of goodies. For the Australian coalition, the focus is quite different.

With the Government facing an election before the end of the year and doing badly in the polls, the political imperative is to provide the means to regain the initiative.

Thus, the Australian Budget focuses on delivering a range of benefits to some tightly targeted constituencies: small business, the elderly, self-funded retirees and so forth.

It seems to be without any medium-term vision.

Second, the link between the fiscal and political strategy is almost completely reversed in New Zealand compared to Australia.

The Labour/Alliance Government delivered the gains to its supporters in the first year, leaving very little in the kitty for the next two years.

This has left Dr Cullen with an increasingly tight fiscal straitjacket for the rest of the Government's term. Commentators are rightly sceptical of his ability to remain confined within this straitjacket.

Indeed, the fiscal cap is already to starting to rise. In contrast, the Howard/Costello Australian Government took the fiscally tough decisions in its first year, 1996.

The fiscal bounty delivered by that Budget has enabled the increasingly expansionary fiscal policy settings of the last few years.

Third, in terms of reporting the surplus, the Australian Government has been able to get away a degree of budget trickery that would be impossible in New Zealand.

The cash surplus forecast by Costello for the 2001-02 fiscal year is boosted by increased dividends from the RBA, asset sales and so forth.

If Costello had been reporting the fiscal position on the same basis as Dr Cullen, he would have forecast a deficit for 2001-02, rather than a surplus.

The Australian response to this would rightfully be that if they imposed the same sort of tax burden on Australians that the New Zealand Government imposes on Kiwis, then their surplus position would be very strong indeed.

Costello might also point out that the NZ Government will actually be increasing the dollar amount of government debt over the next few years, while the amount of Commonwealth bonds will continue to fall.

Australia is also reducing tax rates, with the company tax rate falling to 30 per cent this year. In contrast, the Labour/Alliance Government has no plans to reduce tax rates (they have actually gone up) and, instead, is planning on diverting large amounts of money into a savings fund.

I still fail to see any economic merit in the Government building up a saving fund as against repaying debt and/or reducing taxes.

The fiscal policy of this Government has never been particularly focused on growing the size of the cake rather than redistributing it.

It is somewhat ironic that what may be Costello's last Budget can be criticised from the same angle.

* David Plank is Fixed Income Strategist with Deutsche Bank

www.nzherald.co.nz/budget

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