If Australia goes soft on budget we will suffer too

New Zealand sails in Australia's wind. Local economists, assessing what the change of government in Canberra might mean for New Zealand, looked first at Tony Abbott's budget policy. ANZ's Cameron Bagrie thought he was likely to play the austerity card which could crimp Australia's growth in the short term but produce better growth in the long run. BNZ's Stephen Toplis agreed, saying tighter spending could be a "headwind" for a while but beneficial eventually.

Unfortunately, they are wrong. The outgoing Prime Minister Kevin Rudd made a fearful hue and cry in the election campaign about the spending cuts Mr Abbott supposedly had in mind. But it suited Mr Rudd's campaign to suppose so. In fact, as an Australian commentator pointed out on our pages on Wednesday, Mr Abbott's deficit reduction target is practically meaningless.

It amounts to just A$1.5 billion a year in a budget of A$400 billion currently running a deficit of A$30 billion. As Geoffrey Garrett, dean of business at New South Wales University, said, a $1.5 billion cut in a deficit of $30 billion is in the region of a rounding error.

He pointed out that Mr Abbott's actual proposals will do exactly the reverse. A paid parental leave scheme he promised, in the hope of improving his vote among women, will be very expensive. He matched Labor's promises on education and disability care. He is committed to cutting company tax and repealing carbon and mining taxes. All of those would raise the deficit.


The little that most people outside Australia know of Mr Abbott is based on his reputation as a political hard man, an "attack dog" before he became opposition leader, a climate change sceptic, insensitive and conservative on social issues. All of these he may be, but it does not necessarily follow that he will be hard-headed in economic policy.

By all accounts he is not. He is in no hurry to restore a budget surplus while Australia is struggling in its own headwinds from China. The main market for its minerals is no longer building so much infrastructure and consuming so much coal, iron and gas, and Australians are no longer enjoying the good ride they had through the global financial crisis and the years following it.

They might not be as badly off now as they seem to believe they are, but the belief can be debilitating for an economy. The general view in Australia seems to be that this is not the time to return to a budget surplus.

They look around the world and they see the United States and other countries still living on monetary and fiscal stimulants introduced after the financial crisis. But if Mr Abbott looks this way he will see one country that did not believe in the stimulants, never resigned itself to budget deficits indefinitely and is on course to return to surplus next year.

John Key is not a particularly hard-headed economic "dry" either. But he believes a balanced budget to be important for financial and business confidence in his government and the country. It is very much in New Zealand's interest that Mr Abbott's Government comes to a similar view.

His background appears not to be in business. When he declared in his victory speech that Australia is now "open for business" he may have thought that tax relief was all that the productive side of the economy requires. It is not. Investors and consumers need to have confidence that the country is properly governed, its money will hold its value and public spending will not exceed its means. Budget policy is the key to all of that.

If the government of our nearest and largest market goes soft on its deficit, we will suffer too.