With the New Zealand Budget due on Thursday it’s timely to take stock of how the New Zealand economy is faring relative to our largest trading partner Australia, and the volatile and debt laden European economies.
The good news is that New Zealand and Australia are seen as the golden boys having weathered the GFC (Global Financial Crisis) in better shape than most other OECD (Organisation for Economic Co-Operation and Development) economies.
The bad news is we are still vulnerable to a prolonged recession in Europe and slowing growth in China and other Asian economies.
Much of Europe is straining under the pressure of economic austerity, with the fate of Greece’s membership in the EU still in the balance, and France with a new President looking at measures to stimulate growth rather than staying on the path of harsh austerity preferred by other European Governments.
More recent economic data suggest the UK economy is heading back into recession. The British are firmly focused on balancing the books but unlike New Zealand and Australia they are still heavily debt laden with a £100 billion pound deficit and projections of a much slower return to surplus. UK unemployment at 8.2% is higher than New Zealand’s 6.7%, but more significant is that their public debt at nearly 85% of GDP compared with our more manageable 32%.
Unlike our Government’s zero budget approach the Brit’s are looking to slash public spending with significant cuts to the public sector, rather than increase taxation to close the gap. Despite its fiscal predicament, the UK Government is hoping to stimulate growth by cutting the company tax rate, progressively from 24% to 22% by 2014 and reduce the top personal rate from 50% to 45%, to improve competiveness.
Australia remains the star performer of the pack, and has been for some while now, weathering the storms of the GFC on the back of a strong financial sector, and robust demand for minerals from Asia.
However concern still remains over the two speed nature of the Australian economic story, with the mining sector driving economic growth, but softening in the retail and manufacturing sectors putting the brakes on economic recovery.
The latest Australian Budget notes these ‘downside risks’, but still predicts GDP growth, in real terms, of around 3% per annum, unemployment to peak at around 5.5%, and the Government books to be balanced in the upcoming financial year (faster than any other developed country). The Australian Government will manage this while handing out around A$5 billion of tax and non-tax benefits to lower and middle income families. This is to be funded partly by Australia’s new mining and carbon taxes.
Despite the tumultuous events of 2011 New Zealand’s economic position is much closer to that of Australia than the UK with forecasts of the public accounts, particularly Government debt, to be in reasonable shape when the Budget is announced. This despite recent downward revisions of tax revenues by around NZ$1 billion.
Much will depend on the timing and scale of the Christchurch rebuild, this being the key driver for economic growth. How well we fare will also be influenced by New Zealanders’ trend towards reducing private debt and our reliance on strong global commodity prices, especially dairy.
This week’s Budget has signalled a further squeeze on spending, but unlike the harsh European austerity measures that have been the downfall of a number of European Governments, here, re-prioritisation of existing programmes rather than deep cuts have been signalled.
Although the Government re-affirmed its commitment to achieving a Budget surplus by 2014-15 it is not clear what ‘surplus’ will look like and what conditions, if any, will be attached. Equally, we should not expect similar benefits to those in the Australian Budget to be replicated in our own. Further tax cuts have been all but ruled out. If there are any reductions, these are likely to be modest and funded from tax increases elsewhere.
The 2012 New Zealand Budget will contain further steps to deliver New Zealand on the path to prosperity; however the challenge will be continuing this course in the face of ever tightening fiscal conditions and global uncertainty. Recent events in Europe have highlighted the effects of extreme austerity without accompanying economic growth, and once again highlight our vulnerability to events beyond our control.