Economists Say New Zealand's Fiscal Strategy Not Advisable For Australia

Australia cannot afford to follow New Zealand’s model of fiscal consolidation. Economists said that unlike Australia, New Zealand’s economy has performed “exceptionally well” with the help of government after it raised taxes and cut spending.

Prime Minister Tony Abbott has previously referred to the budget of New Zealand and hinted at the possibility of making it a blueprint for his upcoming second budget. He told ABC that New Zealand’s government was successful in stopping expenditure without deep budget cuts, adding New Zealand did not implement “big cuts.”

Paul Bloxham, chief economist of HSBC Australia and New Zealand, said New Zealand’s economy has grown remarkably in recent years. Aside from budget cuts and tax hikes, New Zealand also introduced a carbon price and lifted the GST rate to 15 percent, reports SMH.

Bioxham believes Australia’s economy is “too weak” to follow New Zealand’s lead. “Now is the wrong time for fiscal consolidation,” said the economist. He suggested a looser fiscal policy for Australia since its short-term focus should be on demand management.

Bioxham explained that New Zealand has not only managed to curb its spending, it has also generated revenues. He said if the Abbott government wants to follow New Zealand, Australia will have to consider tax reforms as well.

Last week, the Reserve Bank of Australia has cut the interest rate to a record low of 2.25 percent. The Australian central bank said cited the high unemployment rate, which is expected to be as high as 6.5 percent, and 1.7 percent inflation as the main reasons for the decline in cash rate.

In contrast, New Zealand’s interest rate rose from 2.5 percent to 3.5 percent in 2014 while the employment rate increased to 3.5 percent. Inflation in the country has also remained stable. New Zealand’s economic growth rate is more than 3 percent compared to Australia’s 2.7 percent, according to recent reports. The rebuilding and construction at Christchurch has also boosted New Zealand’s economy.

Meanwhile, Australian Treasurer Joe Hockey has warned that Australia may never return to a budget surplus if spending is not reduced. The Australian reports that Hockey’s statement followed a warning from former treasurer Peter Costello of a possible break in the budget if the government will not push through with its saving plan.

Hockey had dismissed calls for holding a bipartisan economic summit since he believes the Labour party was “not interested” in repairing the budget. He said he went to the offices of the Opposition but Labour did not give him any answers when he asked for help on the budget.

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