Australia can't afford to mimic New Zealand budget strategy, say economists

Prime Minister Tony Abbott has pointed to New Zealand as a model of fiscal consolidation, but economists say Australia cannot afford to mimic that country's spending squeeze.

Mr. Abbott has twice referred to New Zealand's fiscal strategy in the last week - including in his speech to the National Press Club – hinting at a possible blueprint for his second budget in three months.

This week he told the ABC's 730 that New Zealand's government had successfully stopped spending growth without cutting too hard, and it had successfully reduced its size of government.

"If you look at what New Zealand did with fiscal consolidation, they had a very tight clamp on new spending," Mr. Abbott said on Monday.

"They didn't engage in big cuts. They had a tight clamp on new spending and New Zealand has got government, as a percentage of GDP, from 35 per cent to 30 per cent - a very big change in just a few years," he said.

But the chief economist of HSBC Australia and New Zealand, Paul Bloxham, says New Zealand's economy has performed exceptionally well recently, and its government has helped the economy get those results by cutting spending and raising taxes - including introducing a carbon price and lifting the GST rate to 15 per cent.

He also says Australia should not follow New Zealand's fiscal strategy because its economy is too weak. "Now is the wrong time for fiscal consolidation," Mr Bloxham said.

"We do need consolidation and reform in the medium term, but the short-run focus needs to be on demand-management, which means looser fiscal policy for the moment.

"The New Zealand government has managed to claw back some of its spending, but it is not just a spending-side story, it's a revenue-side story too. If the [Abbott] government wants to take a leaf out of New Zealand's book they will need to look at tax reform as well."

Australia's Reserve Bank cut the official cash rate to a historic low 2.25 per cent last week, citing rising unemployment, which is expected to peak at 6.5 per cent, and annual inflation falling to just 1.7 per cent.

That compares to New Zealand, where the official interest rate was lifted from 2.5 per cent to 3.5 per cent last year, where employment is growing by about 3.5 per cent a year, and where inflation remains under control.

It also has an economic growth rate of more than 3 per cent – higher than Australia's 2.7 per cent – with economic activity supported by a strong pick-up in construction activity, partly in post-earthquake rebuilding. "Economic growth is tracking below trend and the RBA is scrambling to cut interest rates to extraordinarily low levels to support growth," Mr Bloxham said.

"We think the government ought to be considering raising the GST in its tax reform agenda. It needs to consider tax reform as well as just looking at spending."