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. |
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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."
Source::
The Sydney Morning Herald , dated 10/02/2015......... |