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A tale of two budgets

The Australian and New Zealand Budgets this week illustrate the contrasting outlooks for the two economies. And the distinctly divergent approaches of their Governments over the last three years.

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While Australian businesses and consumers are bracing for years of big deficits, cutbacks and new taxes, New Zealanders are set to welcome their first budget surplus since 2007 after three years of tight spending control under the centre-right National Government led by Prime Minister John Key.

"There'll be plenty of Australians who will be looking across the Tasman when they hear how large their deficit is on Tuesday night and see our surplus on Thursday, and will say that's an impressive result that we've achieved over here in New Zealand," Key told reporters this week.

New Zealand business and consumer confidence is at 20 year highs and GDP growth is powering up towards 4 per cent, which is expected to drive the budget surplus up to 2.1 per cent of GDP by 2018 and push the unemployment rate down to 4.4 per cent from 6.0 per cent in early 2014.

In a rare switch to the usual economic form guide, New Zealand's economy is expected to grow significantly faster than Australia's in the next year and generate more jobs growth. While Australia's mining boom is ending, New Zealand is just starting building booms in Christchurch and Auckland and is riding high on strong demand from China for dairy, log and meat exports.

That tale of two economies has underpinned a halving of net migration to Australia in the last year as fewer Kiwis looked for jobs across the Tasman and more New Zealanders returned home for jobs in Auckland and Christchurch.

Along with the stronger growth and jobs outlooks, Finance Minister Bill English is also expected to announce a small surplus when he delivers the budget to Parliament on Thursday afternoon.  He will celebrate the first surplus in National's sixth budget since it was elected in 2008. The Budget will also be a catalyst for debate ahead of the September 20 General election.

The real interest in the budget will be the expected increases in surpluses in the 'out' years beyond 2014/15. The December forecasts suggested the surplus could rise to $NZ5.6 billion by 2017-18.

Wage growth will also be in focus, given the Government has promised the fruits of the recovery will come through wage growth from employers, rather than any great handouts from the Government.

Treasury forecast in December that average ordinary time wage rates would rise by 2.7 per cent in the year to March this year, 3.2 per cent the following year, 3.2 per cent in 2015-16 and then 3.4 per cent each in the following two years.

English and Key are however pledging to keep a tight hold on the spending reins, limiting new discretionary spending to $NZ1 billion.  This is where the real contrast between Australia and New Zealand lies.

Like Australia, New Zealand used government spending and extra borrowing to support the economy through the aftermath of the Global Financial Crisis in 2009 and 2010. Devastating earthquakes in 2010 and early 2011 added to New Zealand's budget burden.

But in 2011 and 2012 the Key-led Government ran 'zero' budgets where any extra spending in health and education was offset by cuts in other areas. The shackles were eased somewhat with $NZ900 million of new spending in 2013-14 but that discretionary spending allowance for 2014-15 is not expected to rise much on Thursday.

The budget and election debates will focus on what the Government might choose to do with the surpluses likely after 2014-15. Bill English has been cautious about saying what those surpluses could be used for, focusing firstly on debt reduction, but also leaving open other options.

English's last comment was after fresh Treasury figures last week suggested a small surplus in 2014-15 would grow in future years.

“This will give us choices about repaying debt, investing a bit more in priority public services and, eventually, resuming contributions to the New Zealand Superannuation Fund," English said.

In the last May Budget the Government delayed the resumption of contributions to the sovereign wealth fund by two years to 2020-21 to ensure that net debt was first reduced to 20 per cent of GDP. It suspended the contributions in 2009.

The other not-often-mentioned use for surpluses could be to rebuild New Zealand's Earthquake Commission fund after it was wiped out by the Christchurch earthquakes.  The Government-owned fund provides another layer of land damage insurance for all those with home insurance.

Many are also watching for more Government moves on housing supply to address shortages that have contributed to double digit house price inflation over the last 18 months.

But Housing Minister Nick Smith said this week there would be fresh measures in the budget to address housing supply.

Key has also hinted this week there may be a small expansion of paid parental leave benefits, which has been welcomed by many. A more extensive expansion was proposed by the Opposition Labour Party.

The contrast of an improving economy being able to pay for an uncontroversial increase in benefits for young families in New Zealand could not be more stark with the outlook in Australia, given the dramas around Tony Abbott's flagship plan for more paid parental leave widely perceived to benefit those not in need.

Bernard Hickey is the publisher of Hive News, an online news service based in Wellington which reports on government and business from around the “Beehive” – the home of the New Zealand parliament. He has more than two decades experience covering New Zealand affairs.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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