If a week is a long time in politics, two years is an eternity. In 2011, Wayne Swan was named the Euromoney Finance Minister of the Year. The news was hard to believe even at the time, but in hindsight Euromoney’s choice looks even stranger.
Australia’s public finances are in a state of such obvious disrepair that no one would dream of awarding any prizes for sound fiscal management to an Australian treasurer today.
But New Zealand’s Minister of Finance, Bill English, might be the frontrunner for the world’s best finance minister. His achievements since assuming office in late 2008 put Swan’s fiscal mismanagement into perspective.
At the beginning of the global financial crisis, Australia and New Zealand faced very different prospects. Australia had a mining boom, no debt, and general economic prosperity. New Zealand was in recession, had a collapsed non-bank finance sector, and government spending to gross domestic product had increased from 29 to 35 per cent under the Clark government. Officials briefed the incoming Minister of Finance that he faced indefinite deficits. And that was before earthquakes destroyed large parts of Christchurch, the country’s second-largest city.
Today, five years on, the fortunes of both countries have changed. New Zealand will be back in the black next year, while Australia faces years of deficits. But how did this remarkable switch come to pass?
One of the great myths about the GFC is that stimulus “saved Australia”. But is this actually the case? The answer, clearly demonstrated in these pages over recent weeks, is a resounding no. China’s stimulus, the Reserve Bank slashing interest rates, and the formidable inherited fiscal position were what actually put Australia in good stead.
Home insulation, cheques in the mail and the ubiquitous “Roads to Recovery” program were certainly not Australia’s saviour. But they drove up Australia’s debt by scores of billions.
If it had been only stimulus, that would have been one thing. But the taste of debt finance gave Swan an appetite to place even greater demands on the public purse. Despite record terms of trade, and substantially increasing tax receipts from 2010, Swan never came close to delivering a surplus, spending every cent that came in the door, plus some that didn’t. “Spreading the benefits of the boom” in practice meant “squandering the record terms of trade”.
New Zealand chose a very different path. In response to the GFC, what meagre stimulus measures were introduced were designed to help business retain workers and ease cash-flow pressures. Taxes could be delayed; there was some temporary money available to businesses.
But more importantly, there were structural reforms. Whereas many Australian commentators advocate both spending cuts and tax increases, English proved that wasn’t necessary. In fact, income taxes were cut: the top tax rate for someone on about $NZ45,000 a year went from 33 per cent to 17.5 per cent, the top income-tax rate was slashed from 39 per cent to 33 per cent at NZ$70,000, aligned with the trust tax rate. To encourage savings ahead of consumption, GST (which applies to everything) was increased from 12.5 to 15 per cent. Company tax was reduced to 28 per cent.
Employing people has been made easier. A probationary working period was introduced, and the emissions trading scheme was trimmed significantly. Compulsory employer co-contributions to Kiwisaver, New Zealand’s voluntary retirement savings scheme, were reduced from 4 per cent to 2 per cent, increasing to 3 per cent as conditions improved.
The government has also quietly reformed the welfare state. There have been massive changes to state housing tenure. Policies helping single parents into work were introduced, plus measures to move beneficiaries on sickness and invalid benefits back into the labour market.
On top of it all, the New Zealand government produced a series of “zero budgets” where only education and health recorded modest spending increases. New programs had to be funded from cuts elsewhere.
As a result, a budget surplus will be delivered next year, ahead of schedule. This is an impressive turnaround, achieved by doing precisely the opposite of Australia’s approach of the past five years. In New Zealand, there were no great announcements of meaningless measures, and no shovelling cash out the door to fund them. Instead, a measured, responsible and sometimes dour approach has delivered the goods.
This leaves the Rudd-Gillard-Rudd government’s claims of the difficulty of balancing the budget looking faintly ridiculous. Since 2007 the increase in Australian tax revenue has been greater than New Zealand’s entire budget.
Of course there is plenty to criticise the New Zealand government for, particularly around long-term demographic challenges. Nonetheless, it has done a stellar job in the difficult years since 2008.
Ultimately, fiscal management is about choices: choices made according to principle and responding to circumstance. Swan made easy but poor choices, while English made difficult but sensible choices. As a result, New Zealand’s public finances are in good shape, and the Kiwi economy looks forward to continuing its healthy growth rates.
Next time Euromoney is looking for a prize-worthy Finance Minister, they should look to New Zealand.