- Figures show that New Zealand had a budget surplus of some 1% of GDP in 2018 against Australia’s 1% of GDP deficit.
- New Zealand also has a slightly better performance when comparing the level of debt to GDP.
- However, there isn’t a lot in it when it comes to declaring a fiscal policy winner. Both Australia and New Zealand’s treasurers would score better than Greece’s.
Ahead of the 2019 Rugby World Cup, to be held in Japan in September 2019, one or two of my countrymen may have mentioned that the All Blacks are the most successful team in the history of the tournament – having won it three times to Australia’s two. But international rivalries in other arenas are much more complex to referee.
At the time of writing, Australia was preparing to hear its election-year Budget on 2 April, with New Zealand expecting to hear from its Minister of Finance in May. So in the spirit of friendly trans-Tasman competition, it’s as good a time as any to ask: Who has been playing the better fiscal policy game over the past 20 years or so?
Our starting point is the International Monetary Fund’s (IMF) fiscal database which is available free online. That’s not to say there’s anything wrong with our local fiscal data, but for games like this it makes sense to have a neutral referee.
“Small blips in either number can turn an apparent surplus into a deficit and vice versa, but the change of label has zero economic significance."
Who wins the fiscal surplus prize?
Let’s start with the number the pollies are obsessed with – the headline fiscal balance. It’s become shorthand for “I’m a better economic manager than you. I can run a surplus, you can’t. Nya nya nya.”
Josh Frydenberg in Australia’s green-and-gold jersey will say he’s planning a surplus; Grant Robertson in the Kiwi All Blacks kit already has one and will say he’s keeping it going.
If your measuring stick is a headline fiscal surplus, then in recent years New Zealand takes the prize (see Figure 1). Up to the global financial crisis (GFC), New Zealand put a lot more effort into getting into the black. Since the GFC – and despite the heavy costs of the devastating Canterbury earthquakes – New Zealand has already bounced back into surplus.
Meanwhile, Australia is still in deficit and (on the IMF’s estimates) not expected to get into surplus until 2021. You’d have to ask successive Aussie treasurers: if you can’t run a surplus in the longest business expansion ever recorded in a developed economy (27½ years and counting), when can you?But why the big if? Because despite all the macho political posturing, the headline balance tells you very little. It’s got some limited value as a loose proxy for economic stewardship but that’s it.
For one thing, the headline balance is the difference between two ginormous numbers: in Australia revenue and spending are both around the A$500 billion mark. Small blips in either number can turn an apparent surplus into a deficit and vice versa, but the change of label has zero economic significance.
For another, it’s cyclical. An apparently careful treasurer can be banking temporarily strong tax revenue – from, say, a resource price boom – which conceals an underlying profligacy. Ideally you’d strip out the cyclical influences to reveal the true position, and fiscal policy tragics routinely do. It takes some tricky statistical footwork, but you can get to a ‘structural’ or ‘cyclically adjusted’ or ‘underlying’ balance.
On the IMF’s structural numbers, New Zealand again wins, with a surplus of some 1% of GDP this year, against Australia’s 1% of GDP deficit. But deep in New Zealand Treasury’s own figurings are calculations which show that if commodity prices weren’t as good as they are today, Kiwis wouldn’t have a surplus at all.Figure 1. Headline fiscal balances (IMF version, % of GDP). Click the image to enlarge.
Level of debt to GDP
How else might you judge the game? One hot topic among the fiscal wonks is ‘fiscal space’ (alternatively ‘headroom’ or ‘leeway’). How much wiggle room would you have if the proverbial hit the fan?
In a classic exercise in 2013, IMF economists looked at the forecasts made for the level of government debt in 10 big countries just before the GFC and compared them with what actually transpired over the following three years. Government debt rose by far more than expected. In fact, by a stonking great 26% of GDP more than expected.
There were big bills to stimulate national economies. There were big macroeconomic shocks to taxes (down) and expenditure (up). There were expensive financial sector bailouts. There were fiscal risks that hadn’t been on the official books, or not adequately, plus a large slab of other stuff that got sheeted home to the luckless incumbent governments of the day.
A GFC doesn’t come along every day, but even so the lesson is that you wouldn’t want to go into the next shock with the fiscal credit card already maxed out. And for both our countries, the long-term health and demographics trends will be a progressive fiscal squeeze, and there’s got to be room created to pay for them, too.
So how do Australia and New Zealand scrub up when you look at our levels of debt to GDP? Do we have the flexibility insurance we ought to carry? As Figure 2 shows, by international standards we’re both in excellent shape.
Strictly speaking, New Zealand looks in a better place, but I wouldn’t push it. It’s good to have plenty of borrowing room, but there’s also a point where you can be spending too little. Given the choice of trying to get around Auckland or get around Sydney on public transport, or get into the CBD from either airport, which would you pick? Exactly. Let’s call it a draw and move on.Figure 2. Gross government debt, % of GDP, 2019. Click the image to enlarge.
Fiscal policy boosts and brakes
There’s another scorecard we could look at, and that’s whether fiscal policy has been doing the right thing at the right time. Has fiscal policy been used to boost the economy in bad times, and brake it in boom times? If it has, who’s done it best?
You’d think this would be an uncontroversial yardstick of success: if there was one lesson we all learned from the Great Depression and from Keynes, it was that fiscal policy ought not be tightened in bad times but instead be let rip. Conversely we shouldn’t throw petrol on the flames if the economy is already running hot.
“There’s another scorecard we could look at, and that’s whether fiscal policy has been doing the right thing at the right time.”
Oddly, modern macroeconomic theory has walked back from what used to be taken for granted. There are fancy business cycle theories that say, essentially, the economy will sort shocks out by itself (yeah, right) and that policy can’t (or shouldn’t) be used to do the job.
There’s one grain of truth to this. It’s probable, these days, that voters see through fiscal lolly-scrambles. The citizenry don’t rush into the shops with their election year handouts, knowing full well that they’ll be presented with the belated bill for them later on. Lollies don’t deliver the sugar rush they used to. But otherwise I’d stick with the old orthodoxy: fiscal policy can and ought to help manage our economies’ ups and downs. How’d we both go?
There’s a gizmo called the ‘fiscal impulse’ that gives you a feel. Here it is.
Australia scores some bonus points for a bit of stimulus through the ‘tech wreck’ of the late 1990s that New Zealand didn’t bother with. Both do well with big supportive boosts through the GFC. New Zealand’s broadly been better at taking away the punchbowl from the post-GFC party, bar an anomalous boost in 2018 when the Kiwi economy was still fine. Both plan modest touches to the brakes in years ahead.
You’d struggle to declare a clear winner. And on all three scorecards there isn’t a lot in it. We like to pile into our pollies, and often with good reason, but for fiscal management they rate pretty well. There would be plenty of voters in Athens or Dublin or Paris who’d happily swap their treasurers for ours.