How did Australian Treasurer Jim Chalmers and New Zealand Finance Minister Nicola Willis end up as such fiscal soulmates in their budgets this year?

You’d have thought they’d have gone in different directions. For one thing, they faced quite different economic backdrops. Australia in the June 2024 year is expected to have grown by 1.75 (according to the Aussie Treasury in its budget forecasts), whereas New Zealand (on its corresponding numbers) is likely to have experienced a 0.3% recessionary contraction in GDP, partly reflecting its tougher monetary policy. The Kiwi official cash rate is 5.5%, compared with the RBA’s 4.35% cash rate.

For another, they came to their decisions from very different political viewpoints. Chalmers, from the left, champions the likes of government-led industry policy. Willis, from the right, pushes limited government: she’s taken a scythe to the public payroll.

But when it came to their budgets, they opted for the same choice: personal tax cuts, partly paid for by pushing the expected date for balancing the overall fiscal books further into the future.

Buy now, pay later

The best guess at the true underlying position of the public purse, when any transient effects of the economic cycle or of commodity prices are backed out, is the structural budget balance. On that basis, Australia plans ongoing structural deficits into the 2030s. At first glance, New Zealand hasn’t kicked the can quite as far and aims to be back in structural balance by June 2028. But that’s a year later than planned and, in any event, relies on some rather hopeful expectations that enough money will turn up by then to keep the show on the road.

You can’t keep putting the groceries on the credit card, so why did both ministers put tax cuts ahead of a timely restoration of the health of the exchequer?

Politics, you’ll say, and you’d be right. Tax cuts are at least superficially popular with the voters in both countries. Plus, in Australia, Labor got backed into the corner of carrying out the final stage three tax cuts started by the previous coalition (albeit tweaked in a less regressive direction), while in New Zealand, tax cuts were front and centre of the National Party’s 2023 election manifesto: it would have been politically impossible for either government to back out.

Mitigating factors

To be fair to both ministers, it made a lot of sense to unwind the serious bracket creep of previous years, where lower- and middle-class taxpayers, because of the failure to index tax bracket thresholds for inflation, were being pushed ever deeper into the tax brackets originally meant for high earners. Unwinding the stealth tax made the tax system fairer – and would have been fairer still if the ministers’ new-found conversion to doing the right thing extended to a commitment to ongoing threshold indexation.

To give them the ultimate benefit of the doubt, even after several more years of ongoing deficits, the resultant accumulation of further government debt doesn’t put either country in any debt crisis zone. By international standards, the extra debt will be manageable. In New Zealand’s case, the current economic environment is too soggy to bear an immediate turn to austerity, so tomorrow looks a better time to start than today.

No rainy-day funds

All that said, sooner or later there needs to be an adult in the room pointing out that unremediated structural deficits running into the far future are bad policy. They hamper your ability to use discretionary fiscal policy when shocks turn up: you can more easily deploy the likes of the huge job guarantee schemes we saw rolled out on both sides of the Tasman during COVID-19 if you’re starting from a good fiscal position. Left long enough, the rising interest rate bill on government debt starts an unwelcome dynamic: more of the tax take needs to go to pay the debt holders, and there is less to pay teachers and doctors, which means more borrowing to keep all the balls in the air.

Yet despite their long-term harm, structural deficits are more the rule than the exception across the developed economies at the moment. Australia and New Zealand have plenty of company and there are some current examples of truly gross fiscal indiscipline, notably in the politically dysfunctional US.

"Sooner or later, there needs to be an adult in the room pointing out that unremediated structural deficits running into the far future are bad policy."

A little fiscal responsibility

That reflects a collective unwillingness to confront a difficult question: how are we going to pay for all the things we need or like? The answer involves increasing revenue or reducing delivery of public goods and services, but there is no strong constituency for either option, and near-term tax cuts make the ultimate long-term consolidation choices even harder than before.

Personally, I’m beginning to look more sceptically at the ‘let’s pare back what the government does’ option and more warmly at the ‘raise more money’ route. There’s too much still left undone – a decent level of unemployment benefit in Australia, fixing dilapidated hospitals in New Zealand, confronting falling levels of educational attainment in both countries – and lots more about to come down the pike, including all the stuff needed to deal with climate change, to handle the demography of an older population and to provide greater security in a more fractious world.

Years ago, when I first moved to New Zealand, the Rogernomics reforms were in full flow, including sharp cuts in personal income tax rates, and I was singing the praises of lower taxes to the dairy farmer next door. ‘Well’, he drawled back over the fence, ‘that depends on what you get for them.’ He was right then, and he’d be right now: maybe it’s time to say, if there are goodies that we’d like, we ought to be prepared to pay for them.