Date posted: 10/08/2023 5 min read

The Jim & Grant Show

Treasurers on both sides of the ditch will be pleased with how their May budgets were received. However, what elements are sound fiscal policy and what comes down to luck?

In Brief

  • Both budgets had a likely fiscal surplus, with historic low unemployment, high inflation and high commodity prices all contributing to favourable conditions.
  • Neither treasurer expects to be in surplus for long, and both pushed big issues – including tax reform and significant action on climate change – down the track.
  • Australia and New Zealand may both benefit from non-partisan fiscal advice, similar to what’s in place in the UK and the US.

This year’s government budgets in Australia and New Zealand came within a fortnight of each other: Jim Chalmers in Canberra on 9 May and Grant Robertson in Wellington on 18 May. Both performances got good reviews. Jim’s effort was intended to show a safe pair of hands on the economic tiller and concern for households facing rising costs, and Grant’s version pressed the same household bread-and-butter buttons, and helped position the government for October’s general election with goodies like the abolition of prescription fees.

Backstage, Jim and Grant will have been pleased with how their budgets played with the critics and the public. But was The Jim & Grant Show actually as successful as it looked?

New Zealand’s Labour Minister of Finance, Grant RobertsonPictured: New Zealand’s Labour Minister of Finance, Grant Robertson. Image credit: Getty Images

Labor’s Treasurer of Australia, Jim ChalmersPictured: Labor’s Treasurer of Australia, Jim Chalmers. Image credit: Getty Images

Surplus or deficit?

Let’s start with the bit that gets the most attention: the headline fiscal surplus or deficit.

Jim scores big on this one: there’s a small cash surplus likely for the 2022–2023 fiscal year. Grant, less impressive, but not too bad: he’s holding out the prospect of a small surplus on New Zealand’s key measure, the OBEGAL (operating balance before gains and losses) in the 2025–2026 year.

To be fair, achieving a surplus or aiming for one does indeed require some degree of discipline in managing spending and collecting tax. What’s more, Jim and Grant know that there are political payoffs in showing fiscal responsibility, particularly for Labor/Labour parties whom the electorate hasn’t always trusted to be the most dependable managers of the public purse. So, political calculation and sensible economics came together nicely, and both budgets can claim some curtain calls for good fiscal management.

Riding the wave

But only some. Riding the wave of lucky coincidences they’ve inherited shouldn’t earn them the gold stars Jim and Grant have taken to wearing. Frankly, if you can’t run a surplus in current economic conditions, you never will. Unemployment is unusually low in both countries: Australia’s 3.6% unemployment rate is well below its average this century of 5.4%, as is New Zealand’s 3.4% compared with its average of 4.9%. Inflation is unusually high, boosting all sorts of tax revenues: Australia’s current 7% inflation rate is way above its longer term 2.8%, and New Zealand’s 6.7% is also way above its 2.5%.

And both ministers have lucked into the benefits of unusually high commodity prices. On the Reserve Bank of Australia’s index of commodity prices in Aussie dollars, prices are 88% above their average since 2000. Things aren’t quite as frothy in New Zealand, but on the ANZ Bank’s index in Kiwi dollars, prices are still a healthy 42% above their long-run level.

“Riding the wave of lucky coincidences they’ve inherited shouldn’t earn them the gold stars Jim [Chalmers] and Grant [Robertson] have taken to wearing. Frankly, if you can’t run a surplus in current economic conditions, you never will.”

Both ministers also left income tax thresholds where they were. Aussies on low incomes – between A$18,200 and A$45,000 – ought to be paying a tax rate of 19%, but more have been drifting into the significantly higher 32.5% bracket. It’s remarkably similar in New Zealand: Kiwis earning between NZ$14,000 and NZ$48,000 should be paying 17.5% but are increasingly drifting into paying 30%. It’s politically cynical and economically unfair – nobody wants to see nurses and teachers taxed like company executives – but it’s also helped to swell revenues even further in already tax-take-friendly times.

Dark clouds on the horizon

A corollary is that when today’s tax-friendly tides turn, the fiscal outcomes won’t look so hot.

Jim was upfront about it. In his speech, he said that “there are genuine structural challenges facing us into the future – defence, health, aged care, the NDIS [National Disability Insurance Scheme] and interest payments on debt”, and the Budget papers showed that the underlying ‘structural’ balance, shorn of the contribution from today’s unusual low unemployment/high inflation combo, will be in modest deficit in coming years.

Grant predicted that New Zealand’s structural balance will be in surplus by 2025–2026 but if it is, it won’t be for long. New Zealand Treasury long-term fiscal forecasts show a stonking challenge from 2030 onwards, as demographic cost pressures (notably on health and pensions) start to squeeze a lot tighter.

It’s hard to avoid the feeling that although this year’s fiscal management has gone off OK, there’s been a lack of urgency on both sides of the Tasman about the longer-term pressures on future budgets, even though today’s good times would have offered a good launching pad to get started.

Swept under the carpet

And there are other issues that have also been put to one side for the time being. Australia is accumulating an ever lengthening list of unimplemented tax reform recommendations. Both countries haven’t quite sussed how to coordinate fiscal and monetary policy – this, after COVID-19’s simultaneous, full-bore fiscal and monetary rocket fuel helped bring us today’s high inflation. There were some initiatives on decarbonisation in both budgets, but they are only the first steps on a long journey.

Nor has either country begun to grapple properly with the deteriorating quality of public services. Jim was right when he instanced doctor visits in his speech – “The costs are too high… the wait times are too long… and the consultation is too short” – but it’s a wider systemic issue for both countries across education, health and infrastructure, as I’m reminded every time I hit a pothole on the road into town.

A neutral perspective?

One Budget can’t solve everything at once. We’d be better off relying less on one-off theatrics and more on longer-term policies with settled multi-year budgets – and we should be thankful for whatever can be achieved on the day.

However, there’s such a lot left to do that you wonder whether both countries might benefit from a bit of specialist help, along the non-partisan lines provided by the UK’s Office for Budget Responsibility, America’s Congressional Budget Office or Ireland’s Fiscal Advisory Council – all bodies that help grease the wheels of fiscal effectiveness.

Better management isn’t easy – in particular it’s hostage to political tit-for-tattery, where if you want to put GST on food I’ll promise to take it off. Someone on the sidelines pointing dispassionately to the national interest could well take us to a better place.

Why aren’t our taxes working harder?

Considering how much tax we pay in Australia and New Zealand, we’re remarkably trusting of how government goes about spending it. Maybe our big spenders could learn a thing or two from small business.

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