THE 1994-95 New Zealand Budget, brought down on 30 June, produced a spate of comparative analyses that put the Budget of the Australian Treasurer, Ralph Willis, to shame. Surprisingly, however, these analyses did not bring out the most important point: that the New Zealand strategy has put the country on a much more sustainable growth path.
In particular, New Zealand is making a great deal more room for its private sector to expand over the next three years by providing for Government expenditure to fall by 1996-97 to 31 per cent of GDP from 40 per cent in 1992-93; and by providing for the Budget surplus to be as high as 4.6 per cent of GDP in that year, compared with a deficit of 2.3 per cent of GDP in 1992-93. Yet this seemingly "deflationary" policy (in Keynesian terms) is confidently projected to achieve economic growth averaging nearly four per cent a year.
Such a growth rate is similar to that projected for the next three years for Australia in Mr Willis's Budget, but in per head terms New Zealand's growth would be faster and is more likely to be achieved.
By giving more room to the private sector to expand, New Zealand is less likely to have to cut back private-sector spending by increasing interest rates to keep inflation or the current account under control.
It also starts from a much better position on both these fronts, with inflation down to about one per cent a year and the current account now running a small surplus.
Almost as significant in terms of sustainability may be the passage of the Fiscal Responsibility Act, described as "an act to improve the conduct of fiscal policy". This act is the idea of the former Finance Minister, Ruth Richardson, who, despite being "sacked" after the last election, nursed it through Parliament from the back bench.
She has since announced her resignation from Parliament, but she claims that the act "will do for fiscal policy what the Reserve Bank Act has done for monetary policy".
The act improves the potential, external shocks aside, for New Zealand to have sustained high economic growth. Were that to occur, it would be good news for Australia as New Zealand is our fourth-biggest export market. Yet when he visited Australia early last month, the New Zealand Prime Minister, Jim Bolger, was treated more like a country cousin.
What is the basis of Ruth Richardson's comment about the significance of the Fiscal Responsibility Act? The short answer is that the act makes it more difficult for politicians to change fiscal policy purely to secure a short-term electoral advantage. It does that in two main ways. First, by legislating five principles of fiscal management, which include requirements to establish and maintain prudent levels of Government debt and net worth, and to pursue policies consistent with having stable and predictable tax rates. Second, by requiring the Government to publish its fiscal strategy for the short, medium and longer terms three months before each financial year and the Treasury to publish at various times (including before each general election) economic and financial updates.
Of necessity, these principles are stated in terms that are open to differing interpretations, and nobody would be naive enough to imagine such legislation will guarantee fiscal discipline. If the political culture is not conducive to such discipline, politicians will find ways of avoiding it. New Zealand also has in prospect major changes in its electoral system which, at the next election, are likely to involve governments consisting of a coalition of two or more political parties. This could make it more difficult to maintain discipline.
However, by having these principles and procedures on the legislative books, the "culture" will be influenced and politicians will have to be more open about the likely effects of change in budgetary policy, particularly over the often-forgotten medium to longer terms. In economists' jargon, there will be greater "transparency".
The parallel in Australia is the procedure that has developed to publish before the annual Premiers' Conference the national fiscal outlook for the next three years. This move is along similar lines to my proposal to have a federation budget but it has a good way to go before it subjects governments to the discipline and transparency that Ruth Richardson's initiative seems likely to do. In the meantime, with the Victorian Opposition committing itself to responsible financial policies, the time may be ripe for a bipartisan Fiscal Responsibility Act in Victoria.
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