The recent reports on New Zealand and Australia economic performance have been very different. In New Zealand, the gross domestic product (GDP) per capita growth over the last three quarters of recession has been very low, from 1.5 percent to 0.6 percent, while Australia’s economy contracted by three percentage points over the same period. As the New Zealanders digs out of the current recession, they will find that they are still enjoying some of the best levels of economic freedom enjoyed by most modern countries. Australia’s experience has been much more mixed. While the resources boom is coming to an end, corporate tax rates are rising, real estate values have declined, and overall consumer confidence has declined.
There are two major drivers of economic growth in New Zealand compared to Australia. The first is the role of the government in the economy. The New Zealand government has been careful to stimulate the economy by keeping taxes and fees at reasonable levels, reducing the size of the population, and using sound fiscal policy to allow the economy to function well without relying on future international aid. In contrast, Australia’s government is cutting budget expenditure, raising taxes, and changing the rules for businesses to get a bigger piece of the national pie. As a result, businesses are feeling the pinch, not just in relation to profitability but also in relation to the demand from consumers.
The second driver of Australia economic performance is the extent of government involvement in the economic process. The New Zealand government has taken a hands-off approach to the economy. Its main concern has been to keep the government deficit as low as possible, so that it can attract investment through capital gains and interest rates are low enough to encourage investment. The approach to business hasn’t been any different. While the government has reined in its tax expenditures, it has not altered its policy of encouraging business through regulation of the market. Australia’s situation isn’t quite as bleak, but it is far from perfect.
This is because the New Zealand government has made some astute decisions to ensure that its companies remain competitive in global markets. For instance, it has developed a highly efficient and competitive tax system that lets businesses structure their operations to minimize their taxable exposure. It has also developed an impressive industrial property development strategy that has led to the creation or building of thousands of new jobs, as well as the release of enormous amounts of free government money for business owners. Finally, it has developed some of the most progressive industrial policies in the world. These have led to a marked reduction in Australia’s overall taxation burden and have helped businesses flourish despite the global economic downturn.
Australia hasn’t gone down that route yet, though it seems to be heading that way. It has, however, adopted a moderately aggressive fiscal policy that will continue to pressure businesses to invest. That means higher taxes and fees on businesses in the short run, but potentially lower costs later on. Many companies view that as a good combination and have looked to raise funds amongst other options.
The country has also kept rates low for a number of years now and has maintained an effective exchange rate with the dollar. It has done so since the early nineties, when Australia was just beginning to recover from one of its worst cycles ever. While the currency was low, the cost of doing business in Australia was exceptionally high. With the massive slew of tax cuts and monetary stimulus measures in place, those costs are starting to erode. Australia’s trade surplus has also returned to pre-recession levels, which bodes well for Australian businesses.
The key to Australia’s continued economic growth lies in its ability to reorient its industries away from resources and toward knowledge-based service industries. This is a process that Australia has been slow to engage in, despite its rapid economic recovery. It took the likes of Microsoft and IBM to begin to pull up their sleeves and getting their businesses prepared for the future. Australia hasn’t yet done that. But it is starting to. There are official plans to roll out a new e-commerce platform in Australia by the end of the next year, in an effort to position Australia as a cutting-edge information and technology hub for the global market.
The other key element to Australia’s growth is the housing sector. It is starting to pick up momentum, which is a positive sign for an economy that has been so slow to pick up after being in a slump for so long. Combined with a strong economy and interest rates that are already on the incline, it looks like Australia is on the road to recovery. With further accommodative monetary policy measures in the offing, the Australian economy should continue on this path as it begins to climb out of the doldrums that have plagued it for the past few years.