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Special Topic: Comparing the economic and fiscal outlook - Australia and New Zealand

Australia’s 2014 Budget was delivered on 13 May, followed by the New Zealand Budget on 15 May.  This special topic summarises the economic and fiscal outlooks presented in the two Budgets.

Near-term economic outlook stronger for New Zealand...

The Australian Budget forecasts real GDP growth of 2.5% in 2014/15 and 3% in 2015/16 (June years).  The corresponding forecasts for New Zealand are 3.9% and 2.6% (Figure 1 and Table 1 at the end of this topic).  Both Budgets contained upward revisions to the short-term growth outlook from the respective mid-year forecasts.

Figure 1: Real and nominal GDP growth
Figure 1: Real and nominal GDP growth.
Source: The Commonwealth of Australia, the Treasury

The difference in nominal GDP growth (which is the main driver of government revenues) is stark at 4% for Australia versus 8.2% for New Zealand in 2013/14. This reflects the terms of trade growth in New Zealand and the fall occurring in Australia.  However, the gap in nominal GDP growth is forecast to narrow, moving to 3% and 4.5% respectively in 2014/15.

Based on latest forecasts, by the end of 2015/16 the Australian economy will have grown slower than trend for seven of the past eight years, leaving a negative output gap (actual output below potential output) of 2%. In contrast, we expect a positive output gap of around 1% for New Zealand (Figure 2). However, in the years following, Australian real GDP growth is forecast to exceed New Zealand’s. This reflects a combination of the growth required to close the respective output gaps and somewhat higher assumed potential growth in Australia.  In 2016/17 and 2017/18 growth is above trend in Australia but below trend in New Zealand.

Figure 2: Australia and New Zealand output gaps
Figure 2: Australia and New Zealand output gaps.
Sources: The Commonwealth of Australia, the Treasury

...resulting in divergent unemployment paths

Reflecting the different stages of the economic cycle that New Zealand and Australia are at, their unemployment rates are forecast to move in opposite directions over the next few years. The unemployment rate in Australia is forecast to increase to 6.25% before declining to 5.75%, while it is forecast to fall below 5% in 2016/17 in New Zealand.

Current account to remain stable in Australia but increase in New Zealand

Over the period to 2015/16 Australia’s current account deficit is forecast to fluctuate between 3% and 4% of GDP, while in New Zealand it is expected to move from 3% to slightly more than 6%. In Australia, export growth is forecast to be much stronger than previously and import growth much weaker, reflecting the transition from investment to exports in the natural resources sector.

The Australian Budget shows an improved fiscal outlook...

The Australian Budget showed a marked improvement in the fiscal outlook from that presented in the 2013 Mid Year Economic and Fiscal Outlook (MYEFO).  The underlying cash balance, Australia’s preferred operational target, is projected to move into surplus in 2018/19, and net debt peaks and then declines. This contrasts with ongoing deficits and rising debt in the MYEFO (Figure 3). 

To compare fiscal outlooks we need to go beyond the headline fiscal figures reported in the respective budgets. This is because Australia compiles its budget on an IMF Government Finance Statistics (GFS) basis, while New Zealand reports on a Generally Accepted Accounting Principles (GAAP) basis. However, to assist with international comparisons we also produce high-level GFS accounts for New Zealand.[1] The different scope of the Federal Government in Australia compared with central government in New Zealand leaves some remaining differences. This particularly impacts capital spending. Table 1 on the following page summarises the fiscal outlooks for both countries.

Figure 3: Australia’s underlying cash balance and net debt
Figure 3: Australia’s underlying cash balance and net debt.
Sources: The Commonwealth of Australia

Australia forecasts most of its fiscal aggregates to trough in the current 2013/14 fiscal year, and improve steadily towards a balance or surplus position in 2017/18 or 2018/19 depending on the measure.  The GFS cash balance moves from a deficit of 3.0% of GDP this year to 0.0% in 2017/18.  The corresponding figures for New Zealand are a deficit of 1.8% moving to a surplus of 1.0% respectively.

Figure 4: GFS Fiscal balance
Figure 4: GFS Fiscal balance.
Sources: The Commonwealth of Australia, the Treasury

The fiscal balance improves vis-a-vis the mid-year forecasts in line with the outlook for the cash balance for both countries, but particularly so for Australia (Figure 4).

Australia’s net debt is projected to peak at 14.6% of GDP in 2016/17 before declining to 0.7% by 2024/25.  Calculating net debt on a broadly comparable basis, New Zealand’s core Crown net debt (including advances and NZSF as financial assets) is forecast to decline steadily over the forecast period, falling from 10% of GDP in 2012/13 to 6% in 2017/18.  The net debt measure we use in our fiscal budget is forecast to begin declining in 2015/16, falling steadily thereafter.  Financial assets such as advances and the NZSF are excluded from the target measure because they are considered ring-fenced for specific purposes.

Australia’s fiscal adjustment is initially moderate...

The path of fiscal adjustment in Australia allows for ongoing growth in public spending, just at a slower pace than previously forecast.  The largest adjustment in spending plans from the 2013 MYEFO occurs in 2017/18 and beyond, when the economy is expected to be growing at a more robust pace. Between 2013/14 and 2017/18, the ratio of total payments to GDP is forecast to fall by 1.1 percentage points. In comparison, in New Zealand, the ratio of core Crown expenditure to GDP is forecast to fall by about 1.1 percentage points between 2013/14 and 2016/17.

...so fiscal drag on the economy is relatively modest near-term

Given the profile of adjustment and its moderate pace, the drag on the economy over the next few years is relatively modest for Australia.  All up, market economists estimate that fiscal policy will subtract around 0.2% to 0.5% from demand on average, not dissimilar to the fiscal impulse estimated for New Zealand.

Overall, the fiscal adjustment processes underway in New Zealand and Australia will help both countries maintain their strong fiscal positions relative to many other advanced economies.
Table 1: Economic and Fiscal Outlook
June years   2012/13
(actual)
2013/14
(forecast)
2014/15
(forecast)
2015/16
(forecast)
2016/17
(forecast)
2017/18
(forecast
Real GDP[1] Australia 2.6 2 3/4 2 1/2 3 3 1/2 3 1/2
  NZ 2.2 3.4 3.9 2.6 2.1 2.2
CPI[2] Australia 2.4 3 1/4 2 1/4 2 1/2 2 1/2 2 1/2
  NZ 0.7 1.8 1.9 2.6 2.2 2.0
Unemployment Rate[3] Australia 5.6 6.0 6 1/4 6 1/4 6.0 5 3/4
  NZ 6.7 6.0 5.5 5.2 4.8 4.5
Current Account Balance[4] Australia -3.6 -3 1/4 -4 -3 3/4    
  NZ -3.8 -2.8 -5.1 -5.9 -6.2 -6.3
GFS Fiscal balance[5] Australia -1.5 -2.8 -1.6 -0.7 -0.4 0.1
  NZ -0.7 -0.7 0.0 0.4 0.8 1.1
GFS cash surplus (+) / deficit (-) [5] Australia   -3.0 -1.6 -0.8 -0.4 0.0
  NZ -1.9 -1.8 -2.3 0.0 0.7 1.0
Net debt Australia 10.0 12.5 13.9 14.4 14.6 14.0
  NZ [6] 10.0 9.1 9.2 8.5 7.3 6.0
  NZ (Budget basis) 26.2 25.8 26.4 25.9 24.9 23.8
  1. Annual Average percent change
  2. Annual percent change, June quarter
  3. Seasonally adjusted, percent, June quarter
  4. Percent of GDP
  5. IMF Government Finance Statistics basis, percent of GDP
  6. Net debt including Advances and NZSF as financial assets

Notes

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