The background to yesterday's budget is an economy that has averaged real economic growth of around 4 percent annually for the last four calendar years. Unemployment has fallen to around 5 percent of the labour force and capacity utilisation has been high.

The platform for this reasonably robust performance was the economic reforms implemented in the 1980s and early 1990s. In addition, the economy has benefited from a low exchange rate, favourable growing conditions, relatively buoyant commodity prices and a turnaround in net migration.

As a result, finance minister Michael Cullen was able to deliver a budget in which the government's accounts appear superficially to be in tolerable shape.

Headline features included an operating surplus of NZ$4 billion (3.1 percent of GDP) and a continuing fall in net public debt to 14 percent of GDP. Last year New Zealand regained an AAA credit rating.

The Labour-led government elected in 1999 has increased government spending substantially, particularly in the areas of retirement income, health and education. However, it has favoured more centralised control over health and education services, and it is unclear whether higher spending is leading to better outcomes. The greater role of the private sector in Australia appears to be a factor in its superior education performance.

Only the relatively strong economy has kept the ratio of government spending to GDP stable. However, spending by governments at all levels in New Zealand exceeds that in Australia as a share of the economy, and is too high to permit fast economic growth.

The government also increased the top personal tax rate from 33 to 39 percent in 2000. It has rejected the recommendations of an official tax inquiry, the McLeod Review, to move to a lower and flatter income tax structure.

The outlook for the economy is becoming problematical. The budget forecasts are for growth of 2.5 percent in the year to March 2004 and 3.2 percent for the following year.

The long-run projections for the coming decade are for average annual growth of barely 2.5 percent a year. This compares with New Zealand 's average annual growth rate of 3.6 percent in the decade to 2002 and expectations of growth rates in the 3-4 percent range in Australia .

The deteriorating outlook reflects the failure of New Zealand governments since the mid-1990s to build on the earlier reforms, an overall lack of consistency and stability in policy, and the present government's more interventionist approach. It talks of "more active" government and dislikes what the budget called "the whims of the market".

Unlike any other OECD government, the New Zealand government has a policy of no further privatisations. It has rejected OECD criticism of renationalising some businesses and engaging in activist industry policies.

The costs of its decisions are now showing up in the government-dominated sectors of the economy such as electricity and transport (particularly roading) which are emerging as bottlenecks to growth, and in growing welfare dependency.

Business organisations have been critical of the government's many anti-growth initiatives. It has responded by affirming that its top priority is to achieve faster growth to restore New Zealand to the top half of the OECD income rankings, a position now occupied again by Australia .

In practice, however, the government has turned its back on the lessons for growth and innovation demonstrated by countries such as the United States . Its bias is towards European-style policies such as union-based bargaining and worker protection laws, heavier regulation of business, a larger welfare state and adherence to the Kyoto Protocol.

Further increases in welfare spending are foreshadowed for the 2004 budget, as well as tax cuts for low income earners which would widen rather than flatten the tax scale. The focus is still on income redistribution, not wealth creation.

New Zealand 's overall economic framework remains within OECD norms, and there is no likelihood of major policy reversals. Economic performance is likely to be average by OECD standards.

The problem is that the prospects of further improvements are currently not good, and that the economy will continue to perform below its potential.

Although the economic reform process in Australia can be criticised as patchy and lacking adequate momentum, its direction has been generally consistent and market-oriented. New Zealand , by contrast, has followed an erratic path and it has been headed recently in the direction of less rather than more economic freedom. Business organisations in general have been pointing out that this is not a recipe for economic growth.

With the economy slowing and strains in infrastructure and other areas becoming more apparent, their views may get a better hearing.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz