Last week, the New Zealand Government presented its budget for 2017/18 and frankly, it put Australia to shame. The projected surplus of 0.6% of GDP is a direct reflection of sensible and strong leadership. It is also a result of a parliamentary system which is not hamstrung by state rights – there is no upper house. New Zealand dragged itself out of the mire of the GFC and into a period of sustained economic growth where today’s biggest challenge is controlling a highly inflated Auckland residential property market.
The first table puts into context the size of the New Zealand economy. With GDP of NZ$260 billion, it is approximately 15% of the size of Australia.

Figure 1. GDP by sector
Source. StatsNZ, The Treasury
New Zealand’s population is estimated at 4.8 million or 20% that of Australia. Whilst it is experiencing significant income and wealth growth, the average New Zealander has wealth equivalent to 75% of that of the average Australian.
The following chart partly explains why New Zealand is growing faster than Australia. The annual population growth of 2.1% (100k pa) is greater than Australia’s (in percentage terms) and the acceleration is impressive.
Population Explosion, NZ annual population growth
Figure 2. Population Explosion, NZ annual population growth
Source. Statistics New Zealand, Bloomberg
The surge in population growth (net immigration) and the decline in mortgage rates has led to a boom (if not a bubble) in residential property prices. The next table shows this and tracks the decline in mortgage rates. Over the last ten years, Auckland house prices have doubled and mortgage rates have halved. With an estimated population of 1.6 million, the Greater Auckland Region is home to 33% of New Zealanders and is one of the fastest growing regions in the country.
Mortgage Rates and Auckland Housing Prices
Figure 3. Mortgage Rates and Auckland Housing Prices
Source. REINZ, RBNZ, Haver Analytics, The Treasury
New Zealand has a highly urbanised population with around 73% of the resident population living in urban areas with 30,000 or more people. As at June 2015, over half of all New Zealanders (53%) lived in the four main urban areas of Auckland (1,454,300), Hamilton (224,000), Wellington (398,300) and Christchurch (381,800).
The surge in population growth has required a response from Government in terms of a solid commitment to infrastructure investment. The following table from the New Zealand budget pack is impressive – even more so when you compare it to Australia’s government commitment.
Crown infrastructure investment
Figure 4. Crown infrastructure investment
Source. The Treasury
The 2017/18 Australian budget forecast infrastructure/capital investment by the Commonwealth Government of $38 billion over the next 4 financial years. The New Zealand budget forecast is for NZ$32 billion over the same period. As we noted earlier in our GDP comparison and based on their relative sizes, Australia should be spending a significantly greater amount than New Zealand. The fact that this is not the case exposes the nonsense of the Australian Government that infrastructure is a major focus of its budget.
New Zealand’s economic growth has been better than Australia’s and will be significantly better than other developed economies.
NZ leading the pack in forecast growth
Figure 5. NZ leading the pack in forecast growth
Source. The Treasury
More embarrassing for Australia is the budget and debt outcomes that flow from the New Zealand budget. Not only is New Zealand currently operating with a fiscal surplus, but this is forecast to remain the case in coming years. Further, NZ government debt to GDP is forecast to fall rapidly over the next 4 years while the Australian Government forecasts continued deficits.
Summary of fiscal projections, as a percentage of GDP
Figure 6. Summary of fiscal projections, as a percentage of GDP
Source. The Treasury
The budget outcomes – past, present and forecast – are presented below. While there is a justified level of scepticism in Australia’s budget forecast of a return to surplus in 2021, there is much less doubt regarding New Zealand. They are already in surplus!
Core Crown revenue and expenses
Figure 7. Core Crown revenue and expenses
Source. The Treasury
The next chart shows that the GFC interrupted the dramatic decline in New Zealand government debt repayment that had been underway prior to 2008. The GFC hit the New Zealand economy hard and the government responded with a massive fiscal stimulation from 2009/12. Since then the economy has bounded forward and the budget returned to surplus last year.
Net core Crown debt
Figure 8. Net core Crown debt
Source. The Treasury
As a result of the recession of 2008/09 and the effects of the global financial crisis, fiscal projections prepared in early 2009 showed that, without a policy response, net debt would increase to over 60% of GDP. Instead, operating surpluses are growing and net debt peaked at 26% of GDP and is now falling.
Real GDP grew 3.1% in the year ended December 2016. Annual economic growth is forecast to average over 3% over the next four years, peaking at around 3.8% in 2019.
Summary of Treasury’s economic forecasts in the Budget Update
Figure 9. Summary of Treasury’s economic forecasts in the Budget Update
Source. StatsNZ, The Treasury
The fiscal surplus resulted from expenditure constraints with the growing economy generating tax revenue. The next table shows key expenditure categories and the restraint shown since 2012.
Core Crown expenses
Figure 10. Core Crown expenses
Source. The Treasury
In New Zealand legislative power is vested in Parliament, a unicameral body designated the House of Representatives. There is no house of review and governance occurs through a coalition agreement between represented parties. Members of parliament are elected on a proportional voting system where either Labour or Conservatives lead the coalition with minority parties. The system seems to work well allowing the government to properly set policy unhindered by minority review that exists in the Australian Senate.
This may be reflected in New Zealand’s impressive trade performance. Given its size the country must import significant amounts of consumer items and yet it is able to balance its trade account on a regular basis. The parliament’s decision to legislate Fonterra as industry co-operative based monopoly for milk purchase and export has paid off.
Trade is essential to New Zealand’s economic prosperity. Exports of goods and services make up around 30% of gross domestic product and New Zealand’s trade interests are well diversified. Australia, China, North America, the European Union and the Association of South-East Asian Nations each take between around 9% and 19% of New Zealand’s goods and services exports. Other major trading partners include Japan and Korea. NZ’s exports consist mainly of agricultural products (especially dairy but also eggs, honey, meat, fruit), and its imports are made up primarily of vehicles, machinery, fuel and electronic equipment.
New Zealand’s Terms of Trade … on the rise since 2004
Figure 11. New Zealand’s Terms of Trade … on the rise since 2004

NZ Minister of Finance, the Hon Steven Joyce
In the 2017/18 budget the NZ government highlighted the improvements to the fiscal outlook and declared the NZ Government’s intention to build fiscal resilience. Therefore the Government aims to reduce net debt to between 10% and 15% of GDP by 2025, once the current target of 20% of GDP by 2020 has been achieved.
Over the next few years employment is forecast to continue to grow strongly, with the number of people employed increasing by 215,000, while unemployment is forecast to gradually decline. Wages are forecast to grow, with average wages expected to be over $64,000 by the end of the forecast period. Wages growth in New Zealand has been greater than in Australia in each of the last two years.
Average Wage and Number of people employed
Figure 12. Average Wage and Number of people employed
Source. The Treasury
Consumer price inflation is expected to pick up over the next few years as spare labour capacity is used up, stabilising around an annual rate of 2%. Based on this forecast there seems no reason to expect anything other than a relatively stable government bond market.
NZ Core Inflation Rate over Last 10 Years
Figure 13. NZ Core Inflation Rate over Last 10 Years
New Zealand’s net international investment position has improved significantly since 2009: from a net liability position of 84% of GDP in early 2009 to a net liability position of around 60% of GDP at the end of 2016. Over the forecast period, the net international investment position is expected to remain broadly stable as a percentage of GDP.
“Core” Crown revenue is now expected to fall to just below 30% of GDP over the forecast period: Core Crown expenses are rising in dollar terms but falling as a share of GDP, having reduced from 33.6% of GDP in 2008/09 to 29.2% of GDP in 2015/16. They are expected to continue to decline as a share of GDP, meeting the NZ Government’s long-term objective to maintain core Crown expenses below 30% of GDP.
On this measure – taxation revenue and expenditure – New Zealand runs a larger relative budget than that of Australia (26% of GDP). Arguably this larger government sector has not impinged upon entrepreneurial corporate spirit and the country has a national pension scheme that can be accessed free of a means test by all retired citizens.
Summary of fiscal outlook
Figure 14. Summary of fiscal outlook
Source. The Treasury
A significant difference in taxation rates in NZ occurs in its GST rate. At 17.5% it greatly exceeds Australia’s but it has allowed significantly lower PAYG rates to apply. The structuring of the NZ taxation regime is not hamstrung by a states house (the Senate) and the GST is not controlled by state governments that in Australia act to stifle reform.
The performance of the New Zealand stock market since the GFC ranks as one of the best in the world. Meanwhile Australia’s equity market continues to flounder. The following chart shows that Australian investors are poorly served by Australian companies and maybe it is time for Australia to follow the successful economic and political strategies of New Zealand.
 NZ v Australia equity markets: NZ outperforms Australia by 25% over the last 10 years
Figure 15. NZ v Australia equity markets: NZ outperforms Australia by 25% over the last 10 years 
Source. Clime Asset Management 
The Kiwis have more than just the All Blacks to be proud of.
All Blacks
Source. Getty Images