NZ budget charts small, pragmatic steps towards a surplus by 2015-16

THE New Zealand budget handed down yesterday is a fascinating contrast to the debate in Australia: on tax reform, and on getting the budget back in the black.

New Zealand has a right-of-centre government, as Tony Abbott hopes Australia soon will. New Zealand has also just had an independent tax review, as Kevin Rudd and Wayne Swan have.

But there the similarities end. The Henry review proposed an ambitious reform agenda, of which very little will be implemented. New Zealand's tax review was more modest but yesterday's budget committed to implementing most of it in some form.

In Australia, Labor has adopted an austere fiscal policy to put the budget back in the black by 2012-13 and limit net debt to 6 per cent of GDP which the Coalition says is too much. But the Coalition's Kiwi allies have a far more relaxed approach. They will increase their deficit next year as we cut ours. They will leave it to 2015-16 to return to surplus, and aim to limit net debt to 26 per cent of GDP.

After 25 years in which Australia has been the pragmatic sister, are we seeing a role reversal?

New Zealand's Prime Minister, John Key, is pragmatic above all. A boy from a Christchurch housing estate, he rose to make millions as a London foreign exchange trader. Then, at 40, he came home to enter politics. Within six years he was Prime Minister, skilfully heading an improbable coalition of his National Party and three small allies.

Bill English, his Finance Minister, is a commonsense conservative from the Southland who gave up sheep farming for economics, then politics. In their lifetimes they have seen New Zealand slide down the economic rankings, partly due to six years of too much ideology, followed by 17 years of too much caution.

The diagnosis English gives of New Zealand's problems is the same as was given a decade ago by his Labor predecessor, Michael Cullen: too little research, innovation and exports, too little saving, too much debt and property speculation and too much emigration of its best and brightest, above all to Australia.

"New Zealand's largest single vulnerability is now its large and growing net external liabilities," English said yesterday. "New Zealand owes the world $NZ168 billion ($A135 billion), or around 90 per cent of its GDP." (Australia owes 61 per cent).

"The government is committed to policies that will reduce our vulnerabilities by tilting our economy away from debt and consumption towards savings, investment and exports."

Yesterday's tax changes are meant to drive that. They will:

Cut all income tax rates to a four-tier scale: 10.5 per cent (low incomes), 17.5 (low-middle), 30 (upper-middle) and 33 per cent (upper, although cutting in at just $A57,000).

Lift the GST rate from 12.5 per cent to 15 per cent. Low-income households will be compensated by a rise in pensions and benefits to match the 2 per cent lift in inflation.

Cut the company tax rate from 30 per cent to 28 per cent.

End tax breaks for depreciation of rental housing, and stop investors using their losses to qualify for means-tested benefits.

Invest $A260 million in new science, research and technology programs, $A1.2 billion on new rail and other infrastructure, and $A1.1 billion in education.

But Key and English rejected more radical proposals from their tax review, headed by Victoria University (Wellington) economist Bob Buckle: a capital gains tax (NZ still has none), including on the family home, and tough moves against negative gearing, by taxing landlords on an imputed rate of return.

Are yesterday's tax changes the catalyst that will change New Zealand's culture from speculation to innovation? Or just the latest in the series of minor reforms we saw from the Bolger and Clark governments, leaving the culture unchanged? Surely the latter.

On the budget, unlike their Australian counterparts, Key and English are in no hurry to return to surplus. Next year the underlying deficit will rise to 4.2 per cent of GDP (as against 2.9 per cent here), then gradually decline into surplus by 2015-16, by which time NZ's net public debt would have risen to 26.5 per cent of its GDP.

That's hardly Greek or US levels, but by then Australia's net debt would be almost zero. You can't change the culture this way.