Brits have cause to be jealous of NZ
As Prime Minister John Key visits Britain, the differences in strength of recovery in New Zealand compared with the UK are stark, writes John Hartevelt.
The Chancellor of the Exchequer stood atop a half-built tower in central London and declared the argument over.
George Osborne, the British equivalent of New Zealand's Finance Minister Bill English, said the critics of austerity had been proven wrong.
"We held our nerve when many told us to abandon our plan," he said.
"And as a result, thanks to the efforts and sacrifices of the British people, Britain is turning a corner."
A week after that speech, Prime Minister John Key arrived in London. He has met with his friend, the British Prime Minister David Cameron, with the Foreign Secretary William Hague and with the reliably rambunctious London Mayor Boris Johnson.
Key has arrived to a more optimistic mood. Britain, it seems, has finally hit rock bottom and in the last few months is showing signs of a sustained recovery. Has austerity conquered its critics?
New Zealand's version of austerity, carried out through a series of "zero budgets" in which no new spending was committed, cannot compare with Britain's.
With only occasional exceptions, the Conservative-Liberal Democrat coalition government has been lowering net debt in every quarter since 2010 from a peak of 151.7 per cent of gross domestic product (GDP) in 2010 down to 135.1 per cent now.
In New Zealand, by comparison, the Key Government has actually allowed net debt to climb - but to a far less alarming 26.4 per cent of GDP. Whereas in the UK, further fiscal tightening is planned to continue cutting debt, in New Zealand, new spending is in the books and net debt is forecast to grow further, up to 28.7 per cent of GDP by June 2015.
The differences in strength and timeliness of recovery in New Zealand compared with the UK are also stark.
New Zealand recovered to growth in March 2011 and has been ambling along at around 0.5 per cent growth in each quarter since.
In the UK, the ride has been much rockier with growth bouncing under and over 0 per cent repeatedly since 2008. New Zealand also did not fall as hard as the UK.
The worst quarterly fall in GDP in New Zealand was -1.1 per cent. In the UK, it went as low as -2.5 per cent in the first quarter of 2009 having already contracted 2.1 per cent in the last quarter of 2008; -1.4 per cent and -0.9 per cent in the quarters before that.
Osborne's political opponents argue that his austerity programme made the troughs deeper and delayed the recovery.
The New Zealand government's narrower programme of public sector cuts and its more even recovery might lend some weight to that argument. But Key doesn't think so.
"Every country has got its own challenges," he says.
"Sometimes for a smaller economy, a speed boat is quicker to turn around than an ocean liner."
In both countries, there has been a great clamour to re-balance the economy in the wake of the crisis.
Cameron is fixated on what he calls "the global race," in which the leading countries are exporting more than they are importing and working more efficiently than their competitors.
New Zealand is similarly targeting an increase in exports of between 5.5 and 7.5 per cent a year and a lift in productive savings and investment. But there are, as yet, few signs of the desired rebalancing in either country.
New Zealand continues to carry a large current account deficit - 4.8 per cent of GDP on the latest figures. In the UK, it's around 3.8 per cent of GDP, the highest it has been in almost 25 years.
Perhaps more immediately alarming is the prospect of dangerous housing bubbles reappearing in both the UK and New Zealand - more specifically, in London and Auckland.
In the year to July, London prices were up 9.7 per cent and in Auckland they were 13.1 per cent up in the latest figures.
The two governments diverge over the existence of, and desired response to, their respective bubbles. Key is concerned by what he sees in Auckland.
"We do worry that there is a bubble that's created in Auckland and long-term that could cause the problem you saw in the United States with the housing market, ultimately the bubble burst and as a reflection of that, you could have a lot of first home buyers massively under water."
Osborne, by comparison, has been labelled "in denial" over London's house prices. Looking across the whole of the UK, Osborne says there is no evidence of a "housing boom".
"What I see is not only house prices 25 per cent lower than they were but mortgage approvals half what they were, transactions two thirds of what they were. In other words, we are a long way from a housing boom."
Whereas New Zealand's Reserve Bank next week implements tougher high loan to value ratio mortgage lending rules, Osborne describes exactly such 90 to 95 per cent loans as "not exotic weapons of financial mass destruction". Osborne instead sees them as "a regular part of a healthy mortgage market and an aspirational society".
New Zealand and the UK are also parting ways on their approach to monetary policy. The Canadian now in charge at the Bank of England, Mark Carney, has promised no interest rate hikes until unemployment falls to below 7 per cent, which is not forecast until 2016.
New Zealand's Reserve Bank, meanwhile, remains primarily focused on an inflation band of 1 to 3 per cent.
The broader view taken by Carney is highly relevant to New Zealand.
Labour's finance spokesman and new deputy leader, David Parker, is a proponent of a more explicit role for joblessness and the exchange rate in the practice of monetary policy.
If Carney is forced into an earlier than promised interest rate hike by high inflation, it could undermine the new approach.
Already, UK inflation is significantly higher than in New Zealand. This is contributing to another of the key differences between the recoveries in each country - real wage rates. In the UK, inflation has exceeded nominal wage growth for 39 months in a row.
That means the average family income has been shrinking, in real terms, for more than three years. In New Zealand, where inflation was 2.1 percentage points lower than the UK in the latest data, real wages have held up.
Nominally, there is not much difference with the UK in wage increases and the 1 to 2 per cent average annual rises are well short of the 3 to 4 per cent figures of the earlier 2000s.
The key to New Zealand's better results, compared with the UK, has been its lower rates of inflation.