of the tax system: a comprehensive value added tax replaced a myriad of differing sales taxes, while the
corporate and income tax base was broadened and tax rates reduced. Tax incentives concerning exports or
retirement savings were abolished. On the spending side, focus was put on organisational and managerial
devolution and improved accountability, for instance in health and education. Chief executives became
responsible for managing departments, being directly accountable to their Ministers for hitting specific
output targets. Moreover, the large number of trading departments was turned into state-owned enterprises,
many of which were subsequently sold.
22. Stronger growth did not help fiscal consolidation early in the reform era. Partly reflecting heavy
industrial and agricultural restructuring and job losses from rapid efficiency gains of former trading
departments, GDP barely increased between 1984 and 1991. Also the exchange rate and real interest rate
were high. Early in the reforms, consolidation was largely achieved by revenue increases and while some
spending items were pruned severely, spending on health, education and social services increased as a per
cent of GDP. But stronger growth followed and a fiscal surplus was achieved in the 1993/94 financial year.
Fiscal performance has been strong since then, the government recording a deficit in only one year since
1994 and a net debt position of more than 40% of GDP has swung into a net asset position of 10% of GDP
currently. This partly reflects a decent, though not outstanding, growth performance and partly the
principled approach to fiscal management that was put in place in 1994. It is a blueprint for principles that
underpin responsible fiscal management and transparency, which have been taken up in the UK’s code of
fiscal conduct and the OECD Best Practices for Budget Transparency. Macroeconomic policy was set to
provide stable policies rather than stabilisation policy.
23. Reforms in New Zealand since the mid-1980s were broad ranging and quick, against the
background of large macroeconomic imbalances. By tackling many areas quickly there was no stable
coalition formed to oppose reforms: for instance, farmers who had their subsidies withdrawn,3 strongly
supported tariff cuts; and farmers and other businesses then put pressure on the government to reduce
spending to bring down the interest and exchange rate. But moving quickly also led to some backlashes, as
the reform process stalled between 1988 and 1991, from when onward it resumed again. The experience
highlights that fiscal consolidation and radical change can go hand in hand, even when the results of
reforms on economic performance do not come quickly.
24. In contrast with New Zealand, the Australian reform process was gradual, but it was also
principled and coherent (Banks, 2005). As in New Zealand, policy prior to the reforms was characterised by
being highly regulated, anti-competitive and redistributive, even though the macroeconomic background,
while not brilliant, was more benign. Productivity growth of just over 1% between 1973 and 1990 was
relatively poor and, also affected by terms of trade losses, the international income-per-capita ranking
slipped badly. Though reforms started in 1973 with a 25% across-the-board tariff cut, this precipitated a
heavy backlash against reforms. It took until 1988, that tariff reductions were phased in and virtually all
tariffs were below 5% by 1996. The early 1980s also saw financial market reforms. Increased competition
led to pressure to reform labour markets and sheltered sectors. The reforms ultimately embraced all product
markets, factor markets and the public sector, including as in New Zealand the commercialisation,
corporatisation and privatisation of many government enterprises.
25. Contrary to New Zealand, Australia adopted an incrementalist approach to reforms, thus avoiding
heavy initial adjustment costs. The programme evolved in a cumulative way to encompass reforms across
much of the economy. Moreover, and again contrary to New Zealand, reforms were accompanied by
retraining schemes and displaced workers could rely on the relatively generous welfare safety net.
Adjustment costs were also eased by sector-specific restructuring and assistance schemes, which amounted
to AUD 600 million annually under the Automotive Competitiveness and Investment Scheme. Similarly,
when price support for the milk industry was abolished in 2000, farmers were provided with a substantial
stream of payments, financed by a levy on milk consumers. Also regional policy schemes eased the
3. The largest farmer association, the Federated Farmers of New Zealand argue that the sudden and unexpected removal of subsidies have made the
farming sector stronger and that farmers are determined never again to be dependent upon government handouts (Federated Farmers of New
Zealand, 2002). Productivity gains, for instance, moved from 1% pre-reform to nearly 6% post-reform, while the initial impact of the reform,
while sizeable, was much milder than officially projected.
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