Tell someone in an Auckland café that the economy is booming and they will laugh. Unemployment in the city is 6.1 per cent. Cafés and shops are closing their doors. Boom? What boom?

Drive through rural Canterbury or Southland, though, and you will see new farm machinery in the paddocks. Business confidence has hit multi-year highs. These regions are prospering.

Both realities are true. New Zealand is simultaneously booming and struggling, and this split reveals how the country manages its money.

The boom is real: a terms-of-trade boom that has pushed New Zealand’s trading position to the highest levels ever recorded.

Terms of trade sounds like economic jargon, but it is quite simple. Imagine you are at a farmers’ market. Last year, your jar of honey sold for $10 and a coffee cost $5. You needed one jar to buy two coffees. This year, your honey sells for $15 but coffee still costs $5. Now one jar buys three coffees. You are richer without working any harder.

That is New Zealand right now, but on a bigger scale. The country sells milk powder, beef, lamb and logs at strong prices. It buys cars, phones and petrol at prices that have fallen. Same volume of exports, but they now pay for far more imports.

In the June 2025 quarter, export prices nudged up while import prices dropped 3.7 per cent. The terms of trade surged 4.1 per cent, exceeding expectations. At 1567 points, the index hit an all-time high. New Zealand’s purchasing power in world markets has never been stronger.

So, is this an all-round good news story? Well, not quite. But that requires an explanation.

When farmers and exporters earn higher returns, they pay more tax. GST is mainly collected when owners and workers spend their incomes. When they hire workers and pay higher wages, there is more income tax. This upswing should flood the government with extra revenue.

Except that did not happen. Treasury now says the boom will deliver almost no extra tax revenue. Just $300 million more this year than expected six months ago. Next year? They actually expect $3.3 billion less, despite the strong trading conditions continuing. How did that happen?

The government faced a dilemma. Rural regions were booming but cities were struggling with job losses. Their solution? Cut taxes to help urban workers.

Income taxes were cut in July 2024, just when the rural boom could have delivered extra revenue to the government. This year, the government introduced Investment Boost, letting firms deduct 20 per cent of new asset costs upfront (the rest is depreciated normally). This lowers tax paid today. On top of that, those cheaper imports also mean less GST collected at the border.

The government tried to have it both ways: helping urban New Zealand through tax cuts while also increasing spending everywhere. Core spending rises from $142 billion this year to $150 billion next year – an $8 billion increase. The rural windfall was thus spent before it could be saved.

The strong trading conditions delivered no extra money after the tax cuts.

These factors explain the two-speed economy. New Zealand’s agriculture sector does well while jobs disappear in Auckland and Wellington.

But the real concern is what happens with government finances. Normally, during terms of trade booms, responsible governments pay down debt and build reserves for the inevitable downturn.

New Zealand, meanwhile, is doing the opposite. Despite the best trading conditions in history, the government runs deficits of 2-3 per cent of GDP. Treasury’s own forecasts show deficits at 3.4 per cent of GDP this year and next.

Why does this matter? Because New Zealand depends overwhelmingly on selling farm products to a few countries. Around a fifth of all exports go to China alone. Manufacturing has shrunk to just a tenth of the economy.

When commodity prices are high, this concentration is not a problem. When they fall, it becomes dangerous.

In 2013-14, dairy prices crashed from $8.40 to $3.85 per kilogram – more than halving in two years. Farmers lost $260,000 each on average. Many were forced to sell.

Imagine the same shock hitting today, with the government already spending heavily in deficit.

When this cycle turns – and commodity cycles always turn – New Zealand faces the downturn with no reserves. The government has built no buffers and reduced no debt.

Instead, it locked in higher spending in a highly favourable trade environment. Yet it was a boom that enriched farmers but delivered almost nothing to government coffers.

The Auckland café owner and the Southland dairy farmer live in different economic worlds today. One struggles with weak demand. The other enjoys the best prices in a generation.

But when commodity prices fall, they will share the same fate: neither will be prepared.

The café owner never benefited from the boom. The farmer assumed it would last forever. And the government spent money it did not have.

Failing to get the government’s finances under control during benign trading conditions will prove disastrous when the terms of trade boom ends.

Record terms of trade. Substantial budget deficits. When the boom ends, both will matter.

To read the full article on The Australian click here.