This paper investigates how shocks to government spending and income taxes in Australia affects both Australia and New Zealand economies and looks at the channels through which these effects are transmitted from one economy to the other. A semi-structural vector auto regressive (VAR) approach is used to analyse quarterly data from the period: 1974:3 – 2005:4. The empirical results show that a shock to Australian income tax revenues leads to a decrease in both Australian and New Zealand output, and a shock to Australian government consumption leads to an increase in both Australian and New Zealand output. The impact of government expenditure shocks is transmitted through the interest rate channel only. The empirical results also suggest that the impact of an income tax shock is transmitted through the interest rate channel, which dominates the effect of the exchange rate channel.