New Zealand’s great regression

Luke Malpass

20 October 2010 | The American, Journal of the American Enterprise Institute

Over a year ago in Auckland, the humorist P.J. O’Rourke gave a dinner lecture for the Centre for Independent Studies titled “Invisible Hand vs. Visible Fist: Securing the Future Wealth of Nations” on the global financial crisis and the disastrous role that governments played in it. For a country full of lefties and lacking the rich tradition of political satire as in the United States, P.J. was a refreshing shot in the arm for the classical liberals in attendance.

Delivering the vote of thanks was the Honorable Ruth Richardson, New Zealand’s indomitable former minister of finance and author of the “mother of all budgets.” Richardson had effectively dismantled the welfare state and slashed government expenditure in the early 1990s before Prime Minister Helen Clark’s Labour government reverted New Zealand to type. In her speech, Richardson noted that since her tenure, New Zealand had “lost its policy mojo” and implied that her former party (the current conservative National-led government) was about to commit “fiscal child abuse.” On my way to the restroom after this remarkable serve, a fellow commented that although he was very glad that Labour was gone, “Ruth just reminded” him how much he disliked her policies and rhetoric.

New Zealand is not in a league of international political big hitters. There are few things that Americans would know about New Zealand: maybe the Lord of the Rings films, perhaps our anti-nuclear policy, or, for the politically minded, the liberalizing reforms of the 1980s (colloquially known as “Rogernomics,” after Minister of Finance Roger Douglas). These reforms ensured that from 1984 to 1993, New Zealand was a beacon of liberalizing reform (liberalizing in the classical sense, as I will use it here) to the rest of the Western world. In reality, despite its great results and international recognition, New Zealand’s overtly ideological and doctrinaire approach to reform was an anomaly in the nation’s otherwise pragmatic path. New Zealanders never really got into reform zealotry, and although the medicine was taken, the exercise regime that would make it unnecessary in the future required a bit too much discipline. It was easier to fall back into the old habits of tax, spend, and regulate.

And so it is. New Zealanders are pleased that Helengrad (the pop culture name for New Zealand under Prime Minister Clark, 1999–2008) has fallen and the socialist government gone. But the nation also seems relatively content with a conservative government doing the same socialist things with marginally lower income tax rates. John Key’s National-led government prefers not rocking the boat—he is keeping up entitlements and continuing to tax and spend, and to clamp down on incorrect social behaviors. As the above reaction to Richardson’s comments suggests, the age of ideology and bold reform seems to have been fleeting—and to have passed.

For followers of global politics and supporters of liberalizing reforms, New Zealand served as a shining example of brisk change. If the nation upset the non-communist world with its antinuclear policy in the 1980s, it also provided fertile ground for many of the ideas of Milton Friedman, Friedrich Hayek and, in the latter stages of reform, Joseph Schumpeter.

To understand the liberalizing period of 1984 to 1993, which was essentially an aberration in the modern political history of New Zealand, it is important to know just how out of character these reforms were for New Zealand. It is also important to understand the moribund state of the economy prior to the changes. It was, in popular language, considered a “Polish shipyard.” One of New Zealand’s most ardent reformers and successful entrepreneurs, Alan Gibbs, has called it a “feudal economy” and a “nonsense economy.” And nonsense it was.

Progressive Beginnings

From the beginning of European settlement in New Zealand in the mid-19th century, the nation has been heavily influenced by Fabians, socialists, and the idea of government as an enabler. Indeed, when migration to the island nation took off in the late 19th century, New Zealand was considered a great “social experiment”—a new country where socialist and egalitarian principles could be applied. After all, unlike other colonies around the world, people came to New Zealand for economic gain and to escape from Britain (where perhaps they were in the black sheep part of the family). There was no cash crop, no slave-based economy, no convict colony, and no fervent desire to practice religious freedom. From the start, the basic social structure in New Zealand was egalitarian—there wasn’t an obvious group to exclude, economically take advantage of, or build myths around (although, as with most imperial enterprises, the indigenous Maori did suffer at the hands of colonial rule).

So New Zealand was ripe for socialist experiment. Progressive academics, thinkers, and ideologues from around the world came down, took notes, and made suggestions to explore ways the state—unshackled from the constitutional constraints or conventions historically held in the United States and the United Kingdom—could help the masses. It is rumored that on his travels to New Zealand, the man of letters and Fabian George Bernard Shaw commented on how bountiful the nation was and mischievously suggested that it would be marvelous if all schoolchildren were served milk every day. Shortly after, state-sponsored milk became a staple of every New Zealand child at school lunch until the 1980s.

It is in this historical context that New Zealand’s regression and reform slump can be explained. The history of its government is replete with ad hocism, failed experiments (government has tried over the years to pick winners in most major industries), and a lack of guiding principles.

It has been argued quite persuasively that New Zealand’s history, especially since World War I, was marked by its search for security. New Zealand lost more soldiers per capita than any other nation in World War I—and this shaped its society and the way it viewed the world for a long time. The legacy of the Great War was exacerbated by the emasculating experience of the Great Depression and the subsequent trauma of World War II. Protectionist walls were erected—security of living, certainty about life, and a “fair go” were given priority over dynamism, change, and international engagement. The 1950s and ’60s were New Zealand’s “golden years”—it had the highest living standards in the world in the 1950s, largely due to postwar export industries, particularly sheep products to the United Kingdom. But hidden behind this prosperity were the seeds of a long period of decline and a slow process of the stultification of society. The nation was complacent during the good times, and successive governments combined a “she’ll be right” attitude with a misguided belief in the long-term viability of protectionist policies. It took 40 years for the consequences to hit home.

The Reforms

When they did, the nation responded with radical reforms in 1984. From being one of the most closed-off economies in the world, New Zealand became one of the most liberalized. When the Fourth Labour Government was elected in 1984, almost every area of the economy except the stock market was heavily regulated with tariff and quota protection import licenses and the granting of monopolies. As part of its protectionist policies, government imposed a total wage and price freeze for almost two years in 1982. The government owned about half of the economy and provided cradle-to-the-grave welfare.

Education, healthcare, welfare, and risk insurance were all (and still largely are) free and public. Many industries had some form of protection through quotas, tariffs, monopolies, import licensing, or subsidies. The top rate of income tax was 66 cents in the dollar. Inflation and unemployment were in the double digits and the overvalued dollar on a fixed exchange rate.

By 1989, the Labour government, led by Prime Minister David Lange and Finance Minister Roger Douglas, had halved the top rate of tax to 33 cents in the dollar and introduced a universal goods and services tax (GST or consumption tax). It removed all support for agriculture, removed or began dismantling the tariff wall, floated the dollar, and turned many loss-making government departments into profit-driven, state-owned enterprises (SOEs) and then privatized a swag of them. The principle of “user pays” was applied across the state sector to efficiently price government-provided goods and services. The Lange government set up an independent reserve bank with the sole responsibility of meeting inflation targets agreed upon with the government of the day.

In 1990, the conservative National government, led by Prime Minister Jim Bolger and Finance Minister Ruth Richardson, curtailed the welfare state and deregulated the labor market through the Employment Contracts Act. This ended a hundred years of centralized wage arbitration and conciliation, which was essentially centralized wage fixing facilitated by government and applicable for a set time period across whole industries, regardless of local conditions. To put an end to post-election budgetary surprises, the government introduced the Fiscal Responsibility Act. “Ruthanasia,” as these economic reforms came to be called, imposed a legal requirement to balance the budget and make full fiscal disclosure.

These reforms were substantial and remarkable for the fact that a social democratic Labour government did much of it and in a short period of time. But had history been different, Labour’s reforms might have gone much further. The government’s modus operandi was to operate a dovish foreign policy, with implied anti-Americanism, while simultaneously implementing the most extensive free-market reforms in the Western world. But this trade-off could only last for so long. Eventually, internal Labour Party divisions broke into open warfare. The government acrimoniously fell to pieces and replaced the prime minister twice before being trounced in the 1990 election. Had this not occurred, New Zealand may have had a flat tax of around 23 cents on the dollar and a wholly privatized economy.

Since then, three major factors have affected the impetus for liberal reform in New Zealand.

1) The pace of the original reforms. Both Douglas and Richardson subscribed to a “crash through or crash” philosophy, relying on an extremely quick pace of change to get through key reforms before opposition could be effectively organized. Although probably politically necessary, their liberalizing reforms substantially changed the political market by removing life’s certainties (at least those provided by government). The rapid societal changes gave an impetus to an electoral reform movement and changed New Zealand’s electoral system from a British-style, First Past the Post system to one of proportional representation. This has made it far more difficult to introduce coherent reform. These changes also made the population wary of reform, mainly because many of these painful changes included large-scale redundancies in state trading departments (government departments that owned whole businesses or industries such as forestry, railways, postal services, etc., and did not operate under a profit motive).

2) Nine years of Clark Labour government. Because the reforming Fourth Labour government collapsed so spectacularly, the reformers are regarded by some as the perpetrators of great class betrayal. Clark was able to paint the reforms of the 1980s as “the failed policies of the past.” This played into a narrative vilifying Rogernomics and the social democratic reformers of the 1980s as a bunch of free-market ratbags captured by the New Right and implementing an anti-democratic “big business” agenda.

3) Reform goes against the natural conservatism of New Zealanders, the National Party (which heads the current government), and natural inclinations of most politicians. It is perceived by the political class that a market for reform no longer exists, and reforming, conviction-based politicians are as rare in New Zealand as everywhere in the world.

All these factors have combined to stall reform with no signs of kicking off again. The small liberal (libertarian) ACT Party, formed out of the ashes of the reforming wing of the Fourth Labour Government, is struggling electorally and has developed a nasty, socially conservative and reactionary streak that makes it more in tune with conservative Republicans in the United States or right-wing parties in Europe and quite out of place in modern New Zealand politics.

Nine years of the Clark Labour government have changed the way many New Zealanders view economic efficiency and growth. Economic growth is now pitted against the vague idea of “New Zealand values.” Indeed, it is not enough to concede that growth might be good but that government should knock off its rougher edges (former British Prime Minister Tony Blair’s Third Way formulation). Growth is not a priority. This is the misconception that Clark Labour bequeathed to New Zealand.

Another widely propagated idea is that economic growth is a zero-sum game rather than the rising tide that lifts all ships. Growth is seen as something that comes at the expense of the environment, the less well-off, and minority political groups.

A New National Horizon

Since 2005, government expenditure as a share of GDP has risen by 6 percent, primarily from increased government handouts to various groups in family assistance, industry R&D assistance, and a large increase in health expenditure. When the National Party was elected in late 2008, there were high expectations it might use its coalition majority with the free-market ACT Party to free up the New Zealand economy again.

The difficulty with these changes is that the current National Party government seems convinced that New Zealanders want an involved state, feel entitled to what the Labour Party created for them, and will vote to have the state provide.

So in its May 2010 budget, the government increased GST, the goods and services tax (one would think permanently, given how devastatingly efficient a 15 percent tax on every good and service purchased in the economy is—food and gas included) to finance income tax cuts. These “cuts” are not being funded by reducing expenditure or the size of government from its now staggering level of 43 percent of GDP. This approach probably better aligns incentives to work, earn, and save in the short term, but in the long term it likely could contribute to a permanent growth in government, because while income taxes are comparatively easy to raise, GST is extremely difficult to cut—a quick glance at most European nations demonstrate the “ratcheting up” effect of GST: over time it rises, and income taxes still remain high.

And so it is. Government in New Zealand is ticking along in very much the same way it always has—as a managerial government. The only substantive difference between this government and previous ones is who manages government better, rather than what ideology it holds. Across the political spectrum, it is accepted that government should provide health, education, welfare, risk insurance, and economic development agencies. It should also own airlines, railways, banks, and telecommunications.

Despite all of this, there are positive signs in the May 2010 budget in the form of tax cuts and a freeze on most government spending, which point to an overall reduction in core government spending (not counting trading entities, or state-owned enterprises, which are supposed to be run like private, profit-making businesses and return dividends to the taxpayer) from around 35 percent to 29 percent of GDP over the next decade. A reduction such as this would be a massive boost for New Zealand’s moribund economy, and have a real effect of unshackling New Zealand from the creeping socialism of the last decade. A reduction would not only see much more of the economy returned to the discretion of those who created the wealth and who can spend it best, but also would signal a substantial reduction in the relative resources government can use to design frivolous and harmful new interventions in the economy. Whether this happens, we shall wait and see.

In the meantime, New Zealand continues in its holding pattern—happily drifting toward genteel poverty and a lifestyle that the rest of the world envies—even if it only exists in tourist brochures.

Luke Malpass is a policy analyst with the New Zealand Policy Unit at the Centre for Independent Studies.

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