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New Zealand’s spending binge

Most of New Zealand’s general election campaign is being dominated by squabbling over the Crown selling a minority stake in four state-owned assets while ignoring serious issues such as the massive and unsustainable increase in government spending in the past decade.

From 2000 to 2010, government went on an unprecedented spending binge. Core Crown expenditure doubled to $70.5 billion, a real increase of 57%. Government’s core spending leapt from 29% of the economy to 35%, while its overall share of the economy jumped to 45% (actually 49.9% of GDP this year because of the Christchurch earthquake).

A lot of this extra cash went into substantially increasing the size of the big three: health, education and welfare/social security. Other costly additions included Kiwisaver, Working for Families, and a larger public sector.

But what did taxpayers get for all this massive spending?

Not much, particularly in the key indicators of health, education and welfare/social security. Overall benefit rolls have not changed greatly except for a substantial transfer of people from short- to long-term benefit rolls. Educational achievement has remained steady, and while elective surgery has improved in the past couple of years, hospital productivity remains stubbornly low and health indicators have not improved. Moreover, as a proxy for the overall health of society – the very thing that social spending is supposed to improve – crime rates have basically plateaued.

For such a massive increase, New Zealand is not a happier, wealthier or healthier place.

The Key government is facing the same problem as the Cameron government in Britain. Both followed Labour governments that had spent the proceeds of prosperity, and are facing hefty deficits into a future of far less certainty.

However, in Britain, as in New Zealand, neither government seems prepared to grasp the nettle and admit to the substantial problems, some of which have been created by massive and irresponsible increases in government spending.

It would be good to see that discussed on the campaign trail.

Luke Malpass is a Policy Analyst with the New Zealand policy unit at The Centre for Independent Studies. His new report, The Decade-long Binge: How Government Squandered Ten Years of Economic Prosperity, was released yesterday.

New Zealand’s Spending Binge

  • Core government spending is now almost $20 billion a year higher than it was in 2000, a 32% increase in real terms.
  • Total government spending now makes up 40% of GDP, compared to 35% in Australia. Most measurements show government spending is higher now than it was under the Muldoon government of 1984.
  • If this extra $20 billion of expenditure was allocated to tax cuts, nearly all income tax could be abolished. All the remaining public services could be solely funded by GST and a low corporate tax rate.
  • The government has little specific information on how effective this extra spending has been. We lack information on outputs and outcomes from the public sector, which makes it difficult to measure exactly what return taxpayers are receiving for their investment. Other countries do a much more comprehensive job of this.
  • The available social indicators we have show negligible improvements since 2000. Life expectancy, infant mortality, hospital outputs, literacy, violent crime, suicide, poverty and income inequality have barely changed despite a massive increase in social spending.
  • Around the world there is little relationship between higher public spending and better social outcomes.
  • A major explanation for why this spending has been ineffectual is because of middle class welfare. A large proportion of government spending is simply recycled (or ‘churned’) straight back to those who paid the tax in the first place.
  • Therefore much public spending today is not ‘new’ spending; it is displacing spending that would have happened anyway, by individuals themselves. It follows that more public spending will not necessarily increase public welfare, and may even reduce it.
  • Many people could afford to purchase their own social services if taxes were lower. This would allow for more competition, innovation and personal responsibility, and would reduce unnecessary bureaucracy.
  • Australia provides an interesting comparison to New Zealand, because they have a smaller government with more reliance upon private health, education and superannuation. They also outperform New Zealand on most social indicators.
  • Diminishing returns from spending are coinciding with rising costs of taxation. This means New Zealand could achieve better social and economic outcomes with less taxation and spending.

Phil Rennie is a Policy Analyst with the New Zealand Policy Unit of The Centre for Independent Studies.