Spending Spree wasted decade of prosperity

To gain wisdom for the future, one must learn lessons from the past. One of the problems with both politics and media in New Zealand is an inability to see any problem from a wider historical perspective. This prevents a more rigorous assessment of the recent Clark government and retards views on the key challenge facing the next government: rabid spending on policy overreach.

Helen Clark’s Labour Party got elected on a narrative of “the failed policies of the past”. She said New Zealand was a ‘meaner harder place with significant numbers of excluded people’ and ‘the balance wasn’t right.’ Believing in the ability of the state to act as an agent of change, her government set about fixing the nation by spending large amounts of money. However, even though core government spending is $34 billion higher than in 2000, key social indicators have barely changed in New Zealand. Indeed, Clark has bequeathed to the nation structurally high levels of government spending, and which the Key government has largely continued.

There are two sides to the great tragedy of the 2000s. One is the wasted painful reform legacy of the 1980s – the pain felt by many sectors of the community as the price of restructuring the economy and changing the way government did business by getting out of certain sectors and keeping costs down. The other was wasting the cash earned from the economic boom. New Zealand retained high tax rates while paying off a minimal amount of debt and building a new bureaucracy and culture of state intervention that is sustainable only as long as there is strong economic growth.

Adjusted for inflation, spending has gone up by 57% in real terms since 2000. The three main policy areas of health, education and welfare/social security all increased substantially – from $6.6 billion to $13.5 billion in health, from $6.6 billion to $11.7 billion in education, and from $13.2 billion to $21.2 billion in welfare social security.

The increase in the big three areas of policy is the big story because health education and welfare make up 70% of the budget (core Crown expenditure) and do so in all Western democracies. People concentrate on the costs of prisons, families’ commissions and the like, while ignoring the big three which are almost invariably the policy areas ring fenced from savings.

The total share of government in the economy is now about 45% of GDP, which is higher than it was in the bad old days of the Muldoon government (actually it is about 50% this year, but that’s a one-off due to the earthquake). It is getting towards European levels and will over time induce the same sort of economic stagnation as in Europe. It is also 10% higher than a decade ago when New Zealand entered the longest sustained period of prosperity in its history, the very reason for the painful reforms.

This increase was driven by a great increase in the value of the Crown’s net worth by acquiring more assets and passing hidden tax burdens onto local councils through greater centrally mandated regulations that local governments had to enforce, without accompanying cash. Councils had to raise the difference through rates.

What have New Zealanders got for this great increase in state activity and expense? Not much. The two great claims of the Clark-Labour government were a reduction in poverty and a reduced gap between rich and poor. The first was a laudable achievement, but it was caused in part by the lowest level of unemployment in a decade and in part by the Working for Families program. The gap between rich and poor, however, is not a policy relevant achievement but a victory in rhetoric.

There was little change in the rest of the social indicators for all this spending. Social programmes are supposed to improve life in ways that can be measured through indicators, but there is little discernible change in education and only some improvement in the number of elective surgeries in the health sector (and only since 2008). In the 2000s, wages in the health sector rose at a far higher level than productivity, whose growth was stubbornly low.

Several factors drove the increased spending in the welfare and social security budgets. Working for Families has greatly extended welfare throughout New Zealand’s middle class. Although unemployment reached record lows in 2008 (and is still historically low), overall welfare rolls remain stubbornly consistent – except that most beneficiaries are now on long-term benefits such as Invalids Benefit and Sickness Benefit. The number of NZ Super claimants also continues its inexorable rise. Kiwisaver, with its guaranteed 50% return, has turned into a very large expense.

Most of these changes occurred once the real tradeables sector of the economy had gone into recession in 2005, disguising the extent to which government was propping up the economy.

The great paradox of the massive extension in state spending and programmes is that it came at a time of great prosperity, a time when citizens should rely less on the state. The problem with such reliance is that it remains when prosperity ebbs and the state wakes up after the binge to realise in the cold, hard light of day that it can no longer afford the promises it had made.

‘Savings’ has been a theme of the 2011 election, and it is pertinent that in his final blog post Roger Kerr railed against this funny interpretation of the real issues facing the nation. What New Zealand really needs is a reduced state and a public that understand that spending more on health and education doesn’t automatically mean better outcomes, and that it can be damaging in the long term because it harms competitiveness.

This is the real story of the 2000s: New Zealand’s lost decade. We could have laid the foundation for a more prosperous future, but we did not. Too much was spent on very little. It was indeed prosperity wasted.

Luke Malpass is a policy analyst with the New Zealand policy Unit of The Centre for Independent Studies. His Paper The Decade-long Binge: How Government Squandered Ten Years of Economic Prosperity was released by CIS yesterday. www.cis.org.nz