Govt must tighten fist for prosperity

By SELWYN PARKER

When I lived in Ireland for nearly eight years in the 1970s and 1980s, the economy was an invalid.

The country was governed by parties that believed in classic, Keynesian, interventionist, prime-the-pump-type economics. For years, they tried to spend their way back to prosperity with taxpayers' money.

They tried to pick winners in industry and backed them with grants, subsidies, write-offs, employment incentives and every sweetener imaginable. They boosted the dole and other benefits.

They pumped billions of dollars, with a little help from the European Community, into public works.

Result? By the 80s, the ratio of Government spending to GDP topped a massive 50 per cent.

The intentions were good. Namely, to boost business and reduce Ireland's chronically high unemployment. These free-spending policies were presented under various feel-good labels, and were supported by voters.

One finance minister after another sold the policies by promising they would boost the economy, cut unemployment, reduce inflation and so on.

Yet they never did.

The results of this profligacy were generally disastrous. And it was not until the mid-80s that Ireland, prompted by the OECD, took a hard look at the appalling outcome of all those years of spending and got religion.

Pretty much for the first time, Irish governments began to respect the taxpayer's dollar and started measuring the returns from its spending programmes, just as business routinely does.

The virtues of this approach quickly appeared and it was not long before Ireland did a u-turn. Governments attacked structural problems in the economy, reduced taxes and cut spending.

Now Ireland's Government spending is down to around 32 per cent of GDP and the economy is booming. Its problems are those of prosperity.

However, we are going the other way. Labour is trying to close the gaps by spending. We have tried this before.

The last National Government launched a daring spending programme, with disappointing results. Now Labour plans to up the ante further by spending nearly $3.2 billion on top of that.

That's 120 per cent more than National. Generally, official measurements of large-scale government spending programmes are primitive. And on the rare occasions they are accurately measured over the life of the expenditure, the results are not clear enough for accurate conclusions to be made.

In 1992, according to Statistics New Zealand, the Maori unemployment rate stood at a serious 25 per cent but four years later it was down to 15 per cent.

Why? The main reason was that the economy flourished over that period and Maori got jobs along with thousands of other New Zealanders. Maori unemployment has since jumped back up sharply as the economy slowed.

The lesson is obvious. It is not spending that closes gaps, but a structurally strong economy with low inflation. You also want a tight-fisted government with respect for the value of the tax dollar.

In the United States, federal spending has fallen over the past seven years from 22 per cent to 18.3 per cent and total Government spending is down to 32.3 per cent. (NZ is heading for 42 per cent.)

Not that all spending is bad. But governments have a moral right to use taxpayers' dollars only if they have first proved a watertight case. Then they are obliged to manage that expenditure conscientiously and, most importantly, to measure the return from it against the original goals and make the evidence public.

The trick is in targeting the taxpayer's dollar to best effect. If successive New Zealand governments had done this over the years, we would be booming.

Budget 2000 feature

Minister's budget statement

Budget speech