The economy is in recession and the government is laying off civil servants. Public-service cuts were a campaign promise from all three coalition partners, and Act has openly salivated at the recent job losses. The Prime Minister’s justification is that households and businesses are doing it tough – why shouldn’t the public service, especially after the money that’s been lavished on it over the past six years to so little effect?
It’s true there’s been a huge increase in the size of the bureaucracy, and this seemed to deliver a marked deterioration in its performance. But that was the fault of the Labour government and the sector’s senior leadership, not the rank-and-file workers. Now hundreds – probably thousands – of them are losing their jobs at a time of rising costs and economic uncertainty.
The savings will help fund the government’s tax cuts, and Christopher Luxon’s argument is that the money will be spent more efficiently by households than the state. This is a standard tenet of right-wing economic theory; it’s probably right some of the time and wrong at other times – and the danger is that in our current gloomy economic conditions, he might be doing exactly the wrong thing.
For the past 30 years, New Zealand has adopted a counter-cyclical approach to public spending and debt. When the economy was strong during the late 90s and early 2000s, the Bolger-Shipley and Clark governments got debt levels down. When John Key and Bill English won power in 2008, they’d promised tax cuts and less government, but these were deferred in the face of the global financial crisis and then the rebuild after the Christchurch earthquakes. They borrowed and spent for four years, then paid the debt back from 2012 to 2017. When Grant Robertson became Labour’s finance spokesman, he signed up to the budget responsibility rules that committed him to a fiscal programme of restrained spending and low debt.
But when the pandemic hit, there was consensus across Parliament, the business sector and economic commentators that Robertson’s rules would be suspended: Covid was exactly the rainy day the government had been saving for. There were grumbles about the efficiency of the spend – but the British economist John Maynard Keynes famously argued that government expenditure during a crisis does not have to be maximally efficient, it just needs to be more efficient than letting businesses go under and workers lose their jobs. As long as the government reduced its budget during the boom years, it could pay back the debt, the private sector could pick up the slack, and everything would be fine.
But Jacinda Ardern and Robertson continued to borrow and spend after the lockdowns ended. Treasury advised them against this, warning that Labour’s 2022 budget would probably be inflationary – and by the end of the year, inflation was at a 35-year high and the official cash rate had doubled.
Cuts that deepen
Since the last quarter of 2022, inflation has remained high and the economy has been in a per capita recession: households have got steadily poorer for more than a year. The new coalition government hopes its tax cuts will be stimulatory: that they will kickstart the economy and get us growing again. But there’s an increasing accord across the political spectrum that Luxon and Finance Minister Nicola Willis are about to repeat the mistake made by Robertson and Ardern: they’re poised to deliver a budget that sustains inflation, keeps interest rates high, and locks us into a recession that could be made deeper by laying off thousands of public-sector workers.
The failure of Ardern, Chris Hipkins and Robertson to adjust the tax system to account for Labour’s additional spending locked in a structural deficit that made state service cuts an unavoidable necessity. National’s commitment to tax relief forces it to go even further – at the worst possible time.
Both National and Labour seem to have abandoned two economic orthodoxies: the Keynesian model of counter-cyclical spending and the neoliberal doctrine of “sound money” – the belief that governments should prioritise low inflation and low interest rates.
Neither party has exciting new ideas for reducing inequality or growing the economy. Labour just wants a bigger state; National craves lower taxes. These are not novel policies. Instead, they’re just avoiding the trade-offs and difficult decisions required for competent government. Labour’s defection is particularly damaging: next time there’s a crisis while it is in power, there will be less consensus around the need for borrowing – it will be regarded as another opportunistic attempt to lock in more state spending.
Smouldering ruins
It may be some time before anyone needs to worry about such a scenario, however. Hipkins recently delivered a State of the Nation speech that he could easily have delivered as a student politician 25 years ago, celebrating the many virtues and values of Labour that it spent the past six years failing to operationalise. He held both the education and health portfolios; both sectors remain smouldering ruins, and voters trust National more on both issues, which are traditionally enduring strengths for the centre-left. But for Hipkins, there is not a flicker of self-doubt, not the slightest indication that anything went wrong other than Labour’s failure to introduce a capital gains tax, a personal decision he defended aggressively just four months ago.
There are many persuasive arguments for a capital gains tax, but giving Labour even more of the public’s money to bloat the bureaucracy while running down essential state services is not one of them. It took them nine years to regain power after the relative competence of the Clark administration – it’s hard to see any path back for this current incarnation. Although Luxon seems determined to build them one.
