The 1984 election, 40 years ago this month, marked a momentous shift in direction for a country on the brink of bankruptcy. In this article, one of a multi-part Listener series looking at the political upheaval and economic and social effects of Rogernomics that continue to define New Zealand, Bryce Wilkinson argues that the country should be grateful that it had such a brave and competent government, like the Fourth Labour one, at such a challenging time in its history.
Forty years is a long time. Half of New Zealand residents today were born after 1984. Fewer still will have any memory of the events that led to the foreign exchange and constitutional crisis in 1984.
So, first, some background. The “good old days” of my youth were bleak by today’s standards. No retail weekend shopping. No wine in restaurants. The six o’clock closing time beer swill was no place for women.
The variety of goods in New Zealand was slim. As a high school lad, to buy multi-studded soccer boots I had to repeatedly visit the Post Office to buy the foreign currency. The limit per visit was a mere 10 Australian shillings. I eventually got enough to mail the cash to a Sydney sports shop. Now, we can order from anywhere with a few clicks of a mouse.
In 1984, I was 36, and newly appointed to the position of director of Treasury’s internal economics division, which was responsible for work on the economic outlook and macroeconomic advice. The latter encompassed monetary policy, tax policy, fiscal deficits and public debt.
Treasury had many talented staff, and not just in economics. For some years, it had recruited a stream of new graduates with good honours degrees. All my bosses were experts in economics, with wisdom and experience to boot.
The Reserve Bank also had quality people. This was a major blessing during the foreign exchange crisis. The bank ably bore the brunt of dealing with it.
In the early 1980s, Treasury intensively studied top thinking globally about economic policy. New Zealand was not doing well. Inflation, deficit spending and spiralling foreign currency debt were big problems.
We were extreme among prosperous countries for the stringency of our import and foreign exchange controls. Despite them, the government was having to borrow heavily overseas. New Zealand’s AAA credit rating was increasingly at risk.
To tackle inflation, the government in 1982 resorted to a comprehensive wage, price and rent freeze and capped interest rates. The freeze addressed symptoms, not causes. Treasury advised against it. The question of “what will happen to wage and price increases when the freeze ends” seemed to have only a grim answer. Pain was being deferred.
Treasury was also uncomfortable with the economics of the government’s drive for major projects to use Māui gas. They looked like a big gamble on future oil prices. If they were good projects, why did they need taxpayer backing?
The day after the July 1984 general election, officials informed the incoming Labour government of a foreign exchange crisis. The policy implications of the subsequent 20% devaluation were profound. Higher interest rates were immediately essential to keep money in New Zealand. They hurt borrowers.
The new government next faced two daunting problems – reducing government deficit spending (fiscal consolidation) and extricating the country from stifling controls (economic liberalisation).
For more than three years, Labour embarked on a bold and ultimately successful programme to address both problems. It was led by a troika of extraordinarily able finance ministers, headed by Roger Douglas.
Market-determined interest rates to support the devaluation were followed by the removal of foreign exchange controls in late 1984 and a floating exchange rate in March 1985. All three changes have endured, with no further currency crises.
The devaluation gave the government some space to reduce export subsidies and import protection. That reduced borrowing, but the transitional pain to farmers was great. Yet, subsidy-free agriculture has largely endured, unusual though that is globally.
The government overhauled the tax system, implementing a broad-based, low-rate income tax (top rate reduced from 66% to 33%), introducing a 10% GST, and increasing user charges. These reforms have largely persisted.
It clarified what crown trading entities were expected to achieve. This state-owned enterprises model has largely endured.
Opponents claimed the unheralded reforms were undemocratic. But Labour won the 1987 general election with an increased percentage of the total vote. The public’s widespread support was real.
The 1988 split between David Lange and finance minister Douglas unsettled the government. Even so, in 1989, their replacements, Geoffrey Palmer and David Caygill respectively, continued to achieve substantial changes.
The Reserve Bank Act 1989 tasked the central bank with achieving price stability, a goal that has endured and spread internationally.
Another lasting change was to adopt accrual accounting for the crown accounts.
The 1987-90 government also sold some commercial activities in whole or in part, including Telecom. The proceeds helped reduce public debt.
Major productivity gains resulted in transport, forestry and telecommunications. Most of the privatisations have endured. Resumed government ownership of Air New Zealand and KiwiRail are exceptions.
Wages doubled
As feared, lifting the wage and price freeze had painful consequences. Average weekly wages nearly doubled from $285 in 1984 to $529 in 1989. That resurgent inflation clashed with monetary policy.
New Zealand went into recession from 1988-91 and the unemployment rate reached an agonising 11% in 1991. The labour market was too inflexible.
The incoming National government from 1990 continued to work to balance the government budget. It introduced a Fiscal Responsibility Act in 1994. Its provisions, now in the Public Finance Act, make it harder for a government to hide bad fiscal news from voters.
It also passed its Employment Contracts Act in 1991. Notably, fast employment growth followed. The act’s changes have largely endured. By 1995, the task of fiscal consolidation could be ticked. It had taken a decade of sustained effort.
Subsequent fiscal deficit outcomes have been mixed. The big spending fifth and sixth Labour-led governments inherited fiscal surpluses and bequeathed large deficits to their successors.
The task of economic liberalisation can also be ticked. The economic freedom New Zealanders could exercise was ranked in 1985 by the Canadian Fraser Institute at 27th in the measured world. By 1993, we were third ranked. Our latest ranking (for 2021) is fourth.
Reform momentum had run out by the first MMP election in 1996. Much had been achieved, but serious weaknesses remained.
Poor-quality government spending and regulation abounded. Reforms in health, education and welfare were partial.
The Resource Management Act 1991 was a serious failure. Housing affordability is its most visible casualty.
The problems in 2024 in these areas testify to the unfinished business in 1996 and the lack of subsequent competent and determined government action.
Those too young to experience those days probably do not realise how fortunate they are that New Zealand had such brave and competent governments at such a challenging time.
Less competent governments might have tried to reform, got cold feet, reversed tack and been thrown out, leaving things even worse than before. That did not happen.
Years after I had left Treasury, a Japanese fund manager asked me, “What would have happened if Muldoon had won in 1984?” My mind froze at the horror of the futilely confrontational possibilities. I had no good reply.
Later, I thought, likely, in the end, we would have had to borrow from the International Monetary Fund and accept its conditions. Greece had to do that more than a decade ago. Its unemployment rate peaked at 28% in 2013.
Bryce Wilkinson is senior fellow at the NZ Initiative, a pro-free market public policy think tank.
Next week: We conclude our series with a look at Rogernomics’ lasting impacts on political management and on our cityscapes.
