Bryce Edwards: The Government’s fiscal impotence

New Zealanders are increasingly aware of the huge social, economic and environmental problems facing this country, yet the new Labour-led government seems unwilling to respond with the type of big, bold actions required. Victoria University political scientist Bryce Edwards says Labour has welded itself to a policy of fiscal conservatism, preventing it from making the necessary investments.

It’s a very strange political alignment when the trade union movement and Matthew Hooton are in agreement. But that’s what has happened over the past week, with both the Council of Trade Unions and the right-wing political commentator speaking out against the government’s continued insistence on adhering to their Budget Responsibility Rules.

These rules are a self-imposed agreement between Labour and the Greens – signed before the election – to reduce core government expenditure to below 30 per cent of GDP, and to reduce government debt to 20 per cent of GDP by 2022. The upshot of this is that the Labour-led government has largely adopted the National Party’s fiscal policies, embracing an austerity-style approach to spending. It means they can’t afford to adequately fund housing, healthcare, workers in the state sector, and public infrastructure in general.

The CTU has been unusually outspoken in criticising Labour’s continued adherence to these austerity rules. President Richard Wagstaff questioned whether the government will be able to adequately deal with the crumbling state of public assets, and whether state servants’ need for pay increases will be properly met.

Although some will write off such criticism simply because it comes from the union movement, it’s worth noting that Matthew Hooton also thinks that adherence to the conservative fiscal policy is unnecessary and will cause Labour problems. He’s written a column in today’s NZ Herald suggesting that the prime minister and her finance minister should “more confidently own Labour's commitment to higher spending and begin the process of gently stretching out the debt reduction target” – see: Fiscal anchor sinking Labour.

Hooton points out that “At a net 22 per cent of GDP, New Zealand's debt is already low compared with the rest of the world.” Therefore, borrowing more money really isn’t a problem, except Hooton says that Grant Robertson is under the misconception that business would object to greater borrowing, and would force some sort of Winter of Discontent upon the new government. Instead, Hooton argues that a revolt is more likely to come from underpaid teachers, nurses, and motorists who are being forced to pay a new petrol tax increase.

Economists have also complained about Labour’s short-sighted embrace of austerity fiscal policies. For example, Shamubeel Eaqub, has been incredibly disdainful about Labour’s reluctance to borrow to fund much greater investment in public infrastructure, including housing. He was reported by Bernard Hickey, last month, as believing that “any Government that did not borrow when interest rates were at the lowest level in a century was a ‘fiscal idiot’.” – see: The case to throw off the fiscal straitjacket.

Eaqub is clear about the need for the new government to be much more ambitious in its spending on infrastructure and public services. He believes that Labour’s conservative fiscal policy is “a fiscal straitjacket that was limiting its ability to truly address the housing crisis and the various problems of child poverty, child health, housing unaffordability and poor education that flowed from that.”

This is far from just rhetoric. Prime Minister Jacinda Ardern recently admitted that her government has no further money to put towards the campaign to reduce child poverty, beyond that already announced. She acknowledged that this is because of their self-imposed Budget Responsibility Rules and, and justified sticking to such a conservative policy by saying that “New Zealanders expect us to keep our books in order.”

But such statements will start to look more and more like ideological dogmatism. There is an increasing awareness that in obsessively seeking to create Budget surpluses, damage is inflicted elsewhere. That’s the lesson in the Middlemore rotting building debacle – that cost-cutting in order to balance your budget can come at a great cost.

Now the government is referring to the “tough choices” it has to make in the budgetary process. There is talk of how choosing to build a new prison in one region might mean that a necessary new hospital won’t be built elsewhere.

This doesn’t mean the new government won’t allow any new spending. But often it’s going to come as a result of budget cuts elsewhere in government departments. Therefore, Treasury Secretary Gabriel Makhlouf is increasingly referring to the need for “reprioritising spending” – which is phrase we will probably hear a lot more from Grant Robertson.

The Government is now searching for ways to fund new projects without borrowing more money. Hence this week’s petrol tax increase. And it seems that the Provincial Development Fund is also likely to be raided for spending on purposes it wasn’t strictly intended for.

Next month’s Budget can be expected to be relatively mild and boring. Of course, Robertson and Ardern will make a virtue of that. And increasingly they are going to have to try selling their tinkering and moderation as being necessary and appropriate. But pressure will continue to build for more ambitious actions and programmes. Calls are likely to grow for Labour to drop their commitment to the Budget Responsibility Rules.

It’s worth noting that both contenders for the Green Party co-leadership position have signalled their opposition to these rules, and desire to drop the agreement in the future. They can clearly see that these dogmatic rules are preventing any significant deviation from the economic status quo and have read the mood of their electorate.

It’s Labour’s acquiescence to National’s fiscal policies that should be truly alarming to those on the left of the political spectrum. It raises the question of whether National lost power at last year’s election, but won the ideological war.

Margaret Thatcher was once asked about her greatest achievement, and she replied: “Tony Blair and New Labour. We forced our opponents to change their minds.” Perhaps something similar might now be said by John Key, Bill English, and Steven Joyce.