Is public spending stuck in the vicelike grip of our quasi-Austerian economic policy?

Are we at a turning point in our politics? I don’t mean whether we have a new government. That is a matter for the voters; the polls say that either they are very volatile or that the polls are very unreliable – probably both. What I am interested in is whether we will have a new approach to the economy.

I don’t mean an intensification of neoliberalism. Jim Bolger has said that neoliberalism has failed. The other parties – ACT excluded – have been making the same point for some time.

Nor do I think it helpful to accuse the Key-English Government of being neoliberal (unless you are among those who describe anything to their right by that term). Certainly it had some elements in its approach, but John Key was predominantly pro-business and business is not especially neoliberal in the sense of wanting to leave everything to the market. Admittedly they use neoliberal rhetoric when they are under threat, but they will demand handouts from the government when it suits them. (Observe the alacrity with which industries reject any levy to cover taxpayer-provided services; better that the taxpayer should subsidise them?)

Bill English is probably more like Bolger. He is not anti-business, respecting the need for business to be one of the central drivers of the economy. But he is more centre-right, willing to use government to support people’s collective aspirations. (On the other hand, Steven Joyce is more pro-business.)

English seems to have shifted the National Party’s stance. Some may argue that he has been subtlety doing it since he became prime-minister. Others say they dont see any difference and that, even if there was a shift, it is a pretence and that it will be reversed as soon as they are back in power (assuming New Zealand First lets them).

This is all preliminary to the main issue that the column is addressing. It is not predicting who will be in the next government; its focus is whether economic policy could change if the next government wanted change.

Any new government will come with considerable baggage. National will not be able to entirely abandon its business allies; Labour has made promises it may regret (as, indeed, has National) and it too is beholden to interest groups. Let’s leave that aside since we do not know which baggage will be in the new government. Here the concern is broader picture.

Crucially the issue is the extent to which private market decisions meet the nation’s aspirations and to what extent there need to be collective decisions via public agencies (notably central and local government). It is only possible to change the economic balance towards public decisions if the government can spend more.

Labour has a number of proposals to increase taxation. I have seen exaggerated estimates of how much it might raise, based on extreme assumptions and estimating procedures reminiscent of those Joyce used for guessing additional spending under Labour. (Ironically if he was right the spending would be covered by the equally wild revenue estimates.)

My guess is that if Labour’s tax proposals are implemented the total amount for central government will be in the order of $100m to $300m a year; recall that the National Government is promising about $200m a year by tightening up tax avoidance by foreign corporates. A useful amount, but a pimple on $100 billion per year of Crown spending.

I add I am more supportive of these taxes and levies insofar as they reduce avoidance, eliminate subsidies to industries and improve the quality and sustainability of overall spending. (Some of Labour’s proposals increase revenue to local bodies rather than central government, probably more than justified given the limitations they face from a dependency on rates revenue.)

The alternative would be for the government to borrow more. National has said that it would do so through public-private-partnerships, which are ‘below-the-line’ borrowing, but still require future spending to service the debt. Instead I take the issue head on: should the government borrow more?

Recall that the government accounts show current revenue exceeding current spending. The surplus is used to fund infrastructural investment. The government aims not to do any net borrowing. In effect, PPPs aside, all the new infrastructure is funded out of current revenue.

It is not clear that this is a rational strategy, especially when a largish chunk of the additional infrastructure arises because of substantial net immigration. (For instance, would we need to extend the Auckland roading network as much if the immigrants were not using the roads too?)

So there seems to be a case for some additional borrowing for infrastructure development. How much? I dont really know; but let’s talk about $1billion a year. In which case the government debt-to-GDP ratio would be steady rather than rise or fall.

Would lenders respect such borrowing? I cannot be sure, but I would have thought many potential lenders would be happy to have more good quality New Zealand debt in their portfolios. So I would expect there to be some room to move but only some. Whether we like it or not New Zealand will be heavily constrained by those from whom we borrow – always has been.

Personally I’d use any additional fiscal freedom for more public social investment spending – on education, health care, housing and reducing poverty to give better opportunities to the poor. (It is not obvious that the poor should be making income sacrifices on behalf of high-income immigrants.)

We should also spend a bit on upgrading the skills of the workforce as an alternative to sourcing skills from immigration. I would not be antagonistic to improving the quality of output either. I have commended the Minister of Culture, Maggie Barry, for finding a bit more for RNZ and am pleased to see that other parties have even more ambitious plans.

So even those who are not neoliberals face borrowing constraints. We can reduce them, generating a bit more public spending to give us a better New Zealand.


(There are other constraints to abandoning the antagonism to the public sector. Not least is the ideological lobby which is neoliberal (well out of proportion to its support in the population), the business lobby which sees any increase in spending on the public sector as less for itself, and the many people who while not direct supporters of neoliberalism but who have benefited from it. That is for another column – after the election.)

Comments (1)

by Kyle Matthews on September 19, 2017
Kyle Matthews

Admittedly they use neoliberal rhetoric when they are under threat, but they will demand handouts from the government when it suits them.

On the contrary, corporate welfare seems at the heart of the contradictions of neoliberalism - as it has mutated and adapted. This is surely the 'neo' component that distinguishes it from classical liberalism - the withdrawal of the government from the public sphere and community, accepting liberal constraints on their role, tied with ongoing demands from capital to meet their needs.

The GFC and the liberalism of the financial system followed by the 'need' for government handouts when it inevitably collapsed is a case in point.

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