Past illusions and future follies mar Grant Robertson's economic strategy

Dr Bryce Wilkinson
NZ Herald
21 September, 2021

In his Budget speech last year, Minister of Finance, Grant Robertson, outlined the government’s policy aspirations. He saw Labour as being able to take decisions that “will define the lives and livelihoods of many people for years to come”.

Those who would prefer to take such decisions for themselves should pay attention.

Robertson looked to the past to find a way forward. He found it in “great traditions” of the First Labour Government. Michael Joseph Savage led that government between 1935 and 1940.

For good measure, Robertson denounced post-1984 economic policies. These policies successfully responded to the 1984 foreign exchange crisis. He blamed them for the pain that accompanied that need.

This week The New Zealand Initiative released a report, Illusions of History: How misunderstanding the past jeopardises our future, that assesses both aspects.

The First Labour Government brought New Zealand to the brink of default on overseas debt in 1938-39. It hid the developing crisis from the general public during the October 1938 general election.

One of the re-elected government’s first measures was to impose draconian foreign exchange controls in December 1938. Even so, in 1939 Finance Minister Walter Nash had to spend two humiliating months in London. He was trying to borrow desperately needed overseas funds. He needed to roll over a maturing loan and to fund an overly ambitious capital spending programme.

New Zealand’s next major foreign exchange crisis occurred in 1984. Again, it was associated with heavy overseas borrowing. Again, the developing situation was hidden from the general public during a general election campaign.

The report also dispels six illusions about the post-1984 economic policies. The reforms did not cause carnage. Borrowing is deferred pain. To blame those who have to deal with a debt problem is like blaming the cleaners for the carnage caused by the previous evening’s riotous party goers.

Another myth is the claim that the reforms did not fail to live up to the expectations of the reformers. The post-reform economic freedoms were not extreme by international standards. Nor were they undemocratic, Labour won the 1987 general election handsomely. Neither did the reforms unequivocally exacerbate economic inequality. Finally, they certainly did not decimate the welfare state.

Robertson extolled the virtues of the big spending First Labour Government, but not those of the Third National Government led by Sir Robert Muldoon. Yet the parallels are quite marked.

Historian Michael Bassett wrote that the First Labour Government’s “heady brew” featured “supreme faith” in the public sector and in centralised direction. Much that this government is doing has the same flavour. But neither was Muldoon’s government out of line in the latter respect.

What was different about the build up to the respective foreign exchange crises?

Savage is the most saintly and revered figure in New Zealand’s political history. He had a pleasant and appealing personality. In the words of historian, Keith Sinclair, Savage “was a benign political uncle, cosy, a good mixer, with a warm emotional appeal”. The same could not be said about the pugnacious Muldoon.

Savage’s unwavering optimism following the Great Depression of the early 1930s met a need. He was a master at defending policies on the basis of their good intentions. His famous riposte to a criticism that a major policy was “applied lunacy”, was that he saw it as “applied Christianity”.

His government is best known for increasing spending on state housing and social welfare. It was fortunate to take office when economic recovery from the Great Depression of the early 1930s was well underway. For a few years from 1935, big increases in tax revenues largely funded big increases in current spending.

His imposing memorial at Bastian Point is testimony to his popularity. Historian Michael Bassett comments that no state funeral before or since has been so emotional. An estimated 200,000 people lined his funeral route in Auckland.

Muldoon’s grave in Auckland is so modest as to be demeaning.

One factor is that World War II saved Labour’s public face. That calamitous war induced the UK government to resolve New Zealand’s borrowing problem in 1939. The UK also assured good export revenues by bulk purchasing New Zealand food exports. Moreover, the need for war-time controls made debate irrelevant about why draconian peace-time controls were necessary.

The general public probably had little reason to be aware of the 1939 borrowing humiliation.

In contrast, the 1984 crisis was in full public view. It was even accompanied by a constitutional crisis. The need for subsequent belt-tightening was apparent to all.

Another factor is that the First Labour Government inherited a strong economic recovery, whereas Muldoon’s government faced income losses from big increases in world oil prices. It was on the back foot, facing inherited budget deficits which it failed to overcome.

The end result is that Muldoon’s reputation was savaged and his policies demonised while Savage is venerated and his policies extolled.

Budget 2020 was prepared amidst the nation-wide lockdown response to Covid-19. That event saw parliament confer extraordinary spending discretion and regulatory powers on executive government. Moreover, for the first time under MMP one party had a clear parliamentary majority.

Another unusual circumstance is that the current governor of the Reserve Bank was ready, keen even, to reduce interest rates and expand the money supply.

Big government budget deficits largely funded by central bank credit creation and the lowest interest rates in the Reserve Bank’s history are unprecedented.

Today, government money is backed only by tenuous trust. The exchange rate is free to fall whenever that trust is shaken, taking down with it the purchasing power of money in the bank. (Note that if trust is also plummeting elsewhere, the exchange rate may not fall, but bad things would still happen.)

In combination, those features give this government a relatively unbridled power to borrow, spend and regulate. They explain why Robertson saw a rare opportunity in government to ‘hit the reset button’ for New Zealanders.

By espousing the policies of the 1935 Labour Government Robertson was presumably telling New Zealanders that he plans to increase government’s share of national income.

Yet, Walter Nash was a fiscal conservative by today’s standards. Fixed exchange rates, balanced budgets (on current account) and adherence to the gold standard were still the hallmarks of respectability. Government current spending and taxation today is about twice what it was in his day, relative to national income.

Today’s budget deficits have much more in common with Muldoon’s budget deficits than to the policies in the 1930s under Savage and Nash.

Finance Minister Robertson’s rhetoric last year is dangerous wishful thinking. By diminishing the governments that fixed the 1984 foreign exchange crisis he seeks to justify a return to bigger and more directive and intrusive government. That would be at our collective peril. Crises have painful consequences. Prudence reduces the risks.

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