The legacy of government spending

Dr Matthew Birchall
Insights Newsletter
6 October, 2023

October 15 cannot come soon enough, and not just because of a potential Rugby World Cup showdown between the All Blacks and Ireland. 

Like many, I have found Election 2023 a tedious affair. Each week, another scandal or poorly conceived policy hits the headlines. And each week, we seem to be stuck in a never-ending debate about spreadsheets and fiscal holes. 

Regrettably, this political sideshow carries real consequences. With our focus diverted by shallow debates, we risk neglecting the issues that really matter. 

For example, where has there been any sustained reflection on New Zealand’s lamentable productivity? Certainly not in the televised Leaders’ Debates, as I recently pointed out in my New Zealand Herald column.      

This is one reason why Bryce Wilkinson’s latest research note on the Sixth Labour Government’s spending spree is so timely. When the policy debate narrows, stepping back and assessing the broader political landscape is important. 

Bryce points out that government spending had begun to spiral out of control well before the onset of Covid, before ramping up during the crisis and then continuing to increase. 

The parallels Bryce draws between the First Labour Government (1935-49) are especially illuminating. Like Labour today, Michael Joseph Savage’s administration spent liberally. Although venerated by some, their big spending policies helped trigger a severe foreign exchange crisis.  

What can we learn from Bryce’s history lesson?  

Perhaps the first thing to realise is the enormous changes in the size of government New Zealand has experienced over the past century. There is no ‘natural’ size of government. Indeed, it is always a political choice.

Secondly, we have seen periods of increased government spending followed by periods of relative moderation. Historically, we can interpret these as moments of economic recalibration, when governments were forced to clean up the worst excesses of their predecessors. The reforms of the Fourth Labour Government and the succeeding National administration spring immediately to mind (1984-1999). 

But thirdly, and most importantly, we can infer from Bryce’s historical overview that more government spending does not equal better government services. Governments can spend little money wisely and a lot of money foolishly.  

Especially when funds are tight, as they likely will be over the coming years, government will need to manage its purse strings with greater discipline and demand higher efficiency from the public service.  

Future historians will judge the next government on how it will deal with this challenge.

Our latest research note, ‘A historical perspective on the 2017-2023 Government's spending spree’ written by Dr Bryce Wilkinson is available here.

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