In Defence of Liberty

Driven by data; ridden with liberty.

New Zealand’s Revolutionary Reforms

After Chancellor George Osborne’s Budget, described as a “steady-as-she-goes budget” by him, concerns are growing that the coalition government’s lust for reform has waned. The only peaks in the Chancellor’s Budget were a suspiciously familiar mortgage guarantee scheme and a possible new scope for the Bank of England. In 2010, John Humphrys delightfully interviewed Sir Roger Douglas, former Finance Minister of New Zealand, on the BBC’s Today programme. Mr Humphrys drew the comparison between contemporary Britain and New Zealand in the 1980s, when “New Zealand stood on the brink of ruin”.

From the time of the Great Depression to 1984, New Zealand governments of various colours had sought to protect and insulate the islands from the economic fluctuations of the surrounding world. New Zealand was a country where many industries were dominated by state-owned enterprises; tremendous subsidies floated the ailing agricultural sector; and ubiquitous trade barriers meant that a citizen required the permission of the nation’s Finance Minister to subscribe to a foreign magazine. Very high CPI-inflation, cresting at 17.8% in the second quarter of 1976, coupled with wage controls severely eroded the earnings of New Zealanders. State spending had bellowed upwards, whilst its hand delved into economic micromanagement.  Government deficits had not revitalised New Zealand’s fortunes, reaching 11.8% of GDP in 1974 and 8.9% a decade later. Pervasive state intervention was exhausted, and the favourable consensus fractured by its eminent failure.

Sir Roger Douglas was instrumental in unshackling the New Zealand economy. (Photo: Alan Leifting)

Sir Roger Douglas was instrumental in unshackling the New Zealand economy. (Photo: Alan Leifting)

Fourth Labour Government

The Fourth Labour government was elected on 26 July 1984, headed by Prime Minister David Lange and Finance Minister Roger Douglas, and immediately began its rapid reforms. One of its first steps was to end the automatic allocation of taxpayers’ money to government agencies, questioning the purpose and efficacy of each agency, making the senior executives purchase resources though contracts based on achieving their identified goals. This method rendered the civil service more impartial, as non-performance became the only criteria for removal. Former Minister Maurice P. McTigue highlights the example of the Forest Service, which went from having 17,000 employees to just 17. Mr McTigue headed the Ministry of Works, started with 28,000 employees under his command and ended up being the only employee, noting: “The government stopped employing people in those jobs, but the needs for the jobs didn’t disappear”, and the displaced employees often earned more in equivalent private sector roles.

The government also floated the New Zealand dollar, introduced a Goods and Services Tax whilst income and company tax rates were simplified and cut. The rates were chosen to attempt to maximise tax revenue, and the increased rate of compliance expanded the total tax receipts. Import tariffs were either abolished or significantly reduced. New banks were permitted. Foreign exchange controls were dropped, and state-owned enterprises were refashioned in the image of businesses and then often privatised, and government spending and taxation statistics were made clearer and easier for the public to access. In one year, Lange’s government had cut all subsidies to sheep farming, where previously the farmers had received about 44% of their income from subsidies. The cycle of dependence and stagnation was broken, and so sheep farmers became vigorously productive in both innovating their methods and the reach of their sales. Previously, sheep farmers sold a carcass for $12.50, along with a $12.50 government subsidy; by 1989, each carcass was worth $30; a decade later, it was worth $115.

The Bowen House Beehive is part of New Zealand's parliamentary buildings. (Photo: Midnighttonight)

The Bowen House Beehive is part of New Zealand’s parliamentary buildings. (Photo: Midnighttonight)

Constitutional Establishment and Educational Autonomy

The reforms of this government were not limited to the economic sphere. After an international consultancy firm found that 70% of government spending for education actually went to administration, the government decided to allocate money to state schools determined solely by the number of pupils, making those schools autonomous in their spending decisions and removed all limitations on parents sending their children to whatever state school they chose. These changes were enacted across the country’s 4,500 schools in one day.

A written constitution and enumerated Bill of Rights were accepted by 1986 and 1990, respectively. The Labour Relations Act 1987 decentralised the power of unions to a company level, but the legislation strengthened that narrowed position. The reforms to administration meant that larger increases to benefit spending were made possible. The death penalty was completely abolished, marriage rape was criminalised and the age of consent for two men having sex was equalised with other sexual consent ages to 16. Immigration was liberalised, particularly in favour of skilled migrants. Te Reo Māori was declared an official language of New Zealand, and the Waitangi Tribunal investigated the claims on land dating back to 1840. This government also made New Zealand a nuclear-free zone, in spite of the consequent harm that did to relations between New Zealand and the United States.

The revolutionary speed of these reforms caused distrust and division amongst the Labour Party, including some Cabinet members who believed such changes crushed their core values, and found Cabinet collective responsibility revolting to them. The Prime Minister and the Finance Minister vehemently disagreed over a flat tax proposal, with a letter from the pen of Roger Douglas stating his lack of confidence in David Lange being taken as his resignation. His replacement, David Caygill, wanted to continue Douglas’s reforms. Public disunion amongst the Cabinet was one reason why the Fifth Labour government fell in 1990.

The Tyranny of the Status Quo

Their replacement, the Fourth National government of New Zealand, also travelled along the path of economic liberalisation. This government had also wanted to significantly cut state spending, which was achieved. These reforms were often unpopular at the time, with one budget by new Finance Minister Ruth Richardson being dubbed ‘Ruthanasia’.

The case of New Zealand brings important lessons for the United Kingdom. The purpose and efficiency of every department and government agency should be questioned. The changes should be swift enough to outpace the paralysis caused by special interest groups and what Milton Freidman terms ‘the tyranny of the status quo’.  Lastly, there is much to gain from rethinking the method by which government performs its functions.

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3 comments on “New Zealand’s Revolutionary Reforms

  1. Simon O'Kane
    March 29, 2013

    I notice this is a Labour government we’re talking about. Would you say these sorts of reforms were compatible with democratic socialism, or was the fourth Labour goverrnment ideologically inconsistent?

    • Anthony Masters
      March 29, 2013

      It depends which tradition of democratic socialism is being discussed. It is true that many members of the Labour party believed these reforms defied their core principles. However, in Scandinavia, it is common for nominally social democrat parties to favour liberalisation of the economy, over which they then redistribute wealth. The key insight for these parties is that wealth must be first be created in order to be redistributed.
      Roger Douglas left the Labour Party in 1993 to co-found (with Derek Quigley) the Association of Consumers and Taxpayers, a pressure group. A change in the parliamentary system to a Mixed Member Parliament in 1996 favoured smaller parties, so a political party was founded, called ACT New Zealand, which are classically liberal.

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