Why this isn’t 'a transformational government'
Jacinda Ardern’s promise to lead a “transformational government” is looking fairly hollow at the moment. That’s because it’s insisting on running the same sort of economic regime as the previous government, while somehow expecting a different result.
Ms Ardern’s administration continues to commit itself to many core National Party fiscal policies – including running budget surpluses, keeping the size of the state small, and paying down debt in a hurry. This self-imposed commitment to broadly retain National’s tax and spending policies will severely restrict the ability of the new government to make big enough changes in areas of urgent concern such as housing, poverty, health, and education.
Increasingly, commentators are pointing out that to run budget surpluses, Labour is essentially running austerity economic policy. That means it will continue to underfund areas like health and education, as well as leaving major infrastructure problems in Auckland unfixed. For example, Bernard Hickey says today that “the 2018 Budget won't properly address the systematic under-spending on infrastructure that has led to this man-made crisis in Auckland that is spreading to the likes of Hamilton, Tauranga and Wellington” – see: The case to borrow and invest.
At the centre of Labour’s fiscal conservatism is the Budget Responsibility Rules that it signed up to during the election campaign, along with the Green Party. I explain the conservative impact these rules are now having in my Newsroom column today, Labour’s budget rules are holding it back.
Labour’s dogmatic adherence to these self-imposed rules is being challenged by commentators from across the political spectrum. That’s because “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.”
Ironically, this is exactly what the new government is accusing the last government of at the moment. But this “blame game” is not washing with many commentators, with plenty of questions being asked about why Finance Minister Grant Robertson is running National-lite economic policy in the face of the need to urgently fix underfunded infrastructure and public services.
One of the hardest-hitting critiques comes from leftwing commentator Gordon Campbell, who has responded to Ms Ardern’s claims of an almost-crisis like state in health and education, saying: “So … since there are expensive needs lurking in every nook and cranny, why is Labour sticking so steadfastly to the right-wing ideological dogma enshrined in the Budget Responsibility Rules (BRR) that – for no good social reason – require Crown debt to be reduced to 20% of GDP in the next five years. (Currently, the figure is sitting at a low by world standards figure of only 23%.)” – see: On Labour’s timidity.
When this question was put to Mr Robertson, Mr Campbell reports that “Mr Robertson had no real answer, beyond saying that Labour has already signalled its readiness to accept a slightly longer debt repayment path than National.” This isn’t good enough, according to Mr Campbell, and he warns that the problem isn’t going away for Labour: “This issue will remain a live one – because it goes to the heart of (a) just how radical the coalition government is prepared to be in dealing with the socio-economic problems it has inherited, and (b) the extent to which Robertson and Co remain beholden to the economic orthodoxy of the past few decades.”
As to the idea that the government has no choice, Campbell responds: “The coalition government is well placed to take on more debt affordably to address these legacy problems. It is choosing not to”; and “Any attempts to reduce say, child poverty are likely only to be token if they don’t address its structural causes.”
Recently, the prime minister admitted the government “doesn't have any money for additional child poverty reduction measures outside of its Families Package” – see Nicola Russell’s No more money available for child poverty reduction – Prime Minister.
Economists are also increasingly criticising Labour and its finance minister for their economic choices. Shamubeel Eaqub has been the most vocal. He was reported back in February as calling for Labour to be more ambitious in its reforms, spending, and borrowing – see Bernard Hickey’s The case to throw off the fiscal straitjacket. In this, Mr Eaqub bemoans that Kiwibuild simply isn’t bold enough to meet the scale of the housing crisis, adding “If I was the minister, (and I'm not), my ambition would be to build 500,000 houses, not 100,000.”
On Sunday, Mr Eaqub’s column again took Labour to task, pointing to the contradiction of promising more without spending more: “There is no way to square the circle. If we, as a nation, want to truly invest in fixing the chronic under-investment in housing, infrastructure and social services of many decades, public spending and investment will need to increase a lot. Timid moves will not be enough, which is where we seem to be headed given this government's commitment to keep spending and borrowing in check” – see: Timidity and blind side-picking gets us nowhere.
And other economists seem to be in agreement. Former Reserve Bank economist Michael Reddell has blogged today about the same issue, saying it’s “a curious spectacle to see a party campaigning on serious structural underfunding of various public services and yet proposing to cut government spending as a share of GDP” – see: Labour’s fiscal commitments.
In terms of Labour’s firm adherence to fiscal conservatism, Mr Reddell says “I don’t know any economists who are particularly wedded to the current fiscal (debt/spending) tracks” and he points to what he thinks is a relatively low and possibly declining spend by the Labour-led government on health and education. He questions that “Labour campaigned on continued reductions in government operating expenditure as a share of GDP, all the time claiming that core services were underfunded.”
For Mr Reddell, the problem is Labour’s Budget Responsibility Rules, and he warns Labour against continuing to dig the hole it has put itself in any deeper, suggesting it should just admit it was wrong.
Interestingly, rightwing political commentator Matthew Hooton is also criticising Labour for its rigidity, suggesting it needs to spend more – see his column, Fiscal anchor sinking Labour. He says “The government now finds itself struggling to meet the demands of nurses, teachers and other key Labour constituencies for pay rises, let alone make the significant new investments in health, law and order, and transport and other infrastructure that the median voters who switched from National to Labour expect.”
It certainly seems hypocritical that the new government is still labelling “National’s underfunding” as “grotesque” but spinning its own version of underfunding as being “responsible economic management.”
Finally, it was just over a year ago that Labour and the Greens made the crucial decision to commit to their Budget Responsibility Rules, which might come to be seen as a turning point in preventing their subsequent government from being any sort of radical transforming one. For a reminder of what this was all about, see my column from the time: Have Labour and the Greens sold out?
This is supplied content and not commissioned or paid for by NBR.