BRYCE WILKINSON: A historical perspective on the 2017-2023 Labour government's spending spree

A historical perspective on the 2017-2023 Labour government's spending spree is new research from Bryce Wilkinson.

Bryce writes:

In this research note, we analyse the six-year spending spree of the Sixth Labour government in the context of historical precedents. Elected on the back of an ambitious policy agenda, the Ardern government quickly found itself struggling to balance the books. Their Fiscal Plan prior to the 2017 general election forecast an $11.7 billion increase in government spending in the five years to June 2022.

Increased government expenditure is often seen during crises, and it is a challenge to use these funds efficiently. However, this research illustrates how the Sixth Labour government's spending spree continued to spiral out of control in a textbook case of Higgs's Ratchet Effect.

Drawing on tax receipt data that goes back to the 1910s, this report situates the Sixth Labour Government in historical context. By drawing parallels with past governments, we find that the First Labour Government set somewhat of a precedent of big spending.

The next government will need to make tough decisions about public finances, hopefully learning from its big-spending history.

Report extract:

In essence, the dominant focus of fiscal government activity since 1950 has been and still is on redistribution – taking from citizens' pockets in tax to give it back to them in cash or goods and services in kind.

Hardly any attention is given to the costs of this. People alter their affairs to avoid taxes and to make themselves eligible for the handouts. People can put serious effort into these activities, as Inland Revenue and social welfare officers likely witness daily. People want benefits.

Moreover, what is said to be free, such as free public transport, is not free. The costs of its provision must be paid for by the community by more indirect means. When something is free at the point of use, the value of the extra use may be very low. Wasteful use is likely.

Nor does this register in public debate. When one political party promises to make something else free, the media typically accost other party leaders to see what they will promise to match it.

In addition, the question of who benefits from the redistribution does not attract enough interest and concern. Concerns about the plight of the poor are easy to express, but policies that are more likely to benefit the relatively well-off also seem acceptable. Interest-free loans for first-year university students fit this category. (An argument the author has encountered is that it is acceptable for handouts to benefit the relatively well-off because they pay most of the taxes.)

An important aspect is the absence of any principled criterion for determining the optimal degree of redistribution. The demand for larger tax revenues is as bottomless as the demand for more handouts. (Outcomes are determined by the evolving political balance of forces, rather than by any principle.)

It does not matter how heavy the tax burden is; making it heavier would benefit some recipients of the largesse. As the saying goes, if the government is robbing Peter to pay Paul, it can be sure of Paul’s support.

Nor would taxation at 100% of national income satisfy redistributionists. Those at the top would direct resources to areas likely to keep them at the top while looking after their own material interests very well indeed. Most people would be very poor, à la Russia.

None of this is to deny the need for charitable provision through some combination of private and collective means.

Yet the question of at what point such redistribution makes a community worse off does not disappear. What determines the optimal degree of government redistribution, messy political swings in government aside?

The answer is not straightforward. Families, friends, workmates, religious groups, clubs, friendly societies and charities can and should all play an important role in helping those who need help. What the government must do depends on the capacity of these other parts of civil society.

But civil society’s own capacity can depend on the depth and breadth of state services. Friendly societies traditionally placed reciprocal obligations on the recipients of aid. State provision which comes with fewer obligations may be preferred by the recipient, eroding civil society capacity. If state capacity and competence itself erodes in time, the worst of both worlds can result. Resources that could have been used to greater long-term benefit by civil society are instead consumed by the state.

One thoughtful perspective is that, on the evidence, countries with higher levels of economic freedom tend to become more prosperous. Getting this right does not mean a nightwatchman government. But there is a great deal that governments have been and are doing poorly in New Zealand currently. Housing, education, infrastructure and environmental legislation all spring immediately to mind.

Size is one thing, competence is another. Tax burdens may be the same in two countries. Still, the one likely to be more prosperous in time is the one with the more competent government with an eye on economic freedom rather than authoritarian dictates.

There is a great deal in New Zealand that more competence in government could improve.

Download the paper here

Dr Bryce Wilkinson is Senior Research Fellow with the New Zealand initiative and Director of Capital Economics Limited, a Wellington-based economic consultancy. He worked in the New Zealand Treasury until 1985 when he joined a share broking firm to undertake capital market research. He set up Capital Economics Limited in 1996. He was a member of the government’s 2025 Taskforce in 2010 and 2011. It was charged with assessing productivity growth and other policies capable of closing New Zealand’s income gap with Australia by 2025. He has subsequently authored three research papers for the New Zealand Initiative on foreign investment issues and contributed to its 2018 submission on the government’s proposed legislative changes.