Shewan on Budgets
June 30th, 2012 at 11:00 am by David FarrarJohn Shewan also talks about best and worst budgets:
One of the last big projects Shewan completed at PWC was to review New Zealand’s last 34 government Budgets.
The best finance ministers included Ruth Richardson, Michael Cullen and Bill English “all in their own way”, during different eras, Shewan said. Cullen, especially, was an “unsung hero” for holding government spending down early in his time as finance minister.
Bill Birch and Winston Peters were treasurers during a “non-reformist period of lost opportunities”.
Shewan said that one of the lessons of history was that, “You have to keep reforms going, otherwise you end up facing bitter medicine in the end.
Australia has managed that - continuous reform.
In the course of clearing up his office earlier this month, Shewan found a government booklet from 1981, from the height of the Muldoon era. There were 45 pages of incredibly generous tax incentives for business.
The bad old days, that some want to return to. They now call the loopholes and incentives “green jobs”.
“Without doubt” Muldoon was the worst finance minister of the past 34 years and did the most damage to the economy.
“But I don’t think he realised. I think he genuinely believed what he did would work,” Shewan said, even though Treasury and others advised against his decisions.
The damage was huge and took a long time to fix.
“I’m sad we haven’t learnt from those mistakes,” Shewan said, given the huge blowout in government spending between 2004 and 2008.
“That will be another era that will be judged extremely harshly when government spending grew 60 per cent. It takes a long time to recover from that,” he said.
In the early 2000s, the Clark government enjoyed huge Budget surpluses. “And in my view Michael Cullen did a good job in keeping a lid on spending between 1999 and 2005,” he said.
But in 2005 the government campaigned to bring in massive spending increases such as interest-free student loans and Working for Families, which led to significant “middle class welfare”.
“Often the worst policies are the ones announced on the hoof during an election campaign with no consultation,” Shewan said.
Interest free student loans are a prime example.
However Shewan gives credit to Cullen.
“Cullen is an unsung hero for being ruthless in stopping fiscal promiscuity in the early period of the Clark administration,” Shewan said.
“He was a clever and talented guy, for whom I had great respect though I crossed swords with him [on some issues].”
Cullen did salt money away in the New Zealand Superannuation Fund, when the Government was running big surpluses. …
Present finance minister Bill English had come in during an extraordinarily challenging period, when the economy was already heading for the rocks, even before the Global Financial Crisis hit, then the GFC did hit, followed by the Christchurch quake.
“He has achieved basically zero growth in government spending – that’s a huge achievement,” Shewan said.
It would be interesting to see his ratings for all the Budgets.
Related posts:
- Shewan on taxes
- Is he trying to be funny?
- Will Cullen cancel the tax cuts?
- The importance of reducing debt
June 30th, 2012 at 11:23 am
I hate to go all Keynesian in hostile territory but calling zero growth in government spending a huge achievement when the private sector is busy deleveraging is oxymoronic – Europeans call this achievement austerity.
The government is currently borrowing at historically low interest rates and there are infrastructure projects screaming out for funding, not to mention a need for a massive building programme. What Bill English is presiding over is another period of lost opportunity. The core government aim appears to be a programme to transfer wealth upwards by taking from the least wealthy, exacerbating already high inequality.
And to those who scream Greece! Greece! you need to remember a couple of things: 97% of government debt is denominated in NZ dollars. And net debt is still incredibly low.
If ever there was a time to take advantage of our financial strength and inspire our economy into a new, sustainable future, this is the time.
Vote:June 30th, 2012 at 11:31 am
Why Luc, why don’t you lead by example given these low interest rates? Upgrade the car, the house and maybe even the missus.
Vote:June 30th, 2012 at 11:31 am
Flawed analysis by John Shewan. If you’re going to praise Cullen for sitting on hands for the first few years then you might as well praise Gordon Brown while you’re at it. New Zealand declined under Michael Cullen’s watch. The Nats aren’t fixing it. New Zealand is very much a country of lowered expectations.
Vote:June 30th, 2012 at 11:45 am
If you’d stopped after your first two words Luc there’d be total agreement from everyone.
Vote:June 30th, 2012 at 11:56 am
Luc – the argument that we should borrow heaps of money now because it’s cheap is exactly what Americans thought on the “low doc, no interest for five years” mortgage loans a few years ago. Then interest rates kicked in and most couldn’t afford to repay. Now they’re living on the streets; the loans are written off; and the banks almost went under.
I call your principle, the “Harvey Norman” principle. If you replace “Harvey” with “Russell” we’ll end up like the Americans if we follow his or your policy.
Vote:June 30th, 2012 at 12:27 pm
Nick, there is no comparison between the sub prime frauds perpetrated in the USA and the New zealand economy.
Now is exactly the time to fund major projects, just as we did to get us out of the Great Depression. My father helped plant our great pine plantations that became so valuable to the country.
We need to address our affordable housing crisis, and the government can play a huge role in this.
I just checked the figures on interest.co.nz showing that although GDP increased by 4% in 2011/12, government spending increased only by 0.7% and from what I can see most of this small increase was on transfer payments. Even spending on education went down by 50 million! What are we supposed to do there? Shrink the kids?
So where’s the investment for our future? What is our economic strategy? Oh, I know, muddle through. Great.
Vote:June 30th, 2012 at 12:32 pm
davinci – we are deleveraging like everyone else should be. But what constitutes rational behavior for individuals is not necessarily rational for the country. Keynes showed that when the private sector is in a spending funk, government should step in to ensure growing economic activity otherwise either stagnation or recession will result.
Cutting spending is not a growth strategy in the current global environment.
Vote:June 30th, 2012 at 12:39 pm
On ‘stimulation’, the particular elements of Keynesian economics being applied nowadays, there are plenty of cases where it appears to both fail and succeed. The grand example of failure being Japan. It seems that it is much more likely to work when there are no fundamental issues around but if there are fundamental issues all it really does seem to exacerbate the problem but even that is not clear.
Another example. The common mantra now is that the depression was fixed by increased government spending but that’s not at all so clear cut. The huge protectionism introduced and then partially repealed at that time is arguably a bigger issue. The other likelihood is that there were fundamental issues that just took that long to work their way out of the economy.
Based on that I’m really not keen to borrow lots of money on the optimistic belief it *might* improve things.
On Cullen, he was always going to have to spend all the money as no way could Labour cut taxes. It broke too many ideological hearts. He knew he was doing it and I rate him as an awful treasurer, Decisions such as Kiwirail and the student loan fiasco are long term disasters that will continue for quite some time – his legacy. The super fund was ludicrous and last time I looked did not beat a risk free return required for removing so much money from the economy. He was also a spiteful and petty minded personality and it came through in his actions. As with others here I reckon he will end up ranked as one of the poorest treasurers we have had.
All that wasted spending combined with the GFC has basically left English spending 10 years of nursing an economy through. Considering the opprobrium he receives from left and right he probably is getting it somewhere about right as it would have been political suicide to instantly undo the more ludicrous elements of largesse. Slowly reducing the bloated civil service etc is the way to go.
Vote:June 30th, 2012 at 12:50 pm
The basic problem with your analysis is that reducing your “bloated civil service” is not a growth strategy. And you can do this hand in hand with a strategic spending programme, anyway.
Japan is not comparable to our situation. We are in a classic business cycle slump and the classic response is for the government to lead, not to hunker down like a frightened rabbit. My prescription would see unemployment down, migration to Aussie down, education infrastructure modernized and all at bargain basement prices.
It’s only Presbyterian puritanism that holds us back.
Vote:June 30th, 2012 at 1:14 pm
Cullen was a good finance minister, up until Helen Clark put her stupid policies in place in 2005. That is what crippled our economy.
At least Cullen kept spending low in the early years, and kiwisaver was a great idea, if too generous in it’s incentives and subsidies.
However, Labour seemed to have no respect for marginal gains. How you can increase govt spending by 60% and yet have no real measurable increases in health/education/welfare/infrastructure outcomes is mind-boggling. I note that in a zero budget year on year climate, NZ’s health system is the best it has ever been, right now, and services have universally been maintained, or improved, or sustained as required (ACC).
@ Luc, low interest rates are ‘temporary’. They can easily rise very very fast. That logic is precisely what crippled so many states and metropolitans in the United States as well as countries like Ireland. This is not to mention the individuals who got mortgages with ascending rates, cheap for 2 years, rising for proceeding 3 years.
It is fundamentally flawed and dangerous logic. Take the interest on the 6 billion dollars Labour will have to borrow after they confiscate kiwi’s property and buy back the shares in the energy companies. The lowest interest rate the government has been able to find is 5% since National came in. That is 300 million dollars interest per year, never mind the principal. However, that can and will rise up to 6.5% and even 7% very easily. Japan has applied Keynesian spending to it’s deflation problem for decades now. If you just do that alone and don’t change structural problems, you get Japan – continued anaemic growth and a plethora of low quality ill conceived projects like billion yen bridges to tiny villages.
Actually, the time to make a big change was 2000-2008 when the country was earning the return on the 90′s reforms by the national party and we had large surpluses and an opportunity to spend money and make improvements in exports, our technology profile, our state institutions – everything.
Instead, we got interest free student loans, working for families, student allowance, a public service that took all the rental space in Wellington, and Union dictated edu/health/industrial law.
Hey it’s legitimate to pay out ‘dividends’, especially after years of high taxes, but as any company knows, you then sacrifice the opportunity for growth and bigger future dividends.
@ Luc: the govt is funding major projects – roads of national significance, ultra-fast broadband, 1 billion dollars for 21st century schools, the Christchurch rebuild.
A zero growth in govt spending combined with maintained and improved services is a monumental achievement in the current climate. Absolutely monumental. Bill English is the most underrated politician in NZ’s history.
Christchurch will be rebuilt, but in a considered, safe, well planned and executed MEASURABLE way, not the Labour way of throw public money at a problem, dither about, and watch.
What Bill English is presiding over is a time of consolidation and well considered incremental/major changes with big marginal gains and value for money expenditure. Welfare reform is a huge deal. It’s going to make a massive difference over the next 3-4 years on outcomes for people. Labour just wanted to throw a bit of money at people and let them rot.They didn’t even have a database that contained meaningful current details of individuals beneficiaries, because Labour just sees people as groups.
NZ’s housing is being vastly improved by National. Seriously, housing policy has been fucked for many many years. Why did we build all these 3 bedroom houses for either single people, or huge families? precisely the worst thing to do, leading to bad health for big families, and waste for singles.
Why, given NZ housing is worth tens of billions of dollars, did it have ‘TWO’ people from the govt looking at it, and the worthless fastforward fund, have about 100?
Why did the Labour govt do something as simple as remove all the plantlife and gardens from the house’s grounds when existing tenants moved on? State housing zones should be beautiful leafy suburbs. Instead they are horrid austere concrete and grass wastelands.
Luc Keynesian policy would suggest that even though a govt’s debt is so high that no one wants to buy their bonds any more, by creating new fiat money and issuing new bonds, there will suddenly be great demand for that govt’s debt and they will be able to spend their way out of their problems. That, is ludicrous. The National government as always has struck the right balance between decreasing spending but continuing to borrow to fuel the economy. You should be praising them for their Keynesian approach.
Labour have no economic plan, and never have. It consists entirely of raising taxes, and spending money without consideration for marginal gains, hence the public service twice as big as it was in 2000, and ill conceived welfare policies that don’t even target the needy people, where smart people just restructure and take all of our tax money.
Vote:June 30th, 2012 at 1:41 pm
‘a plethora of low quality ill conceived projects like billion yen bridges to tiny villages’
Vote:Roads of National Significance anyone?
June 30th, 2012 at 2:41 pm
Here we go again. Another socialist (Luc) arguing that all we have to do is borrow and spend and we’ll be healthy, wealthy and wise.
Please show me an country that is thriving, or has thrived, because of borrow, spend and…………………hope.
Vote:June 30th, 2012 at 3:11 pm
Luc
I’m encouraged that you appear to be supportive of the current government’s policies around infrastructure investment in areas that will provide structural benefits to the economy, and thereby increase commercial efficiency and save on energy; eg roading, UF broadband. Plus the investment in agriculture by way of the irrigation fund and additional dosh going into aquaculture to do something or rather; with the overall objective of boosting agri exports by c. $1b. There are of course other non-capital structural investments, such as the RMA amendments and commercial and securities legislation and rationalisation of the relevant regulatory bodies, the appointment of a policeman as commissioner, making schools accountable and, most recently, having the courage to set firm targets across a number of measures by which a society might judge its success in education, health, employment, bludging and crime. Plus of course, making government departments actually work with each other to secure these outcomes instead of running isolated fifedoms.
As to building houses well, in effect, government has picked up the tab for that in Christchurch plus splashed out some bucks on insulation and repairing state houses that were left to rot under the stewardship of your former (by all accounts) pinko mates.
These policies sit in stark contrast to the pinko Keynesian policies of Herrs Klerk & Dokter, which involved a piss-it-up-against-the-wall strategy of purporting to invest in the future by giving people money to buy things that they didn’t need and would not otherwise have been able to afford, such $100 Sunday brunches & lattes with the kids, new cars and new houses all paid for by WFF rorts; culminating in an overblown house market and mortgagee sales.
Good to see that you’ve got on board.
Vote:June 30th, 2012 at 7:31 pm
Other quotes from that article
“I’m sad we haven’t learnt from those mistakes,” Shewan said, given the huge blowout in government spending between 2004 and 2008.
“That will be another era that will be judged extremely harshly when government spending grew 60 per cent. It takes a long time to recover from that,” he said.
In the early 2000s, the Clark government enjoyed huge Budget surpluses. “And in my view Michael Cullen did a good job in keeping a lid on spending between 1999 and 2005,” he said.
But in 2005 the government campaigned to bring in massive spending increases such as interest-free student loans and Working for Families, which led to significant “middle class welfare”.
“Richardson was unfairly criticised for what had to be done.”
You are being rather generous to Cullen DPF.
It will be difficult to see Cullen’s term as anything but that over abused phrase, “A game of two halves”.
The 2nd half was utterly terrible and worse than that continued on as a legacy for the next 10 years after he was given his sinecures.
Vote:June 30th, 2012 at 10:15 pm
Incredible that he states that Muldoon pretty much wrecked the place and that Labour enjoyed huge surpluses…. what about mentioning the man that fixed Muldoons clusterfuck and enabled the future Labour Party to enjoy these surpluses?
Stand up Sir Roger Douglas!
Vote: