A New Zealand (NZ) government is once again adopting a contrary economic policy from which the country’s citizens are likely to benefit substantially. Prime Minister John Key, leader of the National Party, heads a coalition government, which took over from the Labour Party in November 2008. The coalition has 68 seats in the 122-member parliament, with the National Party holding 58 seats and the ACT and Maori parties five each.
In a 6 March interview with Mary Kissel of the Wall Street Journal titled You Can’t Spend Your Way Out of the Crisis, Key described the massive stimulus packages of the US, Japanese and Australian governments as “risky.” Projecting into the future he said, “You’ve saddled future generations with an enormous amount of debt and then they have to repay. There is a limit to what governments can do.”
The coalition government’s programme for confronting the crisis includes tax cuts, regulatory reform, limits on government spending, and trade liberalisation. Lower taxes are intended to attract and keep good people and investment, and regulatory reform to remove entrenched regulations that drive away foreign capital.
One major concern is that countries will respond to the recession by raising tariff barriers, which will reduce world trade and retard the recovery process. Key is adamant that his country must be prepared to compete in the global economy and must do this by raising levels of productivity.
Another major concern is that the huge stimulus packages, especially those in the US, will cause inflation that will spill over to the rest of the world. Most of New Zealand’s external trade is priced in US dollars and an unstable dollar will cause serious disruptions. Prime Minister Key, a former currency trader, is well qualified to speak on the subject of currency turbulence.
Another controversial issue the coalition party is tackling head-on is the question of climate change. Amusingly, half of New Zealand’s emissions come from dairy cows, which give off gas front and back; something the government can do little about. Cutting other emissions mean that “we either become more expensive or we cut production. And neither of these options are terribly attractive” Keys said. The response of his government is for New Zealand to “balance its environmental responsibilities with its economic opportunities”.
The liberalisation process now occurring in New Zealand harks back to the transformation that took place in the mid-1980s. Roger Douglas, who was then Finance Minister in the Labour Party but now represents the Act party as a backbencher in the new Parliament, led those early reforms. The reforms are now generally referred to as “Rogernomics” due to certain similarities with “Reaganomics”, which had four components (1) reduce the growth of government spending (2) reduce the marginal tax rates on income from both labour and capital (3) reduce regulation, and (4) reduce inflation by controlling the growth of the money supply.
The far-reaching reforms liberalised and completely transformed the New Zealand economy. As a result NZ catapulted from 60th to 3rd place behind only Hong Kong and Singapore on the Economic Freedom of the World rankings in the decade between 1985 and 1995, without doubt the most dramatic change that has ever occurred in any economy. After a painful adjustment period the economy started growing rapidly, achieving a peak GDP growth rate of 6. 2 per cent and a government budget surplus of 3.6 per cent of GDP in fiscal 1993.
Financial market reforms commenced in 1984 with all controls on prices, wages, credit, dividends, foreign exchange and out-bound overseas investment lifted. The requirement for banks to hold deposits with the central bank, or to hold specified investments in government securities, was abolished. Banking was opened up to competition and the requirement for licensing of foreign exchange dealers was discontinued. The law was also changed to allow contracts to be denominated in foreign currencies though the importation of foreign currencies intended for circulation was still prohibited.
Quantitative import controls were phased out by the early 1990s. Reduction of tariffs commenced in 1984 with trans-Tasman free trade established by 1995 and a target of 5 per cent set for all products by 2000. A target date of 2020 was set for free trade and investment in the Asia-Pacific region. Much of the trade liberalisation was unilateral as successive governments recognised that it was in NZ’s own interest.
Agricultural and industrial subsidies were virtually abolished at an early stage. Monopolies and restrictive government controls in domestic air services, long-distance freight haulage, taxi operation, coastal shipping, electricity generation, courier services, shop trading hours and telecommunications were all abolished.
The labour market was liberalised in 1991 through legislation that placed employment contracts on almost the same basis as other commercial contracts. Employees and employers could have individual contracts, or collective contracts, or a combination of both. This changed wage negotiations from centralised bargaining to company-based bargaining. Working days lost through strikes declined sharply and unemployment fell rapidly as employed numbers increased at 3.3 per cent per annum.
A host of other reforms occurred, such as tax reductions, privatisation, devolution of school management to school boards of trustees and a great deal more. A remarkable reform was in making the Governor of the Reserve Bank personally responsible for ensuring that the rate of inflation remained low – at one time set at a maximum of 2 per cent. If the Governor did not meet his contractual obligation he could be fired. The effect was a long period of price stability and a thriving economy.
Labour government during the period 1999 to 2008 led to some re-nationalisation and increased welfare expenditure, a matter that will no doubt receive attention from the new government. A recent poll suggested that the National Party would gain a majority vote in a new election. This signifies satisfaction with steps the coalition has taken in the first 120 days of government. The country’s people are no doubt very pleased to have a Prime Minister at the helm who is determined to give them a competitive advantage in the difficult economic times that lie ahead.
By Eustace Davie.
Eustace Davie is a director of the Free Market Foundation.