What you need to know ahead of the Spending Review: the New Zealand experience

Patrick Nolan 2:22pm

This is the latest of our posts with Reform looking ahead to the Spending Review. The first five posts were on health, education, the coalition’s first hundred days, welfare and the Civil Service.

International examples of public finance rescue missions

Other countries can provide important lessons on what does, and what does not, work in devising a plan to bring government spending down. Several countries have undertaken major programmes of reform that have set out to restore fiscal credibility and improve the quality of their public services. Examples include New Zealand, Canada and Ireland. Reform has drawn on the experiences of senior figures from these countries, and lessons from the New Zealand experience are discussed below.

New Zealand

A centre-right government was elected in New Zealand in November 1990. The incoming government faced a larger than expected fiscal deficit (approaching 20 percent) as the economy moved into recession and funds were required to stop the country’s largest bank from collapsing. In 1991 the Minister of Finance, Hon Ruth Richardson, introduced a wide-ranging budget that:

-- Removed middle class welfare, such as replacing a universal child benefit with targeted family assistance. This reduced the degree of churn in the welfare system (where tax rates on higher income earners were used to fund transfers they receive with associated economic and administrative costs).

-- Addressed the growing costs of pensions through reforming the levels at which pensions are paid, adjusting the degree to which assets and incomes are taken into account in the assessment of entitlement and raising the qualifying age.

-- Reformed main welfare (e.g., for people out of work) and supplementary benefits (e.g., housing assistance) to improve incentives for work.

-- Restructured the health system to separate funding from provision of services and introduce part-charging for patients for in-hospital and outpatient services (and moving towards a defined list of core treatments the state would fund).

To ensure that the shift towards a more prudent fiscal policy achieved in the 1991 Budget became permanent in 1994 a Fiscal Responsibility Act was introduced to improve fiscal policy by specifying principles of responsible fiscal management and strengthening reporting requirements. This Act highlighted the importance of transparency of fiscal plans and aggregates in ensuring ongoing political commitment to reducing public debt. Following these reforms the level of public debt in New Zealand fell every year, reaching an unprecedented low of 5.7 per cent of GDP in 2008.

In a forward to Reform’s alternative 2010 Budget, Hon Ruth Richardson identified that the success of her programme hinged on the following:

-- Courageous and visionary political leadership.

-- Strong early actions.

-- A coherent framework for re-thinking the government’s role as a spender, a tax collector, an owner of assets and a regulator.

-- Instituting fiscal rules that require transparency and accountability in the conduct of public finances, with the focus on outputs, not inputs.

-- A performance driven Civil Service, restructured and reduced so that as to form and function it is fit for purpose.

Similar success factors were also noted by Hon Sir Roger Douglas MP, a New Zealand Parliamentarian and Minister of Finance in the 1984 to 1990 Labour Government, who began the process of rescuing New Zealand’s public finances. Speaking at a recent Reform conference, Hon Sir Roger Douglas noted that politicians need to first ask what should be done in the interests of the nation and only then should they ask the question how the policy should be marketed to the public. His view was that the New Zealand experience shows that wherever a quality decision was made then those decisions survived, but whenever decisions were half measures then governments got into trouble and major political debate continued.

This discussion highlights a key lesson from the New Zealand experience for the UK. The support for and consensus around radical reforms tends to emerge after the event, so political leadership is critical. The Coalition needs to back itself, take the tough choices and focus on the longer term national interest.

Further information

Hon Ruth Richardson will be giving a public lecture on “A once-in-a-generation opportunity to transform the way that government works” on Wednesday 8 September 6.00 pm to 7.30 pm. This lecture will include a panel discussion with Julian Glover, The Guardian, David Smith, The Sunday Times, and Steve Richards, The Independent. Further information can be found here.

D. Bassett, T. Cawston, A. Haldenby, P. Nolan, L. Parsons, N. Seddon and K. Trewhitt (2010), Budget 2010: Taking the tough choices, Reform.

Nolan, P (2010), ‘The First Hundred Days,’ The First Hundred Days, Reform.

Scott, G. (1995), ‘New Zealand’s Fiscal Responsibility Act,’ Agenda, Volume 2, No. 1, pp. 3 to 16.