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Does Anyone Care About New Zealand's Economic Future?

Speech delivered to the Institute of Economic Research AGM
Thursday 30 August 2007

Sir Joseph Ward

Text of the British Dictionary of National Biography entry prepared in 1995.

Joseph Gordon Coates

Text of the British Dictionary of National Biography entry prepared in 1997.

“How Ideal was the Savage Ideal”

M.J. Savage Memorial Lecture, La Trobe University, 4 September 1998.

Peter Fraser

"The Political Context of the Prime Ministerial Years", conference paper August 1997.

"Politics versus the Economy 1940-1975"

Speech given at the Stout Centre conference in April 1999 at Parliament Buildings.

"An Overview of the War History Branch",

Lecture to Department of Internal Affairs seminar, Wellington, 1997.

"Unofficial Channels"

Review published in International History Review, vol.22, 2000.

Jock Barnes

Obituary for Barnes published in the Dominion, Wellington, on 6 June 2000.

Sir Apirana Ngata

Review of He Tipua: The Life and Times of Sir Apirana Ngata.

Sir Keith Holyoake

Review of Sir Keith Holyoake: Towards a Political Biography, in the Dominion, 18 April 1997.

Norman Eric Kirk (1923-1974)

Dictionary of New Zealand Biography, vol. 5, Wellington, 2000.

"Martyn Finlay"

Obituary for Martyn Finlay published in the National Business Review, February 1999.

"His Way: A Biography of Robert Muldoon"

Review of His Way: A Biography of Robert Muldoon, in the Dominion, 21 August 2000.

"The Collapse of New Zealand’s Military Ties with the United States"

This Fulbright lecture was first delivered at Georgetown University on 2 December 2002.

"James Brendan Bolger: An Early Assessment"

Dominion, December 1997.

"The State Sector"

Paper given at the Legal Research Foundation's conference "Shaping the Future State Sector", Parliament Buildings, 21 September 2000.

The National Years 1949-1999

Published in the Dominion, December 1999

The Conflict of Visions about New Zealand.

Paper given at ACT's Northern Regional Conference, November 2001

"Jim Anderton"

Published in the Dominion, 23 February 2002 after Anderton, the Deputy Prime Minister, fell out with yet another band of supporters and began his third political party.

John Banks: A Biography

Review of Paul Goldsmith's book, Auckland, 1997.

“Sowing the Wind and Reaping the Whirlwind”

Welfare Reform Seminar: 14 August 2004

David Lange

Obituary for David Lange, August 2005

“Remodelling the State Sector: A Political-Historical Perspective”

by Michael Bassett

All around the world the Twentieth Century gave birth to what one writer recently called “the democratic Leviathan”. Governments grew to monstrous proportions. As a percentage of GDP the OECD average for state spending was 12% at the outbreak of World War One, 28% by 1960 and 43% by 1980.(1) New Zealand was slightly ahead of the field at the end of the Nineteenth Century. Today, as big government retreats, the OECD is so heavily weighted with European countries where subsidies and transfers are a way of life, New Zealand is spending slightly less than the average.(2) However, we have some way to unwind before we match the United States, the best performing economy on earth. Today it has a public spending level of barely 30% of GDP. Most governments around the world have been saying that that figure is their target. However, getting there is another matter.

The growth of government was not steady. There were two big jumps. The first came in the years 1914-45. It coincided with war and depression which heightened the perception that laisser faire capitalism had failed. The second came in the 1960s and early 1970s when there was a surge in the perceived advantages of Keynesian economic management. The retreat followed the end in 1972 of a golden quarter century of growth in world trade, and the international readjustments accompanying the oil shocks. There was growing evidence too that the second surge in government spending in the sixties and the seventies had not brought the extra economic or social benefits expected of it. Some argued that the extra spending actually exacerbated economic and social problems rather than cured them.(3) Economic debate intensified during the 1970s and 1980s with the down-sizers gradually catching the ears of politicians in most countries. However, by this time those with a vested interest in the maintenance of big government had virtually perfected the art of blocking out the messages preached by those who could read the trends. To them the message that big spending did not necessarily produce better societies was most uncongenial. As a result, the contraction of government has been a slow process in many countries.

In New Zealand the comparatively rapid down-sizing was the result of the very serious reverse in our terms of trade from the middle of the 1960s. We began to experience economic shocks nearly a decade earlier than the rest of the world, although we endeavoured heroically to continue with big government until some years after the contraction process began elsewhere. It is that last act of heroic defiance of world trends, associated principally with the period 1974-84, Think Big and Robert Muldoon, from which we are still recovering today. The debt incurred during those years places limitations on any hopes of reviving big government, no matter how strong the nostalgia in some quarters for the old days of Nanny State.

Opposition to the growth of the State in New Zealand existed from early times. At first it was largely ideological, but it gathered recruits from a wider public at times of economic downturn when there were loud calls for retrenchment. After the New Zealand Wars in the 1860s, and an excess of Vogelism in the 1870s there were royal commissions aimed at trimming back the government payroll. Although 8% of the entire workforce was being employed by the State in 1880 - a figure that was high by world standards at the time - little notice was taken of the downsizers.(4) There was some retrenchment by what came to be known as the Scarecrow Ministry in the late 1880s. However, within a few years the Liberal Government was presiding benignly over a rapid increase in the number of public employees. Between 1891 and 1912 the population of New Zealand increased by slightly more than 73%, but the State’s payroll ballooned from 10,000 to 40,000.(5) Many new employees worked in the infrastructural departments - the Post Office, Railways and Public Works, into which ministers poured political supplicants. And it was all paid for by rising prosperity as New Zealand fashioned for itself a role as Britain’s outlying farm.

First the recession of 1921-22, then the Great Depression, provoked debate about the desirability of reducing the size of the Public Service. Ministers, however, found it hard to break the habit of using government departments as employment agencies. It was not until New Zealand’s export prices dropped a catastrophic 45% between 1929 and 1932 that there was any systematic effort to retrench. A rudimentary form of SOE was introduced for the second time in New Zealand’s history; a Government Railways Board tried to de-politicise railways. Like its predecessor, the Government Railway Commission of 1889 to 1894, the Board immediately discovered excess railway staff, and fired some. But political pressure to return to the featherbed proved irrisistible in 1936, and again in the 1950s after another Railways Commission had been established.(6) Not until 1982 when Railways was depoliticised for the fourth time did numbers subside steadily. When the new Railways Corporation was required to operate according to SOE rules in 1986, 17,800 employees fell to 5,000 before privatisation in July 1993. For the first time in its existence, governments had shrugged off the dead financial weight of Railways. The enterprise was carrying more freight because its rates were competitive, but the necessary surgery had been conducted at the cost of pain in many workers’ lives.(7)

After 1935 the social services saw the most dramatic increases in staff. The introduction of the Social Security Act, and the Hospital, Maternity, Medical, Pharmaceutical, X-Ray, Massage, District Nursing, Laboratory Diagnostic, Dental and Out-patient benefits multiplied the number of health providers on the public payroll by 3.5 times between 1940 and 1967 (from 2456 to 8237).(8) Education figures moved upwards at a similar rate, as the numbers of teachers expanded in all sectors. Social Welfare numbers moved rapidly from the late 1960s.

It was during the 1940s that the Public Service Association lifted its game plan, as did other state unions. There was a successful effort between 1945 and 1949 to wring better pay and conditions from the ailing Fraser Government. By 1950 the cost of New Zealand’s bureaucracy had become a huge factor in the annual accounts. There was some public criticism of this continued bureaucratic expansion, and the generous conditions of service now enjoyed by the burgeoning public service, but a buoyant economy meant it could be sustained. However, as growth slowed in the mid 1960s, warning bells rang more loudly. Health, Education and Social Welfare expenditure continued rising at a faster rate than other sectors. Many politicians still believed in Keynes and thought that such spending would stimulate a sluggish economy. Others, however, questioned whether this was right and a growing number in the 1970s asked whether deficit spending could continue indefinitely.(9) But another factor entered the equation; while they were worried by the sluggish economy, politicians were terrified of a backlash if there was to be any restructuring. During the recession of 1967-68 Keith Holyoake’s government subjected several departmental budgets to careful scrutiny and deemed a number of positions surplus to requirements. Firing employees, however, was beyond ministers of the day, and in 1968-69 the Cabinet engaged in several embarrassing retreats, concentrating instead on trying to maximise economic growth to sustain the State’s now unwieldy superstructure with the 1969 National Development Plan.(10)

When recession struck more seriously after 1973 the Kirk-Rowling Labour Government acted like its predecessors. Ministers used government departments as employment agencies. Some parts of the public sector acted unilaterally. Despite having been told by the Department of Health in August 1974 that no more staff could be employed, the Auckland Hospital Board blandly added 703 staff to its payroll in the months before 31 March 1975.(11) It is hard to resist the feeling that politicians were losing control of the juggernaut nominally under their command, and that the taxpayer was now at the beck and call of bureaucrats, local politicians, and/or the state sector unions. Moreover, the structure of the public service as it then existed defied logic. Staff were employed by the State Services Commission, and individual heads of departments were able to exercise little control over, or take responsibility for, staff under their supervision. This was a key ingredient enabling the behemoth to balloon uncontrollably.

This time Treasury sounded the warning. The incoming Muldoon Government was informed in March 1976 that while on average over the past decade more than 18% of New Zealand’s total workforce had been on the State’s payroll, the figure now topped 20%, and it was becoming unsustainable.(12) What can be described as a Public Serive culture ruled Wellington by this time. The journalist David McLoughlin captured some of the flavour:

“Anything approaching the definition of real work was regarded, particularly in government departments, as a form of perversion; turning up for an eight hour day... was all that was required; the Dominion crossword would see an army of grey-cardiganed clerks through nicely until morning tea..., and the first edition of the Evening Post, to help while away the afternoon, was on the streets at 1pm; the PSA ruled the city....”(13)

He exaggerated, of course, but not much; while by world standards our highly regulated society was amazingly free of corruption, a public service job existed for life. It was understood that any new position created would remain on the books. In the early 1970s redundancy was a term still used only by structural engineers. The one expectation that public servants shared was that there would always be more of them. They would have denied it at the time, but looking back we can see that they had become a privileged class of employees, enjoying good pay, and preferential application and appeal rights for positions within their own service. Moreover, the system of appointment of heads of departments was being compared with a mandarinate. Ministers appointed the State Service Commissioners, but they were then answerable to nobody for the appointments they made to top posts within departments.

What brought matters to a head was that in the 1970s New Zealand entered the longest and deepest economic downturn in its entire history. Once Britain was in the Common Market the days of the outlying farm were numbered. The poor productivity and growth that had been noticeable since 1960, and which economists increasingly related to the high level of public spending and protected labour market, got steadily worse. Muldoon was eventually obliged to impose “sinking lids” on public service jobs. Budget cuts became a standard feature of the pre-budget bargaining rounds after 1979. There were some heavily confrontational encounters with the public sector unions. In 1983, after talking about it for forty years, and introducing legislation on several occasions (only to back off at the last minute), the National Government repealed compulsory unionism. This was an attempt to trim the wings of private sector union bosses. Yet, with the Public Service reaching 85,000 in the last year of Muldoon’s Government, and with 280,000, or nearly 25% of the country’s workforce on the State’s payroll, the cost of the public service was now substantially greater than when National had come to power in 1975.(14) This, coupled with the array of other costs being loaded on to the budget such as Think Big, and ballooning subsidies for producers and manufacturers, contributed to the deficit of $2.1 billion in 1982, which became $3.1 billion in 1983, and led on to the devaluation crisis of 1984.

The incoming Lange Government set about economic change at lightning speed. The country’s substantially higher rate of inflation than its trading partners’ was New Zealand’s over-riding problem. There seemed no alternative but to free up the over-regulated market place and to come to grips with the causes of domestic inflationary pressures. The currency was devalued, a whole set of currency and other regulations lifted, and at the beginning of March 1985 the dollar was floated. It was essential, too, to reduce the size of the deficit which played such a role in boosting inflation. At the time of the 1984 election there was every prospect that the internal deficit would reach $5 billion that financial year without radical changes. With the country about to emerge from a wage-price freeze which would inevitably lead to a wage round, expenditure had to be reined in. Farming and other subsidies and incentives were abolished. The producer boards which had enjoyed privileged access to Reserve Bank loans at 1% interest since the 1930s were told that the facility had ceased. By this time they had debts exceeding $1 billion. Cabinet started examining the various state trading organisations that had multiplied in an ad hoc manner since the beginning of responsible government. Plans were developed through 1985 to shift many trading enterprises and their employees off the State’s books into a series of stand-alone organisations which would be required to operate like businesses and return dividends on the $27 billion worth of public money invested in them. The principles underpinning this process were announced towards the end of 1985. Further details were released on 19 May 1986 about the nine organisations that would become SOEs. In December of that year the State-Owned Enterprises Act passed into law. It enshrined the principles governing SOEs and their accountability responsibilities.

During 1986 the process of identifying the assets and liabilities within each trading department told ministers a lot about the poor shape of departmental book-keeping, decision-making and accountability. Just when the Cabinet concluded that all those on the State’s payroll had been identified, Stan Rodger, the Minister of State Services, began reporting to Cabinet each Monday with further lists of workers who had been found in nooks and crannies of the trading departments. It was no wonder that one satirist likened the New Zealand economy to a Polish shipyard, another to a Bulgarian post office! These casual staffing arrangements simply confirmed the advice that was constantly being tendered by Treasury that public servants were incapable of running businesses. Slack management practices contributed to the budgetary pressures being experienced by the Government. In the year to 31 March 1985 Railways had a deficit of $105 million, the Tourist Hotel Corporation a deficit of $27.5 million, State Mines a deficit of nearly $155 million and the Shipping Corporation $11 million. The New Zealand Forest Service with all its potential for expansion needed an injection of $250 million, and the telecommunication section of the New Zealand Post Office as well as Air New Zealand were crying out for development capital which the State was in no position to provide.(15) In 1986 $800 million of Petrocorp’s debt had to be written off, and a substantial part of the $9 billion which Muldoon invested in Think Big projects was written off over the next twelve months, including $1.2 billion spent on the expansion of New Zealand Steel. In June 1986 the Minister of Finance estimated that the public sector was using 25% of New Zealand’s total national resources, half of them going into the State’s trading activities. Collectively they made a return on assets of virtually zero.(16)

As the state trading organisations were readied for corporatisation on 1 April 1987 the Combined State Unions wanted a carry-over of all terms and conditions of employment to the new SOEs. Treasury fought this, arguing that if that happened then everything would change, but nothing would improve. In any event, union demands did not sit well with the Government’s requirement that each new corporate entity be run as a successful business enterprise and return a dividend to the taxpayer. Moreover, the business world was pressing for more radical reform of the wider private-sector labour market.(17) Conscious of the fact that the state sector had done rather better out of the post-wage freeze round of settlements in 1985-86, ministers were in no mood in early 1987 further to empower public sector unions. The State Services Conditions of Employment Amendment Act of March 1987 made minimal changes to existing law, but it was regarded as an interim measure only, pending a further major overhaul of legislation. Meantime with the intention of strengthening proper lines of accountability, the State had pulled back since 1984 from the hands-on approach to dispute resolution which had been a feature of industrial relations for several decades. This earned Stan Rodger, Minister of Labour, the nickname “Side-line Stan”. Shareholders, unions and the market place, not ministers, would decide on points of disagreement, although the principle of arbitration was maintained, albeit under the Labour Court.

After the August 1987 general election the Government set about changing the administrative structure and performance expectations of the diminishing core public service. On 10 December 1987 the Minister of State Services introduced the State Sector Bill to Parliament. It replaced the State Services Conditions of Employment Act 1977 and the State Services Act 1962 governing New Zealand’s public service. The goal of the Bill, according to Stan Rodger, was “to improve the effectiveness of the public sector”. As part of the principle of the level playing field the Government decided that the same grievance procedures and accountability requirements from the Labour Relations Act 1987 governing private sector workers would now be applied to employees in the public sector. The minister told a sleepy House on the last day of a long session that “Unless there is good reason otherwise, what is good for private sector employers, unions, and workers should also be good for State sector employers, unions and workers”.(18) Consequently, the Bill stripped away several privileges such as the internal appeal system that was not enjoyed by private sector employees. The new legislation provided that departmental heads, now referred to as chief executive officers, were to be appointed on contracts of up to five years. They were directly responsible to their ministers for the management of their departments. This eventually removed much of the raison d’etre of the State Services Commission. After vigorous lobbying from the PSA which resented losing hard-won privileges, the State Sector Bill, amended in a few details, took effect on 1 April 1988. It became the basic law covering the core public service.

By 31 March 1987, the day before the SOEs came into force, the total number on the State’s payroll had fallen to 22% of the workforce.(19) The core public service had peaked at 89,000 in March 1986. By the end of 1988 only 58,000 of them remained, and the numbers have kept falling since to a level of slightly more than 30,000 today.(20) In the five years following corporatisation, the aggregate numbers of employees in the new SOEs dropped on average by 50%. If SOEs were to perform to target, and be accountable to their shareholding ministers without subsidies - which were clearly out of the question - then downsizing of padded payrolls was an absolute necessity.(21)

In conclusion, the forces that gave rise to the downsizing should be clear. At various points leading, and sometimes following, trends in other parts of the world, New Zealand’s public service had become a costly, over-staffed, over-protected, unaccountable creature that politicians had allowed to march to its own drum. In the straitened economic circumstances confronting the Government by 1984 a bureaucracy of this magnitude and cost could no longer be sustained. Those who had always ideologically opposed big government won the day in the end, not by the force of their arguments; brutal economic necessity and clear evidence that much of the expenditure required to keep the bureaucratic Leviathan in operation hindered, rather than helped, the achievement of economic and social goals, brought on the reforms. Yet the changes in most OECD public service structures over the last twenty years have contributed to what Michael Winteringham recently called “a sense of alienation and disempowerment” amongst the public.(22) What the public would like, what the Government can afford, and whether the proper lines of accountability now exist within the public service, will no doubt be the subject of further discussion today.

Michael Bassett

September 2000

Footnotes:

1. Martin Wolf, Financial Times (London), 12 July 2000, p.25.

2. Martin Wolf, loc cit. The New Zealand figures appear in Michael Bassett, The State in New Zealand 1840-1984: Socialism without Doctrines?, Auckland, 1998, p.254.

3. For historical studies on the growth and decline of the State, see Robert Higgs, Crisis and Leviathan, New York, 1987; Martin Van Creveld, The Rise and Decline of the State, Cambridge, 1999; Vito Tanzi and Ludger Schuknecht, Public Spending in the Twentieth Century, Cambridge, 2000; Nigel Lawson (ed), The Retreat of the State, Norwich, 1999.

4. Bassett, pp.72-73.

5. Bassett, p.81.

6. The best source of information about Railway employee numbers is the NZ Official Year Books (NZOYB), 1894, 1936, 1956, 1959, and 1963.

7. NZOYB, 1983, p.359; 1987-88, p.546; 1996, p.461.

8. R.J. Latimer(ed), Health Administration in New Zealand, Wellington, 1969, p.37.

9. See for instance J.T. Ward, “The Economics of Health Services” in Latimer, loc cit.

10. Bassett, pp.314-321.

11. Bassett, pp.286-287.

12. Treasury to Associate Minister of Finance, 1 March 1976, T1/3/23, part 2, W2591, National Archives.

13. Quoted in Bassett, p.340.

14. Public sector total figures appear in the NZOYB, 1987-88, p.59.

15. Bassett, pp.372-373.

16. Treasury to Minister of Finance, 2 December 1986, 88-353/185, Douglas Papers, Turnbull Library. Douglas speeches 21 January 1986, (folder 1) and 21 June 1986, 88-097/173, (folder 4) Turnbull Library.

17. Treasury to Minister of Finance, 18 July 1986, 87-121/154; Treasury to Minister of Finance, 9 April 1987, 87-121/155, Douglas Papers, Turnbull Library. John E. Martin deals with some labour market developments at this time in Holding the Balance: A History of New Zealand’s Department of Labour, 1891-1995, Christchurch, 1996, pp.346-360.

18. NZPD, vol. 485, p.1748. This period of reform is described by Alan Henderson, The Quest for Security: The Origins of the State Services Commission, Wellington, 1990, p.341ff.

19. NZOYB, 1987-88, p.59.

20. NZOYB, 1988-89, p.75; 1990, p.72.

21. Ian Duncan and Alan Bollard, Corporatization and Privatization: Lessons from New Zealand, Auckland, 1992, p.55.

22. Dominion, 8 June 2000, p.8.



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