Means to an End: Social Radicals Who Are Fiscal Conservatives

Listener 8 May 1999

Keywords: Macroeconomics & Money;

Michael Cullen and Helen Clark are fiscal conservatives. They think there is a practical constraint to the size of the government’s budget deficit: they may well prefer it to be in a surplus. While they may think, as sophisticate Keynesians, the size of the deficit should vary over the business cycle as a part of demand management, in the long run they see the internal deficit as constrained. However much of their Labour Party are not fiscal conservatives. In government, already evidently in opposition, Labour will face tensions because much of their caucus – even the cabinet – are not so committed to fiscal austerity.

Understandably, for Labour sees a run down public sector under severe expenditure restraints and observes the resulting harm to New Zealanders that results. Spending more on culture, education, the environment, health, housing, industry assistance, law and order, public infrastructure, science research, social security, and so on would relieve the pressures. Moreover, there is a crude Keynesianism which seems to suggest there is no limit on the size of the government deficit or, if there is, it is substantially larger than the current level. If so the policy prescription seems to be to spend more and run a larger deficit.

The argument for fiscal conservative requires greater sophistication. How is a larger deficit to be financed? Pure credit creation (increasing the money supply or zero interest loans from the Reserve Bank), either blows out through spending on imports (and a balance of payments crisis) or through inflationary pressures (or both). (The Cook Islands is an illustration of that path) Borrowing leads to higher interest rates and an increasing public debt burden. Either path ultimately leads to severe fiscal austerity.

The reason I have focused on Cullen and Clark – other fiscal conservatives include Bill Birch and Bill English – is they are confronting the dilemma. Both believe, like the rest of the Labour Party, that there are substantial benefits from additional government spending. To fund it fiscal conservatives have to raise taxes. Labour has announced that if in government it will raise taxes on high income individuals (over $60,000 a year) to raise an extra $400m a year. They have also stated their spending priorities for this extra funding. (They can tell you which.) It is disappointing that the resulting public debate focused almost exclusively upon the higher taxes, ignoring government spending.

It is easy to argue that taxation is a bad thing, and if it were only a matter of raising taxes – which is much the way the public discussion is presented – that would be true. But if there is a purpose to the additional taxation, the argument is transformed. Now the debate is about the adequacy of public provision, and the amount of private consumption we are willing to sacrifice to have that public consumption
For example, Jenny Shipley, as Minister of Health gave a direction that 90 percent of New Zealanders were to be within an hour of an emergency treatment at a hospital. The Alliance Party’s hospital plan adopts that target (actually 91 percent will be within 80kms of the service). I spend most of my time within an hour existing emergency services. Probably I would average not more than week a year away from them. Other New Zealanders are not so well off. So the choice posed is whether I am prepared to pay an extra 50 cents a week in taxation for the extra coverage I’d get, plus the benefits to others worse off than me. (Private health insurance cannot provide it so cheaply.)

What is the response of the average New Zealander to this choice? Do they prefer the current hospital configuration and tax levels, or do they prefer a more comprehensive one and are willing to pay for it with higher taxes? The choice we are being offered is about the balance between public and private consumption, not more or less taxation. All New Zealanders will have an opportunity to express their choices in the next general election, providing the politicians are principled enough to present the alternatives before us honestly.