Listener 12 January, 2002.

Keywords Growth & Innovation; Macroeconomics & Money; Social Policy

A government needs a policy framework to coordinate its various decisions, and give it, its supporters and commentators a sense where it is going. The Labour-Alliance government has not announced one. If it did, what would it look like?

The best starting point may be the policy on which the Lange Labour government (which in those days included members of the Alliance party) campaigned in the 1987 election. It favoured an open market-oriented economy with a commitment to public spending in education, and health and the like. After the election this liberal vision was hijacked by the rogernomes (who remained after Labour lost power). Since 1999, this government has rolled back some of the extremist measures. It raised the top tax rate (to 39 percent, still lower than the 48 percent of the 1987 election) spending more on health and education, and pulled back their commercialisation. It stopped privatising public assets (although there were few possibilities left) and even renationalised some (Air New Zealand and public rail transport). In electricity and telecommunications it has tried to shore up the mistakes made during privatisation by a tougher regulatory framework. It replaced the extreme individualistic Employment Contracts Act with the more balanced Employment Relations Act.

It has reversed even some policies of the 1984 to 1987 Labour government. Today’s industrial policy reflects more the 1984 manifesto, which did not support substantial external protection but wanted government assistance for research and development, regional development, marketing and so on. It has also started to address the quality of the mix of output, with better public provision of arts, broadcasting, the environment, heritage and recreation, but latterly it seems to have lost its way. The rhetoric of the ‘innovative society’ or whatever is not a substitute.

The biggest reversal has been macro-economic policy, where this government has proved much more fiscally conservative than its rogernomic predecessor. That has meant spending restraint – a strategy which may get intolerable in election year when those out of government make wild promises. The benefits have been the lower exchange rate, which stimulated the export sector – probably the best form of industrial assistance. To be fair, the exchange rate fell in 1999 under the National government, and they can claim some of the credit for the resulting strong growth. But their successors have held it down. The miracle is that we have not had an inflationary blow-out.

There are some areas where the government has not reversed rogernomics. Competition policy is still weak. Its regulatory regime assumes that there are numerous businesses in a market, whereas in New Zealand there are often only one or two. The failure to address the inadequacies of the public sector reforms may ultimately be the more damaging. The government does not know what to do, and its advisers, being beneficiaries of the reforms, are unlikely to tell it. One only has to recall the damage the previous government took in 1999 (or the Christine Rankin circus) to see the potential political danger, but thus far the responses have been largely cosmetic. The fundamental problem – the tension between accountability and responsibility (between managerialism and professionalism) – will have to be addressed. If it were only a matter of cabinet ministers and senior servants making public fools of themselves, then we get our money’s worth in entertainment. But the indications are that, for instance, the strain pervades the health sector. We pour in money to ease them.

Most surprising has been the uncritical free trade stance which the government seems to have taken. The prime minister must have known she would put intolerable strain on the Alliance wing of the coalition when she committed troops to Afghanistan. But the free trade deals will compound that stress, especially as at least one of the ministers involved presents himself as an unreconstructed rogernome. The Labour Party could still be committed to an open economy stance, as it was in 1984, without the extremism of its current position.

The government has asked officials to generate a policy framework in two major areas. As the prime minister said of ‘the inclusive society’ reports, there is still a long way to go. The ‘economic transformation’ reports are yet to be released, but may have similar problems. Often behind the pieties is a continued commitment to the rogernomics framework, with its unwillingness to consider seriously alternative paradigms, and its failure to look at history and the empirical evidence. This is understandable given they provide such a powerful critique of the policies which the rogernomes hold, but they are also inherent in the rogernomics methodology. I do not know if the desire of this government is to continue the domination of rogernomics in its policy advice. When it loaded its tax review committee with people of that persuasion, the inevitable outcome was to blow the chance of a useful review.

In the end it is all about ‘the vision thing’. As we move towards the election the government (and the opposition) will have to find a rhetoric with an underpinning policy framework, which will attract the support and the mandate it needs.