When the economy is dire, first Budgets can be good, bad or an ugly shade of black.
Listener: 30 May, 2009. Keywords: Macroeconomics & Money; Political Economy & History;
: Macroeconomics & Money; Political Economy & History; The first Budget of a new government is a defining moment. The Key Government’s is on Thursday, May 28. How will it stack up against earlier ones?
1958 The (second) Labour Government – led by Walter Nash and Minister of Finance Arnold Nordmeyer – took up office in late 1957 with export receipts deteriorating sharply. Like the outgoing National Government, it had promised substantial tax rebates for the year – made possible by the introduction of PAYE. This “Black Budget” contained draconian measures to rein in demand and reduce imports, including raising taxes on alcohol, petrol and tobacco. But it also included a lot of social spending. By what seemed a miracle, unemployment barely increased; the economy stuttered but returned to a growth path. Although the Budget was an economic success, it was a political disaster. Labour lost nearly five percentage points of voter share – and office – in the next election.
1961 The second National Government’s first Budget is probably the one the Key-English Government is hoping to emulate. It opened with the lament that export prices are falling once again and “New Zealand is living well beyond its income”. But 1961 was not as serious as 1958, and there was no black Budget. Although there were grumbles that government spending had increased too much in the previous years under Labour, public spending continued to rise. There were “tax adjustments” rather than “tax cuts”. Prime Minister Keith Holyoake called it a “steady-as-she-goes” economic strategy. (Harry Lake was Minister of Finance.) It worked, partly because, as Holyoake acknowledged, he was lucky – as were we – and the external situation recovered. Lucky or just competent, National lost only 0.5 percentage points of vote share in the next election, and held office for 12 consecutive years.
1973 Labour returned to power, led by Norman Kirk and with Bill Rowling holding the finance portfolio. Its first Budget was relatively easy as the economy was booming and external conditions were favourable. But the international oil crisis hit the economy in 1974, and Labour lost 8.6 percentage points of voter share in the election the following year.
1976 National, led by Rob Muldoon, who was also Minister of Finance, returned to an economy in dire trouble. The first Budget was a tough one, announcing “the time had come for us to take a deliberate cut in our standard of living”. Muldoon was not lucky, and he failed to solve the economic problems. The party lost 7.6 percentage points of voter share in the 1978 election. The quirks of the winner-takes-all electoral system kept National in government for almost nine years, even though Labour won more votes in 1978 and 1981.
1984 The first Budget of David Lange’s Labour Government reminds me of Barack Obama’s Budget earlier this year. Facing great economic difficulties, Lange and co – especially Finance Minister Roger Douglas – were determined to be a radical government. Lots of reforms followed, but the public didn’t wake up to the extremism of the Rogernomics revolution until after the 1987 election. However, the economic management was not fiscally conservative but relied on temporarily hiding the structural deficit. Labour’s share of the vote went up five percentage points in 1987 (and crashed in 1990).
1991 Both Prime Minister Jim Bolger and Minister of Finance Ruth Richardson were determined to eradicate the public borrowing. Rather than a “steady-as-she-goes” phasing in of spending cuts, this “Mother-of-All–Budgets” was the real “Black Budget” of the past 75 years. It hit the marginal and poor particularly hard, turning – as Opposition leader Mike Moore said – “the fiscal deficit into a social deficit”. Unemployment rose to over 11% of the workforce. National lost nearly 13 percentage points of voter share in the 1993 election. However, it remained in office, limping through three terms. At least three of National’s front bench today bear the scars of that political trauma.
<>By past standards, Michael Cullen’s first Budget speech (under Prime Minister Helen Clark) was extraordinary, focusing on the Government’s economic and social strategy of rebuilding a fair and sustainable social and economic order and honouring election commitments, while saying little about the minutiae. Buoyed by a strong economy, its voter share went up 2.5 percentage points in the next election.