Does the Government Know What It Is Doing?

Spirited Conversations, 23 June, 2010, Nelson.

Keywords: Political Economy & History;

Being Able to Predict Government Policy

The topic initially suggested for tonight’s Spirited Conversations was to talk about the 2010 budget. I knew that this event would be two months later, by which time things would have moved on. So I chose instead ‘Does the government know what it is doing?’ as a provocative way of discussing wider issues which I hoped the budget would shed some light upon.

Less provocatively, my interest is the government’s policy framework. I am frequently involved in giving advice as to what policy might be ‘acceptable to the government?’ To answer I need to know something about how the government thinks about policy generally, so for some decades I have had to think about the policy framework of successive governments.

I am particularly anxious to be able to see through the hype, relayed by journalists, of promises of radical policy change. As far as I can see they are usually made by people who have little understanding of the issues, and think slogans are policy. Often it is wishful thinking, say someone with a radical policy agenda, typically with little understanding of the real issues. At the moment there are all sorts of claims being made for the review of long-term dependence on benefits, many of which are not about the long-term. What will be eventually decided depends on some technical issues on which I have some competence, but I also need to know about the politics of the likely decisions. That is where the policy framework is important.

The Policy Framework

A policy framework includes a vision – this government talks of ‘aspirations’ – but it also has a set of principles which help decide the policies which are chosen and ensure they are consistent. A set of policies need not be a framework; they may well be incoherent and even in conflict. Thus a political party’s election manifesto does not give you the framework, particularly if the party is in opposition. Bill English, as National’s deputy leader, admitted as much when he said that his party needed to be in government to develop its policy.

The sentiment was echoed last year by Rodney Hide, one of the ACT cabinet ministers , who said that John Key ‘doesnt do anything’, adding that his party ‘ACT did everything and we are hated’. It is perfectly true that ACT has a policy framework, and so it is relatively easy to predict what its stance on a policy issue will be. But having a policy framework does not mean the policies will work. They may be coherently wrong.

The Continuation of Uncontentious Programs

The focus tonight is the National government’s policies. First, there are a number of practical and politically uncontentious programs that the previous Labour government had underway and which are being continued. A good example is that involving Stephen Joyce who as Minister of Transport has been deservedly applauded for the progressing the development of of the transport infrastructure. The issue arose in 2002 – I was on the government committee which initiated the policy development. It took about six years to get the program underway and, fortuitously for Joyce, it was there when he took over the portfolio. On the other hand, the central management of the Tertiary Education Sector was in a mire at the time of the 2008 election, and it still is; so its minister Joyce has not been nearly as successful. Certainly a minister can be praised or damned for the way a portfolio is handled, and they may accelerate or delay the ongoing program, but success usually means that officials have been working on it long before the minister took over.

Official’s Preoccupations

Some policies are primarily the concern of officials. Eventually they persuade their minister to adopt one, although there may be nothing in it for the politicians and even political downsides.

An example is the merger of Archives New Zealand and the National Library into the Department of Internal Affairs. The cabinet paper’s arguments for the merger are transparently weak, and the merger itself evidently misconceived. It seems barbarians at the gates want to downgrade culture and heritage as a national objective So what is going on? The answer is not in the cabinet paper; the State Services Commission wants to reduce the number of government departments.

Somehow ministers were seduced with nonsensical reasons; they are going to face the humiliation of having to argue them in public. As it happens there are some vociferous lobbies outside government – not particularly political ones; many resisters will be National supporters – and the government is likely to pay a heavy and unnecessary political price for fronting for the SSC. Never forget that the mandarins are always there, treating politicians as dispensable.

Ministerial Style and Taste – and Competence

So there are ministers who are there on top of their portfolios and leading officials, and there are ministers who are not. Additionally ministerial taste and style matters – Chris Finlayson on Treaty settlements is an example; the way Nick Smith handles his portfolios is another, Gerry Brownlie shows yet a third way.

That makes policy prediction much harder, and is why a person in my position has to monitor ministers. But my experience is that in the long term their foibles dont matter quite as much.

The Party Supporters

I would have given greater weight in the transport infrastructure development to public urban transport and the long distance connections between urban centres. That illustrates another feature which is helpful when you are trying to predict policy. The government’s perception of its constituency is more important. As well as being beholden to certain pressures groups – which I will come back to – this government judges that its supporters are less green than those that support Labour and its allies. Hence the downgrading of public urban transporting its infrastructural planning.

Another example is the mining of national parks. This is a desire of the business sector, but politically it has been very badly handled, causing a far greater outcry than was necessary. The government failed to observe there has always been a strong national commitment to conservation even among their supporters– Forest and Bird is hardly a bunch of commies.

Who Wins; Who Loses?

Another place where the constituency matters is when making judgments about winners and losers from a policy change. National and ACT obtain most of their support at the high end of the income and wealth spectrums so when they make a decision they tend to favour the rich at the expense of poor and of greater inequality, as we saw in the budget.

There are some issues here that are subtle, although the arguments usually used to justify favouring the rich are not. Key’s counselling that New Zealanders should not envy them for getting more from the tax cuts was simply crass, as the hurried backdown illustrated.

The widely argued case that lower taxes promote economic growth has little empirical foundation and some evidence contradicts it. Its purpose is to provide a justification for the rich paying less; the rich are an important part of the government’s supporters.

Sadly, many of the rich are out of touch with the rest of the community. During the Rogernomics Recession average incomes fell for seven years in a row. Because the tax cuts favoured the rich, their incomes grew as if they had been no recession – so everyone else’s incomes fell even further. But the rich only remember what happened to them, that they had income growth – not the difficulties that most New Zealanders faced. That is why they can talk about Rogernomics being a success – it did not hurt them. However the claim that Rogernomics was an overall success is objective nonsense (other than for inflation). Those that say otherwise show just how out of touch they are with society as a whole.

Recently a Statistics New Zealand survey found only a quarter of those with household incomes above $150,000 a year – that’s about 10 percent of the population – thought their material standard of living was ‘high’; the remaining three-quarters found thought it was ‘fairly high’ or ‘medium’. The government has responded to these rich strugglers by giving them an additional tax break of at least $117 a week (less GST), although some are not going to benefit from the tax cuts because they dont pay any tax anyway.

There was a case for eliminating some of the exemptions on taxation on property which distorted the market and encouraged a property bubble, although I would have paid more attention to the consequential impacts on the rental housing market. The political issue is what to do with the revenue, at which point the subtlety comes in.

A different political coalition might have used some of the revenue to increase the stock of rental properties or on other public services, or more for the poor and beneficiaries. National chose to use it primarily to cut upper income taxes. Since there are few rich, they do not have much voting power. So some has to be spread among those in the middle incomes who are important politically as they tend to be swing voters.

If you are giving to the deserving rich and the politically powerful middle incomes, it follows that you are not giving the revenue to the poor, to others on lower incomes and to the powerless. It is not just that they got little from the tax rebalance after you allow for the GST, but public sector services and benefits are being restrained or cut back.

The Fiscal Stance, Public Spending Restraint and the Decision Horizon

As it happens, there are strong reasons for reducing the government’s borrowing and debt. In the turbulent international economy in which we live, too much debt is unwise. But the restraint should be on both sides of the budget. Instead the government is putting all the pressure for restraint onto government spending while indulging in unbalanced tax cuts.

That is the way the government thinks. Its preference is for private market solutions to economic issues. Many would say that is National’s raison d’Ltre – its reason for being. So when it has to make a judgement it favours private provision.

I just mentioned that the powerless suffer most. The least powerful are those who dont, or cant, vote. That is why we have so much child poverty and why the government gave so little attention to their interests in the tax cut. Even less powerful are those yet to be born.

This government’s approach is short term, often making a policy decision to be reversed the following week, or even day. I have little sense that there is a policy framework concerned with coherence and consistency in the long term, except perhaps for the fiscal decisions where legislation requires detailed projections with a statement of its medium-term debt policy.

The Influence of the Support Parties

The Government’s handling of its support parties can be equally short term. That National went with ACT was perhaps understandable, even though on more than one occasion John Key has distanced himself from ACT’s philosophy (I think him sincere in this). The relationship with the Maori Party is more intriguing. It seems to have arisen first as an insurance; National may need the Maori Party to form a coalition government in a second term, even though it is not needed this term; and second, National wanted a centre party to balance ACT.

The Maori Party is not strictly a centre party; it is a broad spectrum one with a different concern from the other parties. So while much of its policy is predictable, there are areas where there is no ‘Maori’ perspective and it is hard to guess their stance. When there was not a ‘Maori’ perspective on ACC, the party caucus was conflicted and did not know what to do, leaving the National government to obtain its parliamentary support from ACT, biassing the outcome towards the right, which National’s agreement with the Maori Party was intended to avoid.

The Maori Party is a coalition between the left of Maori voters and the right of the Maori elite. While the Party won five of the seven Maori electorate seats, half of the Maori electorates’ list votes went to Labour. The Maori Party’s largest group are natural Labour supporters; without them it could not hold its seats. But it depends on other groups for its funding.

A nice illustration of this is the frequency with which the Party says it is consulting with the Iwi Leadership Forum which probably supplies the bulk of the party’s funding. Such openness is heartening. But the Forum is hardly aligned with the natural Labour supporters which make up the bulk of the Maori Party voters.

National seems to have gone into the coalition without having given much thought to the complications of the third rail. (You touch the electrified third rail in train system at your peril; going near it, you do so with great caution.) Our third rail is race relations. I would not go as far as Helen Clark to say that a lot of New Zealanders are racist, except when the term is used in a generically meaningless sense.

What I think Clark was saying is that New Zealanders are troubled by race relations at a national level – although most not so much in their personal relations – particularly by the issue of Maori rights and responsibilities. Often they simply do not understand the issues, and react against the demands. Given the shallow level of the public media discussion, one is not surprised.

That is for another Spirited Discussion. My point here is that the National Government does not seem to have thought about the third rail when it formed a coalition with the Maori Party. Instead it has been clumsy. Their opinion polls must be showing that numerous National supporters are troubled by various decisions involving Maori; decisions which in my opinion are not bad in themselves but which have been poorly explained. Since their regional conferences, the Government appears to be taking a harder line on Maori issues.

(Given they have rejected Labour, the troubled National supporters have nowhere to go, leaving an opportunity for a centre-right party which takes a different line on Maori issues. We may see a resurrection of New Zealand First, which was closer to crossing the 5 percent electoral threshold than was ACT. It is not impossible that New Zealand First will determine which major party will form the government after the 2011 election.)

The Failure to Anticipate the Voters

What interests me about National’s failure to anticipate the Maori issue is that it is not unique; on other occasions the government has been just as obtuse. The issue of the privatisation of Kiwibank and the proposal to mine in National Parks are examples.

The government does not seem naturally in touch with its voters. Sometimes John Key can react brilliantly – taking the little girl to the Waitangi Celebration; sometimes he can be crassly blundering – as in the farce over Kiwibank. This suggests his intuition is only tangentially sympathetic with his voters. (Don Brash was even more disconnected, Helen Clark – perhaps the greatest political calculator in our times (challenged only by Muldoon) – may not always have been empathetic, but she knew about her supporters’ beliefs, often before they did.)

This disjunction reflects two trends, First, there is the evolution of career politicians who have not spent much time in their early life with ordinary people. Second, the social evolution of New Zealand is creating politically powerful social groups who are hardly in contact with the rest of the community, let alone empathising with them.

The Auckland Business Community

I illustrate this with the group which is most influential on the government. The business community – especially the Auckland business community – are Key’s friends, his community, and major funders of the National Party. Their account of the world forms a foundation in his and the government’s thinking, even if outcomes do not always meet their expectations.

(National continues to have a rural base, but while it continues to be supportive, Auckland is given greater support, and there appears to be growing rural disenchantment.)

The ABC is not the same thing as the Business Roundtable. It was once, but most serious businesses no longer belong to it, and many of the business people I meet are dismissive of it as having passed its time. The BRT remains vocal, and it is influential on the ACT Party. Sometimes its views align with that of the ABC, although one businessman told me that they were embarrassed when the BRT did, because it turned off the rest of the polity. (I know the feeling.)

The ABC are not the cowboys that ran finance companies. They are mainly people who run real businesses well and New Zealand is the better off for them. They have no representative organisation, although there are other those which sometimes reflect their view – such as the Auckland Chamber of Commerce and the Herald. Think of it more as a network of like-minded people, often with similar problems, who meet in all sorts of venues and in the business pages. Out of this discussion evolves a common view.

I agree with Roger Kerr, executive director of the BRT, that it is rare for someone to be a good business manager and a good economist – although given the ones he has mentioned (always members of the BRT you will observe), it is much rarer combination than he thinks.

Yet business is vitally dependent upon the economy, so it is inevitable that the business community will have a view of it. Where it directly connects with their business they can be very perceptive. As an economic issue becomes less directly connected with their business and more contextual, their insights become – shall we say – aspirational. Their political judgement is hardly better. The ABC’s basic vision is that if you look after business then everything else will come right too, although just what ‘right’ means is vague. Of course we should ensure that business functions well. But that does not mean that looking after business is the ultimate policy objective and business becomes the end in itself, not the means to the end.

Business ends are only part of the way we pursue the goal of the nation; sometimes business cannot have what it wants because that does not contribute to the desired end. That also means that sometimes business models are not the best way of pursuing things. Business does not always understand this.

So the ABC tends to pursue a narrow self-focussed policy agenda. Sometimes it is reasonably effective as with the tax cuts and the ACC changes, and sometimes it takes the government down a track which with hindsight it wishes it had not gone.

The confluence of ACT’s Rodney Hide being Minister of Local Government and Key’s natural empathy with the ABC, meant that initially the government followed the business community’s prescription for the reform of Auckland local government; that where it was not possible to shift the decision into corporate-like agencies which was based upon a business model – then the rump should be managed by a Mayor with powers similar to a corporate chief executive. While there has been some watering down towards a more democratic form of governance, this business-based model for Auckland is still the framework.

Add the ACT propensity to crash through – which in the past has far too often led to crashes. What we have here is all the characteristics which marked the great health redisorganisation of the early 1990s. We await a far from successful – but very expensive – outcome. I dont know what will happen in the local body elections – my main source of Auckland news is the Herald, which is hardly unbiased – but we can expect many expensive systems failures after it.

It is not the only case of the government starting out along the ABC line and has to change course because its voters dont like it. You get a good sense of the disappointment of the ABC from the Herald columnist Fran O’Sullivan who constantly berates the government for not pursuing the business community’s agenda. Her sub-theme is that Key is one of them, but he is too timid to take the course he – and they – believe in. That the public is not as enamoured with the business agenda as business is; that democracy gets in the way of a pressure group pursuing its self interest does not seem to have occurred to Ms O’Sullivan.

A key element of the business agenda is the demand to catch up with Australia – in per capita GDP terms by 2025. We had the ineffective – and largely ACT driven – committee chaired by Don Brash, which made various policy recommendations of benefit to the business community, claiming that it would accelerate economic growth without providing a skerrick of empirical evidence of the effectiveness of their policies.

In fact any orthodox economic analysis shows that there is little chance that we can meet the target. Ironically, the proposed policies are a continuation for the policies which were administered during, and caused, the Rogernomics Recession, which put us so far behind Australia. That is the reason the committee was unable to provide empirical for the effectiveness of its policies, the evidence from the past points to their failure rather than success.

Catching up to Australia is an aspiration, not a policy. As English said, National had no policy in opposition, and it hoped that the officials would find it one. For a quarter of a century officials have been thinking about the objective, had advised previous governments on how to accelerate economic growth relative to the rest of the world, but with little success. Which should not surprise us; if a policy to accelerate economic growth worked it would be adopted by every other country, everyone would grow faster and no-one would catch up.

Why the focus on GDP per capita? The one group in New Zealand who are closest to direct beneficiaries of material economic growth is the business sector. In the long run the profit rate is roughly equal to the growth of GDP. Profits are the objective of business. By arguing for a higher growth rate, it is arguing for a higher profit rate. They may want to have a high profit rate, but that does not mean it should be the ultimate objective of government. Business is a means to an end, not the end in itself.

Predicting Policy Outcome

It is not possible to predict a policy outcome with precision. But I will list some general guidelines for this government. First to set aside some of the more obvious ones which apply to all governments: the continuation of uncontentious programs; officials’ preoccupations; the effects of ministerial style tastes and competence.

What I have argued here is that every government has to balance the tensions between its core support from whence comes its funding and ideas, and its voters and potential voters. National’s core support is the Auckland Business Community although there is also rural group who think it is getting left out.

The ABC does not have a lot of votes and does not seem to be particularly connected to National’s voter base. There are commonalities – they both favour the upper end of the income distribution at the expense of the lower end and the poor. They will do that directly by tax changes, but also by cutting government spending. And of course the preference for private rather than public solutions is an integral part of the National Party’s thinking.

I’ve identified two weaknesses in their policy framework which makes prediction hard. There is a repeated failure by the government to anticipate what their voters think, which means that they frequently announce policy and then to have to back down, after consulting the polls. Additionally the government tends to make very short term decisions, so that there may be policy inconsistency in the long term and policy reversals. Children and the future particularly get discounted.

Policy prediction is not an easy task, but it is proving particularly difficult in the case of this government because of these two effects and the resulting instability of decision outcomes. This amounts to there being no coherent and comprehensive policy framework. If you like, you can say that the government does not know what it is doing. My hope is that as the government settles in, the reservations in this paper will no longer be necessary.