Is the government Austerian?

Brian Easton

The neologism ‘Austerian’ is a portmanteau of ‘austerity’ and ‘Austrian’ (School of Economics). It became extensively used after the Global Financial Crisis. It describes the policies of those countries which had to restrain public and private spending because lenders were unwilling to provide the funds for their budget deficits. Their debts were considered high and unsustainable.

When lenders have such a headlock on you, there is really not much choice other than taking some sort of austerity measures. Countries that  have some control over their exchange rate can issue domestic currency; to excess this will cause inflation, an exchange rate crisis, or both, which in due course will have to be addressed by austerity measures. Even in Zimbabwe.

However, while austerity measures may be necessary in certain circumstances, they have been overlaid with the philosophy of the Austrian School of Economics, a variant of the neoliberal small-state ideology. Thus the attainment of internal balance has involved cutting government spending but not raising taxes, especially not on the rich. Indeed, it is often accompanied by cuts to top tax rates. So the burden of the adjustment is borne by the poor and those on middle incomes; one consequence is greater income inequality. The pressures on the bottom have led to populist dissent, demonstrations and even violence, and to the support of populist parties and causes in the polls. Because of the deadlock from lenders and the refusal to include the rich in the burden of adjustment, the austerity measures usually continued, even when there was a change of government.

New Zealand has not experienced such extreme Austerianism. It had less difficulty adapting to the Global Financial Crisis because the Clark-Cullen Labour Government left its successor Key-English National Government a cushion which was used to ease the country through the trauma.

A particularly valuable part of the cushion was that the Clark-Cullen Government had reduced Core Government Net Debt  down from around 24 percent of annual GDP when it became government in 1999 to just above 5 percent when it left office – although it was projecting a rise to 13 percent in 2013. This ratio is exceptionally low by international standards, enabling the incoming National Government to sustain demand through major tax cuts financed by borrowing. Consequently, the Debt-to-GDP ratio rose to 25.5 percent of GDP in 2013, almost double that which Labour had projected. The ratio amounted to about 23 percent when National left office in 2018 and was projected to fall to slightly above 19 percent three years later.

That the Key-English Government has a much poorer record of fiscal prudence than the Clark-Cullen Government may seem surprising. In part this was due to different external economic conditions.

However, despite reputations to the contrary, New Zealand Labour governments have a better record than National ones on this indicator (as have United States’ Democrats over Republicans). This is probably because governments of the right are keen to cut income taxes, but one could write dissertations on other reasons which may be influential.

Despite the past record, last year in opposition Labour felt it necessary to correct the misperception of fiscal looseness, to comfort financial markets and the journalists with ‘you don’t need to be afraid of us’. The Greens joined them. Hence the Budget Responsibility Rules (especially Rule 1 and Rule 2). To many, the outcome of the rules will be Austerian.

The Key-English Government gave major income tax cuts in 2009 after it gained office in part in response to the Global Financial Crisis but also because that was its ideological bent. Arguably the reductions should have been reversed or eased-back when growth returned. Instead National did not return to the markedly downward net debt to GDP track of its predecessor. As a consequence there was a squeeze on government spending rather than effort to increase government revenue.

This is well illustrated by National’s response to the Canterbury earthquakes of 2010 and 2011. Such was their magnitude and so significant was the destruction that the government was going to be faced with a hefty bill for the reconstruction. It was argued that the rebuild should have been funded by a surtax on income tax. The government would then have explained that these were exceptional circumstances and they wanted to share the burden of reconstruction across the whole nation, with the assurance that if there was a similar regional disaster elsewhere – say a volcano in Auckland – its rebuild burden would also be shared. John Key would probably have been in a much better position to persuade the nation of this course than Helen Clark. (He did appeal to the spirit of nation-building when funding the 2012 World Rugby Cup although that was much less expensive.) But National chose not to pursue this strategy.

Instead, it funded the Canterbury rebuild within existing spending programmes. (Imagine doing this to fight in one of the great wars instead of the levying of special taxes which occurred.) One could argue that the Middlemore hospital debacle (or whatever one’s concerns about government spending failures) has arisen because of the need to fund the Canterbury rebuild within a tightly constrained overall budget.

National’s approach might be called ‘Austerian’. Indeed one could use that label for many of its other fiscal decisions where public expenditure demands were ignored or where, in order to maintain low levels of taxation, it was assumed they would be accommodated by productivity improvements (which never happened) or by cost shifting so that households privately purchased the required service (if they could afford it). The stance is not as Austerian as was seen in those European economies, even if we allow for the economy not being as stressed or as imbalanced. Let us call National’s stance ‘mild-Austerian’.

Mild-Austerianism was a significant reason for voters switching to the Labour-led Government. The myriad of complaints about the consequences of public underspending which have broken out since the new government came into office might reinforce this conclusion (although some may amount to political opportunism). Even so, there are those who argue that the Ardern-Peters-Robertson Government’s policy stance is, in effect, also mildly Austerian. Their claim goes something like this.

Under the Labour-led government elected last year a higher proportion of GDP will be attributed to government spending. It is promising 30 percent which amounts to about an extra $6.5b a year compared to National’s promises of about 28 percent of GDP. There are pessimists who think this will not be enough, arguing that there are not just current demands but an enormous backlog.

But Labour also says that it is going to maintain (broadly) National’s debt track, which means that it is not planning to borrow much more. The implication is that the government will have to raise extra revenue, which will be mainly extra taxation. What it is proposing will have only a marginal effect on revenue but it is promising no major new taxes. The proposed petrol levies might come under this heading but those proceeds are to be spent only upon transport.

There is a widespread view that Labour should borrow more (which would be out of character of four of the five past Labour governments – the exception was the 1984-90 Rogernomics one with its neoliberal preferences). There is a fear that if they do not, they will have to abandon addressing the public expenditure shortages with another three or more years of disastrous austerity in the public sector.

Should the Labour Government borrow more or should it run a higher debt track? New Zealand’s debt-to-GDP ratio is low compared to most other OECD countries and there are lenders who would like to hold more New Zealand government debt (at not too high an interest rate) given the quality of the country’s fiscal management and low debt levels.

Offsetting this is that were there another international financial crisis low debt would ease New Zealand through, as happened after the Global Financial Crisis when New Zealand borrowed almost an extra 20 percent of annual GDP. There also needs to be a protection for another great physical shock such as the Canterbury earthquakes. Prudence often appears Austerian, even by those who have more faith in the potential of the state to make a great difference to our lives.

One potential solution for the government – wanting to invest in infrastructure and social spending but also needing to convey fiscal responsibility – is to reform our system of financial accounting. I write more on this in my next paper. Meanwhile, we await budget 2018 to see how Austerian the current government is.


Brian Easton
About the author

Brian Easton

Brian Easton is one of New Zealand’s leading economists with a unique profile as an economic development practitioner, consultant, journalist and commentator. A former director of the New Zealand Institute of Economic Research and a one-time member of the Prime Minister’s Growth and Innovation Advisory Board Brian has numerous awards to his credit including being a distinguished Fellow of the New Zealand Association of Economists. Dr. Easton is an adjunct Professor of the Auckland University of Technology and is currently writing a history of New Zealand from an economic perspective, Not In Narrow Seas: A Political Economy of New Zealand’s History, to be published by Massey University Press.