aoraki-mt-cook WINSTON

PoliticsOctober 15, 2019

How to spend a surplus: The opportunities, and pitfalls, of fiscal stimulus

aoraki-mt-cook WINSTON

A monument to Winston Peters and Think Big projects would both boost the economy, but Argentina learned the hard way they can also impoverish a nation, writes Tony Burton.

Everyone who loves New Zealand should visit Argentina. There are more similarities than you might think – large areas of wild natural beauty combined with agricultural wealth, for example. But it’s the differences that will tell you how hard finance minister Grant Robertson’s job is in spending the biggest budget surplus in a decade well. The surplus is an opportunity to improve the lives of those in need. It is also very, very easy for fiscal opportunities to become endemic misuse of resources. A trip to Argentina would make that clear.

What could possibly go wrong?

In the 1930s Argentina was as wealthy as France. Then Juan Peron was elected president. Argentines have a joke that Peron loved the poor so much he wanted everyone to share his love. On that indicator he was very successful, because French incomes are now double those in Argentina. 

The best place to see how he did this is the Museo Evita, a museum/shrine in Buenos Aires dedicated to his first wife Evita (yes, the one the Madonna musical is about). The museum is run by people oblivious to the creepiness of books for 5-year-olds that beatify the Perons. This lack of awareness means it faithfully records how these books were part of vast vanity projects masquerading as initiatives to improve education, health and employment. What the projects achieved was the impoverishment of Argentina. 

New Zealand’s wannabe Peron was Robert Muldoon, prime minister from 1975 to ’84. There are no musicals about his wife because he was not as successful at showing his love for the poor. His vanity project was “Think Big”. It did not feature books for children but it did, quite literally, bulldoze through New Zealand’s countryside. People who want to justify him now crow about hydro electric projects, but forget that the more representative development is the aluminium smelter at Tiwai Point which means New Zealanders are paying higher electricity prices while subsidising Rio Tinto to bring the world’s aluminium ore to Invercargill. 

There are still people in Treasury who worked in Treasury in the mid-80s. I have been told there were weeks when they came into work on a Monday unsure if New Zealand would be declared bankrupt by Friday. Pause for a moment to absorb what that would be like, knowing that if you and your colleagues get it wrong, it has consequences for all the people you care about. Or go to Argentina to see the crumbling grandeur of Buenos Aires. 

Muldoonism was 35 years ago, but the psychological scar on the Treasury and the RBNZ is still apparent. It is not the individual settings that demonstrate this scar, but how all of them, formal and informal, are highly conservative, including interest rate decisions, endemic underestimates of budget surplus and fear of debt. For comparison, Germany has famously conservative monetary institutions but balances this with policies that include a debt to GDP ratio around three times higher than New Zealand. 

Cautious economic settings are a means to an end. The real test is how the financial benefits are used. Be in no doubt that every special interest lobbyist, political insider and legacy-seeking departmental chief executive is swarming around that budget surplus like flies over necrotic flesh. Replacing some of those risk averse Treasury and RBNZ prejudices needs to be more than just “opening up the purse strings”.

Is there a better way?

I suspect most readers can think of ways a government might use its money better. But even if we agreed that, say, more should go to the health system, this is not enough to guarantee good spending. Should maternity care be improved or mental health provision expanded? Should it be spent in Dunedin or Whangarei, and is more staff or better equipment needed? If we want all of those things does it mean welfare payments should not rise, or that taxes should remain the same? There are plenty of ways good ideas become bad spending if we do not make the hard choices. 

Worse, it may be obvious that carving Winston Peters face on Mt Cook or expanding anonymous bureaucracies like the States Services Commission (SSC) are New Zealand’s equivalent of creepy books for children. Both the SSC and the deputy prime minister have people whose day job is justifying budget bids, and they will have someone at the meetings where decisions are made. Guess who has greater influence than you on how the surplus is spent?

The trick to improving how money is used is making politicians risk averse in a good way. They need to worry about what is brought about by their spending announcements. One way, chosen by recent New Zealand governments, is to publicly commit to indicators of what they intend to achieve. Whatever the aesthetic merits of Winston Peters’ effigy, no indicator is going to show it increases well-being more than any half-decent health spending. Likewise for plans to expand the bureaucracy. 

But that is not always appropriate, and it would be fair to say that New Zealand overuses that approach. One way to make politicians risk averse is have them closer to where money is spent, for instance. All the major spending agencies – welfare, health, education and justice – have substantial regional offices, but only health has democratic institutions with any say on how the money is spent. Having more decisions made and scrutinised locally is a powerful way to increase the reality of what decision makers are doing. 

People outside Treasury think the job is hardest during recessions. The opposite is true. The system is set up to make it easy to say no when there is no money. As Grant Robertson is now discovering, it is not set up for taking opportunities in good financial times. Reforming that is tough and the costs of failure high. The Glacier Parito Moreno in Patagonia is more spectacular than its equivalents on the west coast of our South Island, but I suspect most Argentines would sacrifice it in a heartbeat for the day-to-day economic tranquility and good government that Kiwis can now take for granted.

Mad Chapman, Editor
The Spinoff has covered the news that matters in 2021, most recently the delta outbreak. Help us continue this coverage, and so much more, by supporting The Spinoff Members.Madeleine Chapman, EditorJoin Members

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