The meltdown in the relationship between the key players in the fourth Labour government can be charted in an extraordinary exchange of correspondence.

The radical, reforming fourth Labour government soared on the contrasting energies of its leader, David Lange, and its finance minister, Roger Douglas. And the collapse of that relationship – as documented in the final episode of Juggernaut: The Story of the Fourth Labour Government, available now – plotted the government’s decline. 

The deterioration centred on a fundamental difference of policy and philosophy: Douglas wanted to double down on reforming the economy, most notably by introducing a flat income tax. He won backing from cabinet late in 1987, after the shudders of the stock market crash, to proceed with a proposal for a package that included that radical plank. 

Lange resisted. He had set up a Royal Commission on Social Policy and taken on the education portfolio personally; he wanted the second term to be truer to traditional Labour values, to reassert, rather than further pare back, the role of the state. In January 1988, he took the extraordinary step of unilaterally slamming the brakes on the flat tax package, while Douglas was abroad.

The Lange-Douglas breakdown was also about personality, however. The more tense it became, the less they spoke directly. Their engagement – and increasing antipathy – played out in an exchange of letters. It wasn’t just the two senior politicians, it was their offices. Geoffrey Palmer, who endeavoured in vain to reconcile the pair, spoke of the “Pope-Burgess letters”: Margaret Pope was Lange’s speechwriter (and lover). Bevan Burgess was Douglas’s long-serving press secretary. Stephen Mills, an aide to Lange of the time, told The Spinoff they called it “the Pope-Hawkins correspondence”, with the ghost-writer in Douglas’s office thought to be his economic adviser Loraine Hawkins. In that light, it’s notable where Lange stresses a letter is “self typed”. 

Below, an abridged selection of those letters. We kick off in April 1987, with a letter from Douglas to ministers, elaborating on a paper he had prepared with four options for the upcoming budget. The most radical option entailed a flat tax and a slew of corporatisations and privatisations across public services. It prompted Lange to confide to one minister, Michael Bassett, that Douglas had “gone mad”.

‘The case for the radical strategy’

Douglas to ministers, April 15 1987 

The case for the radical strategy, which I prefer, is that it offers benefits up-front … It essentially asks people to accept some major trade-offs – large, up-front benefits such as tax cuts and increased low-income support, and a rapid solution to the problem of the budget deficit and high public debt; in exchange for giving up public ownership of most state commercial activities, having a higher GST rate, and charging higher-income people for some social services … 

Already we have a situation where only 15% of those of university age are the children of professionals, yet 45% of those who go to university are from professional families. We need to ask ourselves if we are really helping the disadvantaged under the universal benefits approach anyway. Given that higher-income people will have the benefit of sizeable tax cuts, there is a strong argument that this is a fair trade-off, even if it offends vested interests.

I need your considered view urgently for the Budget strategy. One possibility might be to start work on the radical option without necessarily spelling all of it out in the budget. I could work on this strategy if you wish … We can either adopt a forward-looking strategy or sit tight. I favour the former. It is our hallmark; it sets us apart from previous government; it has kept us in the polls … If you do decide that we should not pursue the more radical forward-looking strategy, you need to make the decisions and tell me what you want in the budget, because it becomes more your budget than mine.

‘My instinctive distaste has hardened’

Lange to Douglas, April 22 1987 

My instinctive distaste for the [radical] proposal has hardened … People are not analysts of the economy. They feel secure or they feel frightened, and that is what decides their vote. They judge us on qualities which are not inherent in your strategy – our unity, our determination, our sense of purpose. Your radical strategy would negate our assets. We would no longer be united. Our determination would falter. Mine would. Our purpose would appal our supporters … 

I cannot dispute what you say about the damage being done by our continuing deficits and our growing public debt. If it is now doing us more harm than good to run a deficit we must ask ourselves — why does the deficit persist? It persists because we are reluctant to ask the taxpayers to pay for mistakes of the past and to pay for what we do on their behalf …

There are several instances where public ownership has no social purpose. I would be happy to engage with you in a campaign to persuade the party to that view. I emphasise persuasion. I am not going to spring it suddenly on them, and certainly not in the budget …

The revolt against government: those who for philosophical reasons object to the intrusion of government are not those whose lives are clouded by disadvantage. They are not the people of Māngere or Manurewa; the people who support us are the people who depend on the government. Their lives are enriched by it; tax cuts mean little to them. Economic growth which widens the gap between them and the rest is not a substitute for social services …

I agree with you that we have prospered as a government by not shrinking from a challenge and not flinching – being embarked on a course. It will not have escaped you that, one way or another, we have stood on the bridge together. I am glad we did. That is where I want us. There is not now a loss of confidence. It is the exercise of political judgement, and that in the end is my responsibility.

Lange prevailed in the ‘87 budget, but following an election and a crash on the share market, Douglas urges his colleagues to embrace the radical approach in the cause of restoring confidence in the economy. Lange responds to his finance minister’s proposals …

‘I do not propose to commit political suicide’

Lange to Douglas, December 1 1987

I think it is right to give my self-typed views on what is politically appropriate. We embarked in July 1984 on a programme of deregulating the economy and we set up various articles of faith by which we have come to be judged. Consistency, predictability were to characterise our approach. We placed enormous political stock on challenging inflation and we made the ultimate totem the budget deficit.

As a basis for any changes in taxation next year we must ensure they are revenue-positive without inflationary impacts. I am certain that we would do ourselves a great deal of harm politically if we: (a) Increase the rate of GST. It is inflationary by its nature and regressive in effect. (b) Have a single rate of income tax. I do not think NZ is ready for an abandonment of progressive rates of taxation and as a high income earner I cannot justify them …

I have a fundamental philosophical problem with the provision of income support as a substitute for government social provision. If that becomes the basis of the social wage then our people are secure while we are in government but at the absolute mercy of an  incoming government …

There is, for me, a very compelling political situation. I am totally identified with the Royal Commission on Social Policy. I do not propose to commit political suicide by having radical changes to benefit policy introduced during the currency of that review … I think that my position is one which reflects the bulk of cabinet’s view. That is why I am anxious to be fully aware of your proposals before they go to cabinet. I know that you propose to do that but I wanted you to know the parameters of my thinking before you wrap it up.

‘Time to get back to work’

Douglas to Lange, December 3 1987

My greatest concern at the moment is that we do not seem as a government to be fully appreciative of just what the situation in the economy and in our strategy actually is at present. We were moving into a shallow recession at the time world share markets collapsed and our own share market in particular took an especially heavy fall … Overall there has been a very sudden and marked decline in confidence in the economy triggered by the stock market collapse but also due more fundamentally to a widespread feeling that the government is not seen to be moving purposefully to stay ahead of events and continue our record of consistent medium- term policy …

I have argued elsewhere the importance of early announcement of an economic package and want to emphasise with you here that the package must be refined very carefully to produce a package of mutually reinforcing changes …

Your philosophical problem with the provision of income support as a substitute for government social provision frankly has me baffled. What I am proposing is that we focus government social provision of services on people who need it and administer it efficiently …

So far as the Royal Commission is concerned, I think we would be most unwise to postpone any overdue reforms of our economic and social policies in the expectation that the commission may come up with major new approaches which we have not considered …

I would emphasise as strongly as I can with you the urgent need for a balanced package of mutually supporting moves in the fiscal, social and economic fronts. I would be failing in my duties if I did not impress upon you my concerns about the current situation, both as regards the economy itself and the growing feeling that there is a lack of leadership on the economic part … After months of deliberation, we decided on a hold-the-line budget before the election. It is now time to get back to work.

On December 17 the so-called “flat tax package” is announced, including the proposed single rate of income tax and a guaranteed minimum family income (though the rates of these are to be determined), a cut in company tax, an increase in GST to 12.5%, and a major asset sales programme.

“The commitments we make today, the signals we send to all sectors of our economy will shape this country’s economic development for the rest of the century,” declares Douglas at the press conference. “They will have a positive far reaching impact on the lives of every New Zealander. They will transform the way we approach the challenges of the 1990s, they will make New Zealand a world leader in economic and social reform.” 

‘Unattributed assertions are not helpful’

Lange to ministers, December 21 1987

Ministers are reminded of the understanding reached with caucus about the economic statement … Ministers must take every possible action to ensure that the understanding is respected. Unattributed assertions in the media which imply that ministers have already agreed on a percentage rate of taxations or that any given rate is inevitable are not helpful … We must allow for the contingency that a flat rate of taxation will prove neither fiscally nor politically sustainable.

‘Let me have Treasury’s assessment’

Lange to Douglas, January 6 1988

Now that a Laffer curve [which theorises the relationship between tax rate and revenue] has appeared in a Sunday newspaper, and you are on record as anticipating supply-side benefits from the measures proposed in the statement, I am sure that many of our colleagues will occupy themselves these holidays reading The Triumph of Politics [Reagan economic architect David Stockman’s 1986 book on “Why the Reagan Revolution Failed”]. Having read that account of the way that tax cuts led to fiscal disaster, I am relieved we made the point that our spending will decide our tax revenue, and not the other way around. Were you aware Stockman says in his book that he never literally believed that the Treasury would take in more after the tax cuts than it did before? He puts that argument down to salesmanship.

I wonder if you could let me have Treasury’s assessment of the impact of the October 1986 tax changes on the pattern of economic activity. A brief summary would be sufficient as long as the sources are documented. I need this material inside the week.

‘It would be wise to avoid making public commitments’

Lange to Douglas (again), January 11 1988

I see in last week’s papers you are quoted as promising income tax at “one of the lowest rates in the world”. It may be advisable to desist from that kind of assertion. I am increasingly concerned that the figures you produced in support of your economic package are fiscally unsustainable. I am commissioning an independent analysis of them which I hope to have available before the end of January. Until such time as our views of the fiscal impact of your proposals can be reconciled it would be wise to avoid making public commitments which it may not be possible to meet. 

Your views about the likely tax rate will be of little comfort to those individuals earning less than the average wage who will … be liable for the same or more tax. They will hardly be consoled by the generous subsidies to be paid to some low income families. 

Any proposition that tax cuts for the wealthy are an economic necessity is, to say the least, arguable. That being the case, we should allow for the possibility that a top rate as low as the one you propose will not be politically feasible.

‘I see no reason for your doubts’

Douglas to Lange, January 15 1988

The package does not rely on increased revenue from Laffer curve or supply-side effects, and I see no reason for your doubts about the fiscal arithmetic I presented in support of the proposals … While elements of the individual fiscal costings can undoubtedly be refined by further work, which was not possible in the time available before Christmas, I am confident that the overall outcome – a fiscally responsible package – would not be affected by any review …

We need to show that we are making progress on the fiscal problem, to signal our continued determination to alleviate the costs to exporters and other businesses imposed by a sheltered public sector. One-off decisions to reduce expenditure are not enough; they will continue to be swamped by other increases unless we do something to tackle the underlying causes of pressure on spending. 

‘My hope is this may help to clear the air’

Douglas to Lange (again), January 15 1988

A separate letter comments on the technical aspects of your two recent letters raising questions about the content of the December economic package. Here I want to deal with my own personal concern about some aspects of their tone and content. The last thing we want is to reach a situation where we are reduced to dealing with some of these matters in formal correspondence. The key to our ability to make progress on key issues as a government lies in our capacity to work through them together personally, in mutual trust and confidence. That certainty was my objective during the period when proposals for this package were under development. My hope is that this letter may help to clear the air, so that we can continue to do that. 

I am concerned that your letters repeatedly talk of “your views” and “your proposals”, as if the package were my own personal document. These are government proposals, not mine alone. As they went to cabinet, they were not by any means what I had originally promoted. They reflected a compromise … 

I am obviously concerned at the view you express that the figures underlying the package may not be sustainable, where both the Treasury and I have expressed clear views based on our analysis that they are in fact sustainable. It is difficult to read those sentences of your letters without feeling that you are passing a vote of no confidence in the objectivity, the competence or the integrity, not just of me personally as minister of finance, but also of the Treasury and its staff. 

I would not like to think that was your intention. If it was, as far as I am concerned, I see that as a matter which would deserve to be taken up with me face to face, in those terms … It is not my wish to have an adversarial role develop between me as minister of finance, and you as prime minister, or with the cabinet. We cannot govern successfully on that basis. Nor can I work effectively in a situation where any proposal I develop has to be continually pushed uphill, because of that. So it is important that we should resolve the underlying questions that may be troubling you, to your satisfaction, on a basis of mutual confidence. From that viewpoint, it may be a good thing, rather than a disadvantage, that I will be overseas for two weeks from January 23, if it gives you a chance to clear your own mind about the package, without interference or further advocacy on my part. 

‘I was flying blind’

Lange to Douglas, January 18 1988

Thanks for your notes on the proposals. I think that we’ve got to work to produce the best outcome, not to engage in some cabinet guerrilla warfare … You know of my alarm at the December proposals. I was flying blind, but my instincts were aroused. The time since has been disquieting … 

The announcement of a flat tax rate has, on the face of it, bound the government either to make large numbers of low and middle income people who do not qualify for GMFI relief pay more tax, or to avoid that by shrinking in arbitrary ways the size of government. That is intolerable. Whether or not ministers should have been able to work it out, they didn’t, and it was not made clear.  It will become clear and the failure to make it clear will carry heavy political costs in the management of cabinet, caucus and party.

My conclusions … are that the implications of these far-ranging measures were not clear in December and that we are only now discovering through the working parties some critical practical limitations. We will need to use the royal commission as part of a political programme to flesh out the details and examine the principles.

I do not propose to publicly or privately advance the tax/benefit proposals in the economic statement but rather work with cabinet and caucus to examine the policy and detail and, I believe, inevitably to vary their content.

In December I anticipated this by the reference to consultation and I am sure the time has come to create the climate in which this is possible by saying publicly that the tax/benefit proposals in the economic statement are open for the widest possible discussion. So that we can put the thing together and achieve the best result I want you to confirm to me by tomorrow that you concur in that.

‘You do not have any mandate’

Douglas to Lange, January 19 1988

Your letter of January 18 asks me to concur with a course of action which involves throwing open the fundamental principles, decisions and direction of the December 17 economic statement for discussion and modification. I cannot do that. You do not have any mandate from cabinet, any more than I have, to depart from the decisions cabinet made.

It may be convenient for you to adopt the position that “the full facts are only now emerging” and to convey the impression that neither I nor the Treasury had done our homework properly, but that just does not wash. The analysis of the fiscal implications of the package was presented to you a fortnight before [the announcement]. You had the opportunity to raise any doubts about it.

I can only conclude that the course of action you propose is essentially designed to serve as a means of walking away from the package. You do not give any indication that you have an alternative policy strategy in mind. The flavour of your letters suggests to me that you are heading towards the sort of high-expenditure, high-tax scenario you expressed in our correspondence before the 1997 budget …

I am willing to devote any time and resource it takes to work through the issues with you. This is too important to allow a stand-off to develop between us.

‘You are the one departing from cabinet’s decision’

Lange to Douglas, January 21 1988

I am absolutely at one with you that a pointless stand-off should not develop and I am anxious to see that we work through the details of the statement. It is, however, fundamental to progress that we clearly recall the history and development of the proposals and the way Cabinet handled them … Everything you say in your letter to me rests on the argument that cabinet’s decision to adopt the statement was based on acceptable and understanding of the proposals put forward in your original package. You know that is not the fact of it.

You are wrong to suggest that I am departing from the decisions made by cabinet. Cabinet in agreeing to a statement of “principles and major measures” deferred its decision on the detail of the policy until such time as appropriate investigations had been completed. You are the one who is departing from cabinet’s decision by insisting on the implementation of your original package.

You refer to the fullness and soundness of your original analysis. Whatever analysis may have been done for the purposes of the package, it cannot be held good for the economic statement. When I wrote to you last I asked for your concurrence in what I see as the only means to extricate ourselves from the political difficulties which the release [of the package] has brought to us.

You did not concur, but that in the end is irrelevant. I shall exercise my political judgement on that point in consultation with our colleagues. I must instead ask you now if you will abide by the terms of cabinet’s decision about the economic statement and work with me towards its implementation. You know the alternative, which I would not welcome but which would become inevitable. I believe we can work on a programme which will be good and equitable. A rigid insistence upon a programme which has demonstrable deficiencies is not going to do any of us any good.

On January 28, with Douglas in the UK, Lange calls a press conference and announces a halt to the package. “I killed it,” Lange would later say. “In the end, it had to be done.”

‘Grossly negligent and misleading’

Douglas to Lange, February 1 1988

I did not have the opportunity to reply to your letter of January 21 before I left for London last week … You gave me your assurance that no decisions or action would be taken on the economic statement until [my return] … Given that you essentially went public with the views expressed in the letter in your press conference on Thursday, I would like to place on record my response …

You seem extraordinarily reluctant to have your criticisms subjected to any discussion or evaluation which might demonstrate or invalidate them and have now attempted to cement them in public opinion before they are given any serious scrutiny …

At the eleventh hour we further discussed the statement and agreed to go ahead with it. It now appears that you want certain parts of the statement effectively stopped. You cannot have it both ways. If that was truly your thinking, to go ahead was grossly negligent and misleading both to me and to the country …

You said in your letter that my concurrence was irrelevant, but that you would work in consultation with our colleagues. You stressed the importance of working together. In the event you did neither of those things, and in acting the way you did have damaged not only the image of unity which this government has consistently portrayed, but have undone much of the rebuilding of confidence which we have struggled to achieve over the last four years. 

You said in your letter how important it is for us to work together, and that you are resolved to do that. Although your actions on Thursday make rather a mockery of that statement, I am still prepared to do that. I believe the situation is still retrievable, if we genuinely strive for a unity of purpose and action.

‘Serious damage to our credibility’ 

Douglas to Lange (again), February 1 1988

I am writing to express my deep concern at your announcements last week on the economic statement of December 17. I fear your actions have already caused serious damage to economic confidence and to our credibility as a consistent, united, and progressive government … I can only regard this as a serious breach of faith, and is a fundamental reason for my decision to return to New Zealand …

I am deeply concerned that my staff had no inkling of this announcement until less than half an hour before it was made, and that even then, the scope of your announcement was not conveyed to them … The dismay expressed in the business community since the Thursday announcement reflects the degree of medium-term confidence inspired by the December 17 statement …

I simply do not accept that there was any need to handle matters in this way … We are now in a position where the government must crystallise its proposals into decisions, and lay them before the public. We will gain nothing by allowing a lengthy period of uncertainty to develop. If we do, we risk destroying economic confidence, and this government with it.

Following Lange’s sacking of Richard Prebble, Douglas appeals to cabinet.

‘Can he not bear the idea of losing?’

Douglas to ministers, November 7 1988

On a substantial and growing number of occasions, the prime minister has unexpectedly overturned decisions or announced his own policies as fait accompli. He has done so without seeking public service advice and without consulting or advising cabinet or caucus. Indeed, without advising even Geoff Palmer. As ministers, we seem to find ourselves at the mercy of an agenda which has never been laid out before us or the country and to which, as a Cabinet, we have never given collective agreement. 

For a year we have responded by loyally defending decisions and positions which in fact threw us back and the country into confusion. What loyalty did we get back in return? Our professional integrity has been placed on the line time after time, defending decisions we had no hand in making. The consequences are self-evident. It is impossible for us to adopt and put into action consistent policies, or to keep the confidence and approval of the general community. We are seen as being ceaselessly at war with each other. Cabinet is never given the chance to resolve any of these matters. We are left without even the chance to paper cracks. 

What is the problem? Does the prime minister not believe in the cabinet process? Does he automatically take it for granted that he has a monopoly of wisdom in cases of disagreement? Has he some difficulty in allowing other people to review the quality of his case? Can he not bear the idea of losing? On two occasions recently he changed agreed policy without warning because he said the issues were stopping him from sleeping. Could he not have talked about it to us in cabinet? It is no longer a matter of personalities to raise these issues. They have become crucial to the fate of this government and its policies. If we cannot, as a cabinet, develop, promote and implement consistent, reliable and predictable policies, the recovery is dead in the water, and so are we as a government.

As the sun sets on 1988, and following the decision by the PM’s office not to renew Bevan Burgess’s contract, Douglas decides he has had enough, and hand-delivers a 14-page letter to Lange. The prime minister immediately decides to interpret it as a resignation.

‘Paralysed by your inability to work with me’

Douglas to Lange, December 15 1988

After long and very careful consideration I have decided to tell caucus that I can no longer work as finance minister in a cabinet led by you. I have put up with this for the past year and refrained from revealing the details of those events to our colleagues, the party or public. My conscience and my concern for the welfare of ordinary New Zealanders prevent me from maintaining this stance any longer … New Zealand is now a country led by a government paralysed by your inability to work with me.

The greatest present danger to the government and the country is not our economic policy or world markets – and certainly it is not the National Party – it is this undisciplined propensity for making misjudgments which are then pursued with fanatical zeal either without seeking, or actively and publicly discarding the advice of the rest of the cabinet, and regardless of the major economic and political consequences. I regret having to reveal matters which should normally be confidential between us or within the Cabinet, but your persistent breaches of trust have presented such an inaccurate view … that I have no choice.

Sources: The Press, The NZ Herald, drawing on the “Douglas dossier”, provided to cabinet by the then finance minister on November 7 1988 and leaked to media in December; Margaret Pope, At the Turning Point: My Political Life with David Lange; Roger Douglas, Unfinished Business.