New Zealand’s Ruth Richardson on Restoring Fiscal Sanity

New Zealand’s Ruth Richardson on Restoring Fiscal Sanity

          
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New Zealand’s Ruth Richardson on Restoring Fiscal Sanity

An Interview with a Former Minister of Finance

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    In This Interview
    Ruth Richardson, former minister of finance, New Zealand

    Education

    Bachelor of Laws, University of Canterbury

    Career Highlights

    1994—present, policy consultant to various governments



    1990—1993, minister of finance, New Zealand; member, New Zealand Parliament



    1987—1990, shadow minister of finance, New Zealand



    1984—1987, shadow minister of education, New Zealand



    1981—1994, member, New Zealand Parliament, for Selwyn

    Outside Activities

    2011, honorary doctorate, University of Canterbury



    1995, Making a Difference: An Insider’s Account of the Politics of Reform



    Member, various corporate boards

     

    Governments in developed countries around the globe are grappling with bloated budgets and ballooning deficits as the robust economic gains of the early part of the twenty-first century have given way to painfully slow growth. Examples of government leaders who have successfully reined in spending—and kept a lid on budgets for a sustained period of time—are rare. Ruth Richardson, New Zealand’s minister of finance from 1990 through 1993, led a successful drive for fiscal responsibility. She spoke with Sek-loong Tan about that effort—and about what other government leaders can learn from New Zealand’s example.

    Restoring Fiscal Sanity: Strategies for Tackling Government Deficits

    New Zealand, now one of the most open economies in the world, experienced significant economic and fiscal challenges in the 1970s and 1980s, including steep levels of government debt. Can you describe what the Labour and National governments were facing as they attempted reform?

    New Zealand had experienced sustained and systemic decline. The government had tried basically every interventionist and protectionist trick in the book to give the public a standard of living that it was not earning. We were engaged in the delusion that we could protect ourselves from global trends and insulate ourselves from the global economy. That delusion came crashing to its knees in the early 1980s. Our institutions were almost literally bankrupt—both financially and in terms of their policy credibility.

    So we had a case of the two reforming governments, the Labour government in the mid-1980s and the National government in the early 1990s, going against their typical philosophical grains in a sense. The Labour Party was one of the most radical market-reforming governments of its time. And National, which had been just a party of the plodding status quo, became a radical reforming government in its own right. And there were remarkable—and thus far, not repeated—episodes of reform in New Zealand.

    What was the guiding principle of reform?

    While there were clearly individual champions, and it falls to the lot of a minister of finance to be the minister of reform, the hero of this story is not an individual but an idea. The idea was that a market-style economy would serve New Zealand very well, reverse the decline, put us on a competitive footing, and allow us to drive our standard of living through the quality of our ideas and the execution of those ideas in an international market place.

    What were the key elements of reform instituted by the Labour government in the 1980s?

    The idea of a more market-style economy demanded that New Zealand float the currency. Our Reserve Bank Act of 1989 had the purest mandate for monetary policy, which was to achieve and maintain price stability, period.

    But the government also said we couldn’t have a two-speed economy in which the private sector has to face the force of the market while the public sector is insulated. So we pioneered with the State Sector Act in 1988—probably the most radical approach to public-sector reform. This act installed modern public-management practices in human resources so that nobody had a job for life. We then matched the human-resources reform in the public sector with financial-management reforms under the Public Finance Act 1989. New Zealand was the first sovereign state in the world to move fully to generally accepted accounting principles (GAAP).

    In the end, however, the Labour government ran out of political will and commitment to maintaining the momentum of that reform. That led to its undoing. And then the government of which I was the minister of finance was elected in late 1990. Within six weeks, we’d effectively taken up that reform baton.

    What were the elements of your National government’s reform agenda?

    It wasn’t enough just to undertake these very big structural reforms—the financial-management reform and the human-resources reform—in the public sector unless we addressed the more fundamental issue, which is, what should the state be doing in the first instance? It’s no use having the state doing things smarter if it is going to do dumb things in a smarter way. That didn’t seem to me to be the right way to proceed. In addition, I convinced my colleagues that unless we radically changed and deregulated the labor market, we would not get the benefit from the more competitive impulses that were coming through the economy. And I convinced my colleagues that we would not get the dividend from a better monetary-policy setting unless we matched it with a credible fiscal-policy setting.

    So we did the usual privatization—the exercise of defining what domain the state should be in and what it demonstrably should not be in. And as a consequence of the Employment Contracts Act of 1991, which reformed labor markets, we had the most open labor market in the world and, thus, the strongest rate of job growth in the OECD. And then finally on the macro level it was clear to me that monetary policy needed a mate. And the mate it was lacking when I became the minister was high-quality and credible fiscal policy. In the wake of a major adjustment to public spending, I sought to institute a fiscal framework that would give politicians an incentive to pursue policies in the country’s long-term interests rather than to serve short-term political ones. The Fiscal Responsibility Act of 1994, which I saw as the companion measure to the Reserve Bank Act of 1989, had three main prongs: moving to GAAP, explicit targets, and openness.

    Not only were costs reduced but also, over a ten-year period, New Zealand was also able to contain the growth in public expenditure. How did you manage to bring such effective fiscal discipline to New Zealand?

    I knew that I had to demonstrate first of all that the way to tame the deficit and deal with the debt was to dramatically and structurally reduce the size of the government claim on the economy. So this was not done by tax increases; it was done by a very substantial reduction in public expenditure. Then, having achieved a dramatic reduction in public spending, the trick was to keep a lid on it, because, as you know, not all minsters of finance are so committed to public-expenditure control. And that’s why I conceived of the Fiscal Responsibility Act of 1994. The idea was to set out the principles of fiscal responsibility—to make them explicit. This code was conceived in the context of knowing that New Zealand had highly credible figures—none of this cash accounting where you just hide all the inconvenient contingent liabilities and expenditures.

    With these institutional checks and balances—now known as fiscal rules—in place, irrespective of who became minister of finance, successors wanted to champion public-expenditure control. If they deviated from the code of fiscal responsibility, they would invite public and electoral displeasure. There would be hell to pay. So the new norm, the new Holy Grail in fiscal policy, became being very responsible and very open in our budgeting approach.

    So how do the requirements of the law ingrain that sort of responsible behavior by politicians?

    First of all, budgeting is open. You have government producing a balance sheet, like an annual report, every year, but it’s in full accrual terms. And then every month, which is even more regular than private-sector corporations, you get the financial statements. To huge electoral benefit, there is also a preelection budget statement required. The secretary of the treasury—who is not a politician but the permanent head of the civil service in the treasury—must publish a statement within the six weeks prior to the election with the absolute up-to-date fiscal position. No opposition would ever get itself in a position from which it could make highly irresponsible, unaffordable promises in the campaign and then turn around straight after the election and say, “If only we had known, we would never have promised ….” There are no surprises.

    It’s completely changed the nature of the political debate. In New Zealand now, there’s a fight to see who can be the most responsible.

    These reforms led to a remarkable turnaround in New Zealand’s financial position. As recently as 1991–1992, when I filed my first full budget, the budget was in deficit by about 7 percent of GDP, whereas three years later it ran a surplus of 3 percent of GDP. By 1996, we were one of the few countries running a budget surplus.

    To drive these reforms you needed to build a consensus across a number of constituencies that radical change was needed. How was that achieved?

    Well, in the private sector, the stakeholders that mattered were the wealth creators. And we were very fortunate in New Zealand that during these two major reform episodes we had a very literate private sector. The Federated Farmers—our agricultural-advocacy organization—were champions of farming without subsidies and were opening up the market. And our business leaders were also champions of reform. Meanwhile in the public sector, while there were some old dinosaurs, the reality was that there were a lot of fine public servants who were just waiting for the kind of structural shift that would let them play their best hand.

    Then it was a matter of trying to get the public to see that their overall welfare was being compromised by vested or protected interests. We were able to convince the population at large that the kind of historical labor-market arrangement we had was effectively a job destruction machine, and, therefore, open labor markets were going to be good for employment and good for people without jobs and from outside the labor market who were pressing their noses against the glass.

    Was there a political price for pushing so much change so quickly?

    It was difficult for both Roger Douglas, minister of finance from 1984 through 1988, and me to convince our respective parties that we should keep our foot on the reform pedal. In the end, both of us, having achieved a high tide of very radical and comprehensive institutional reform, lost our political footing in the process. That’s not surprising. But from our point of view, the political reward was to have spent our time in office achieving such institutional and structural change that has stood the test of time. That is all you could ever hope to achieve in politics.

    Obviously, not all issues were addressed through these reforms. What still needs to be done?

    In education, we wanted to have what’s called bulk funding—you effectively give all the funding to a school board of trustees. After a pilot period, which by any measure was successful, it was unwound in the face of hostile teacher-union pressure. We corporatized the hospitals and made them compete to increase hospital productivity, but this was subsequently reversed. Reform of superannuation (retirement benefits) has just been intractable. New Zealand has one of the worst regimes in the world of “pay as you go.” The OECD says that by 2050, New Zealand will have one of the worst, most unsustainable positions in the world in terms of superannuation unless policy changes are made. It’s these intractable areas of health, education, and social provision that are very much now the Achilles’ heel of our public-policy settings.

    New Zealand is hardly alone in facing such problems. Do you believe those issues can be addressed?

    The developed world has to address what I see as one of the hardest of all political tasks, which is this culture of entitlement. There is an evident and entrenched culture of entitlement in much of the developed world. But I’m an optimist. I know that many of the soft options and delusions around debt and deficit and protectionism are going to be exposed for what they are: failed policy templates—and unsustainable to boot.

    Fiscal circumstance will force the issue of affordability to be addressed, and consumer choice and supremacy, so much characteristics of the Internet age, will become the prevailing forces in the delivery of health and education. The Berlin Walls of state monopolies in health and education will surely fall.

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