Robert MacCulloch
Robert MacCulloch is a native of New Zealand and worked at the Reserve Bank of NZ before he travelled to the UK to complete a PhD in Economics at Oxford University.
Budget 2025 should be the austerity budget that Finance Minister Nicola Willis didn’t have the guts to deliver in 2024. Instead, her lame first-year budget prolonged New Zealand’s economic stagnation (of course, former PM Hipkins and Worst Finance Minister Ever, Grant Robertson, bear most responsibility). The problem is that Willis doesn’t want to associated with former National Party Finance Minister Ruth Richardson, who cut government spending by over five per cent in her famous 1991 budget. However, that problem is easily solved.
Here’s how. First, we need to go back in time and see what the indomitable Ruth, who I’ve met a few times, got right, and what she got wrong in the early 1990s. What can we learn from those times? In a line, her cuts were good in the sense of returning the government budget to surplus, and prompting the biggest pay-down in public debt ever in NZ history. However, they were bad because a bunch of the cuts hurt low earners.
Macroeconomics has moved on since the 1990s. It recognizes now that cutting benefits in times of recession (and 1991 was such a time) hurts struggling families when they need help the most. After all, it was in the aftermath of the 1929 Great Depression that countries around the world set up welfare states, including unemployment insurance, to help folks who lost their jobs through no fault of their own. Even in the US, benefits are made more generous in times of recession.
So what’s the lesson for NZ and budget 2025? Public debt is currently getting back to 1991 levels, when Ruth did her austerity budget. Instead of cutting benefits for the poor, the new coalition should slash welfare transfers, but targeting high earners. What are examples? High earners get KiwiSaver subsidies, totaling one billion dollars. They get winter energy subsidies. High earners’ children attend university at greatly subsidized rates, whereas low earners whose children leave school to start a business get no such help. The world’s second richest man, Jeff Bezos, gets subsidies from Kiwi taxpayers, due to Amazon’s movies in NZ. It goes on.
How do I know about them? Together with a former finance minister, we went through each of them – the total comes to between $10 billion and $20 billion per annum. GDP in NZ is $400 billion, so five per cent of that number is $20 billion – a percentage similar to what Ruth cut by in 1991. My preference is for most of the funds to be put in personal savings accounts for all Kiwis, making us less dependent on the government in the future, relieving pressure on public welfare outlays and avoiding the introduction of new (capital) taxes.
Whatever the details, the cuts outlined above would set NZ public debt on a declining path similar to what Ruth kicked off in the early 1990s. Public debt plummeted from 55 per cent in 1993 to 20 per cent of GDP by the end of PM Bolger’s government in 2000 (see graph below). Ruth was his first finance minister, from 1991 to 1993. Her mistake was targeting low earners for cuts.
The new coalition must, in 2025, target high earners. Or is Willis so determined her four children will go to university without her paying – each receiving a subsidy of $50,000 per year – coming to a total of $600,000 for her own family ($50,000*3 years*4 children) that she will refuse to yield?
For NZ, it’s either the policy we’ve outlined above, or capital gains taxes in a few years time. Take your pick. Will Willis put her own private needs above the nation’s?
Net core Crown debt
Source:
My famous paper (!) “The Determination of Unemployment Benefits”, in The Journal of Labour Economics, which started a large field. It was refereed by Thomas Piketty, who is now a world celebrity on the back of his book Capital in the 21st Century.
This article was originally published by Down to Earth Kiwi.
