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In the early 1980s, New Zealand was on the fast track to bankruptcy. By 1984, when the conservative National Party called a snap election, the deficit was approaching a massive 9 percent of GDP with no budget in place. The government’s share of GDP was 45 percent, unemployment was 9 percent (it would later peak at 11 percent), the top tax rate was 66 percent, and the rate of economic growth was a sluggish 2 percent.
A decade later, New Zealand had one of the most competitive economies in the developed world. The government’s share of GDP had fallen to 27 percent, unemployment was a healthy 3 percent, and the top tax rate was 30 percent. The government went from 23 years of deficits to 17 years of surpluses and repaid most of the nation’s debt.
This remarkable change was not only possible; it was fast and comparatively easy. The incoming Labour Party government paved the way in 1984 with its market-oriented approach to the economy; the National Party administration that took over in 1990 enthusiastically expanded the successful reforms. To solve deep economic problems, successive governments of New Zealand set out to eliminate the deficit, lower unemployment, and increase investment by shrinking the public sector, reforming or eliminating expensive programs, privatizing government enterprises, and reforming a burdensome regulatory process that was weakening our economy. Here’s how it happened.
Privatization: From 1986 through the mid-1990s, New Zealand sold off airlines, airports, maritime ports, shipping lines, irrigation projects, radio spectrum, printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, farms, forests, and more. The capital released by privatization paid down the debt and was reinvested in higher priorities. In each of the services sold, productivity increased and costs went down; the country’s competitiveness improved, and taxes poured into government coffers.
Rightsizing government agencies: After we eliminated those government functions, the bureaucracies that used to perform them were too large to perform their remaining tasks. So the civil service was reduced by 66 percent. Some agencies remained almost the same size, while others were reduced by 90 percent to 100 percent. After we privatized our forests, for example, only 17 of the Ministry of Forestry’s former 17,000 employees were deemed necessary.
Cutting taxes: At the same time, we reformed the revenue system by eliminating capital gains taxes, inheritance taxes, luxury taxes, and excise duties and by allowing income to be taxed only once. We halved tax rates, eliminated all deductions that were not a cost of earning income, and created a system where one-third of revenue came from consumption taxes and two-thirds came from income taxes. Under the simplified system, about 65 percent of the population no longer had to file tax returns—a major selling point for reform.
Reforming the appropriations process: Before 1987, a government appropriation was simply a grant to spend on a specific activity. If money was appropriated to employment programs, for example, there was no expectation that a certain number of unemployed people would become employed as a result. With the State Sector Act of 1987 and subsequent laws, funding was linked directly to results. Agency heads were now CEOs, chosen for capability. They received fixed-term contracts: five years with a possible three-year extension. The only grounds for removal was nonperformance, so a newly elected government couldn’t replace department heads with its own people. In the new appropriations process, these CEOs signed a purchase contract identifying exactly what was to be produced for the money allocated.
Consider this case from one of my own portfolios, the Ministry for Employment. Under the old system, a total of $60 million was appropriated in 1989 to 34 different programs, which found jobs for 40,000 clients. After 1990, under the new purchase agreements, the same amount was allocated to just four programs; the other 30 were terminated. The contract required the ministry to place 120,000 people in jobs, with 56 percent of that figure drawn from the long-term unemployed, 25 percent from the Maori, 14 percent from people with disabilities, and 7 percent from people with social and drug or alcohol dependence problems. The ministry successfully placed 135,000 people in jobs that year.
Welfare policy: We now aimed not just to shrink the state but to reduce the number of people dependent upon it. Welfare had evolved into an entitlement to state support for social circumstances such as solo parenting, unemployment, health problems, and other forms of dependency. Under the new approach, resources were devoted to resolving health problems, education problems, social problems, and poor work skills. This approach moved 300 percent more people from dependency to independent living. It was a carrot-and-stick approach, though: If work was available and a citizen was capable of doing the job, he or she had to take it or forgo benefits.
As the New Zealand example demonstrates, it is possible to meet a crisis with serious, substantial reforms. All it requires is a good plan and strong political leadership.
Maurice McTigue (email@example.com) helped guide New Zealand’s reforms as a member of parliament, cabinet minister, and ambassador. He is currently the director of the Government Accountability Project at the Mercatus Center at George Mason University.
If Canada Can Do It…
Slashing the state in the Great White North
David R. Henderson
In 1994 government debt was 68 percent of Canada’s GDP. By 2008 that number was down to 29 percent. Finance Minister Paul Martin Jr. and Prime Minister Jean Chrétien, both of the Liberal Party, are the two unlikely stars in this heroic tale of fiscal discipline.
Paul Martin’s father was also known as “the father of Medicare,” Canada’s federally mandated single-payer health care plan, so revered by American liberals. Chrétien was the political heir of Pierre Trudeau, prime minister of Canada for all but nine months between 1968 and 1984, who bore a great deal of the responsibility for accumulating all that debt to begin with.
In the 1993 election, the Liberal Party promised to reduce the deficit. Almost unbelievably, its candidates actually kept this pledge after winning office. Chrétien and Martin accomplished the task with large budget cuts—not cuts in the growth of spending, but cuts in nominal dollars spent—and only small increases in taxes.