One thing is absolutely certain about this election result. Overwhelmingly, New Zealanders want a larger government sector. The only party that offered smaller government was ACT and they were close to annihilation on Saturday 17th. The obvious question is how far can government expand before New Zealanders decide it’s large enough?
A similarity between National and Labour was that each promised to expand the government sector faster than the economy will grow over the next three years. All that was at issue was by how much. National’s plans were for government spending to be about 3.5% less than Labour’s four years from now. On the other hand, National promised tax cuts that dwarfed those promised by Labour. Overall National would have reduced the budget surplus further than Labour and as well, returned to debt-financing.
But to answer the question as to how much further future regimes might expand the size of the government sector we could, for evidence, look at an international comparison for guidance. New Zealanders may of course choose to go further than any other country before their thirst for public goods and services is quenched. But at least a comparison across OECD countries will provide some idea as to how far this national quest for a bigger State could run.
Graph 1 compares our government spend with other countries.
At 38% of GDP, our spend is lower than the OECD average of 41% and much lower than the European average of 49%. Indeed of the 27 countries we’re compared with in the table only six – Australia, Ireland, Japan, South Korea, Switzerland and the USA – have lower ratios. But of course with a centre-Left government fairly well entrenched in New Zealand these days and with the centre-Right having moved left (and still running) considerably since the Rogernomics revolution, the European benchmark of 49% is not an altogether fanciful target for contemporary New Zealand. An almost 30% increase in the size of government would indeed change the complexion of New Zealand’s political economy enormously.
There’s some fairly well-documented evidence that economies with large governments do tend to be slower growing, but then there’s no reason to assume that Kiwis haven’t made their preference for public goods and services over growth a conscious choice.
The next consideration is “can we afford it?” There are two aspects to this question. One is from a general economic perspective and addresses the issue of the ‘economic growth’ versus ‘size of government’ trade-off. It is clear New Zealanders have made their judgement in favour of a larger State. They may change their mind of course as the consequences of that decision emerge over time, but for now they’ve voted virtually unanimously for bigger government. Any detrimental impact of that on economic growth, is for future voters to worry about.
The second perspective from which to assess the affordability issue is the impact on government debt. A comparison of our debt position with other countries is presented in Graph 2.
The net debt of the New Zealand government is a paltry 7% of GDP compared to an OECD average of 48%. On the face of it anyway, there’s heaps of scope to expand government debt.
None of the above of course considers the actual ramifications of a burgeoning government sector on the economic performance of an economy, particularly not of an economy with one of the highest external debt ratios out there – over 80% of GDP these days, although our debt servicing bill as a proportion of export receipts has slumped (thanks to lower world interest rates). Everybody has a job, the spending power of our dollar is way up there, house prices have soared, and so there’s no evidence so far to convince voters that bigger government means crimped lifestyles.
Of course until that evidence presents itself, there is little to stop the clamour for more and more government giveaways. The election result, when account is taken of the minor party votes as well, reconfirms that voters have a strong preference still for the government to tax and redistribute rather than provide across-the-board tax cuts. There really is a minority constituency only who think that those on above-average wages without families, should not pay progressively more and more of their income away in tax.
For National, which extended its journey into the territory of the Left significantly this election by promising to expand government faster than the economy, the message is clear. The ground occupied by minor parties is critical to the major party able to form a government. At least while there is no deterioration in economic performance then, voters only want governments that promise substantially greater growth in government spending than National managed to muster in its 2005 manifesto.
Spend up large or stay in Opposition.
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