Comment

What’s driving Labour’s fiscal conservatism?

Victoria University's Bryce Edwards argues Labour has become so immersed in electoral calculations it has lost touch with the shift away from orthodox economics

The last week has seen the Labour-led Government confirm it is not going to deviate far from National’s fiscal policies, and will continue to fund public services at similar levels. How do we explain this insistence on fiscal conservatism in the face of clear and urgent need, and growing calls for change? Victoria University’s Dr Bryce Edwards argues that the Finance Minister and his colleagues have become so immersed in pragmatic electoral calculations they’ve lost touch with the shift away from orthodox economics.

Increasingly the Government’s adherence to the somewhat arbitrary targets of the Budget Responsibility Rules, which pledge to keep public expenditure and debt below levels that even Ruth Richardson was able to achieve, is not being met with praise. Instead, there’s growing condemnation of the Government’s unwillingness to adequately address underfunded public services and infrastructure. Some of this criticism is even coming from economists and right-wing commentators.

The world has moved on from the economic market-centred orthodoxy of the 1990s and 2000s, particularly since 2008, when the global financial crisis upset the consensus and kick-started what has become a period of political radicalism. This “new radicalism” is apparent in a surge of concern about inequality, racism, sexism, fueling various forms of populism and anti-capitalism. Finance minister Grant Robertson and his colleagues are struggling to keep up, remaining welded to the conventional and conservative policies that are increasingly seen as part of the problem.

Early on in this government there were signs of potential radicalism. Winston Peters justified going into coalition with Labour on the basis of the problems of capitalism, and this was followed by Prime Minister Jacinda Ardern openly discussing the failure of capitalism in New Zealand. This combined with Ardern’s strongly-expressed promise to eradicate child poverty.

But so far, the government is far from being the “transformative government” promised by Ardern. In contrast, at the very core of this Government’s “political soul” is its adherence to a very conservative fiscal agenda, which will prevent it being able to achieve much.

So the question is, why is the Finance Minister and his government so out of step with these less conventional times? Why insist on fiscal conservatism when even mainstream economists and right leaning commentators are saying they should loosen up a bit?

The most obvious explanation is that Robertson came up with the Budget Responsibility Rules a year ago as a pre-emptive defence against the inevitable allegations an incoming Labour-led government would be leftwing spendthrifts and financially imprudent. Anticipating this criticism, Robertson, along with then-leader Andrew Little and the two Green Party co-leaders, decided to take the line of least resistance by promising that a Labour-Green government would retain National’s fiscal policy settings, with only minor adjustments.

This was a conservative and rather expedient way of dealing with the risk at the time, but they now find themselves faced with either backing down or doubling down, and they appear to have chosen the latter. It speaks to something about Grant Robertson as a politician that he pushed this strategy, and has since stuck to it, despite a change of leader and even in the face of significant societal and economic problems that require investment to rectify.

It’s hard to say whether this was a successful electoral strategy for Labour. It might well have taken some of the sting out of National’s attacks over fiscal management, though National ploughed ahead with the “fiscal hole” arguments regardless. Arguably this soft approach during last year’s election campaign may have failed to motivate and mobilise their full potential voter base. If the party had been bolder, perhaps it may have won a much higher vote.

Certainly, now that it’s in government and faced with implementing solutions to the problems it faces, the coalition seems likely to lose support with its National-lite strategy. After all, if voters really do want conservative fiscal policies, then they’ll probably just support National. And before long, the Government risks wearing criticism that it is also neglecting public services by underfunding health, education and infrastructure.

Another part of the answer may lie in the history of many of the current ministers as staffers in Helen Clark’s last Labour Government. The likes of Robertson, Ardern, David Clark, and Chris Hipkins were all schooled in running government at a time when fiscal conservatism and “Third Way” Blairite compromise was the dominant ideology on the centre-left.

Clark’s Labour-led government came to power in 1999 with a similar strategy to the contemporary administration – don’t rock the economic boat too much, and demonstrate the ability to be capable managers of a fast-growing economy. But those were more conservative times.

Unfortunately, it seems the “ghost is still in the machine”, with Robertson and his colleagues operating as if nothing much has changed since 1999. No doubt the Finance Minister will produce a Budget next month that would have fitted perfectly in a “Third Way” government programme.

Robertson himself has developed a self-deprecating line to explain his conservative approach, suggesting it’s down to his Presbyterian upbringing in South Dunedin. He even likes to add that “I have also taken the extra precaution of having two Associate Finance Ministers steeped in the background of parsimonious southern Presbyterianism in David Parker and David Clark. The latter being an ordained Minister for good measure."

But there’s more to it than that. His personal politics are probably somewhat more left-wing than he likes to let on, but since his student politician days as president of OUSA and NZUSA he has always favoured acting pragmatically despite his strongly liberal-left ideological beliefs. Robertson continues to operate in exactly the same way now he is a senior Labour Party politician.

He has always been superb at keeping people onside. His determination to “play it safe”, avoid controversy, and to keep everyone onside means that ultimately, he makes himself much more National-lite than he really is.

Robertson’s circumspect nature would have made him a perfect political leader in the Labour government of 1999, where expectations of big change were at an all-time low, and business interests had no time for radical governments. But we are in a new era of heightened expectations, where concerns over inequality and social injustice is at an all-time high. More and more of the electorate demand that political leaders be bold, radical and transformative. Our Minister of Finance’s intention of winning respect and admiration by being restrained and conformist may be completely off the mark in 2018.

Robertson describes his Budget Responsibility Rules as the “anchor” that prevents his colleagues from escaping fiscal discipline. But, if he’s not careful it may be the anchor that drags this government down.

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