Liam Dann: Why Labour’s Budget might be the most radical in 30 years

OPINION

Last week’s Budget represents a significant departure from the economic orthodoxy of the past three decades.

In some ways, it might be the most radical Budget we’ve seen in 30 years.

The numbers themselves aren’t radical.

It wasn’t exactly a huge-spending, fiscally-irresponsible blowout. It was more subtle than that.

But context is everything. It is not about the size of the step Labour took - it is about the direction.

What was radical was the choice to move in a distinctly different policy direction to the Reserve Bank.

There was a clear and distinct break from the orthodox economic prescription we’ve been following for decades.

That prescription is pretty clear. We need to beat inflation, get back to surplus and get Crown debt levels back down.

And because the New Zealand economy is small and vulnerable to external shocks and natural disasters, we need to do that quickly with fiscal and monetary policy in step.

In other words, the Government and Reserve Bank (RBNZ) work together to reduce the money supply so that inflation falls.

When inflation is stable we can all relax and get back to rebuilding and growing.

That broadly bipartisan view was forged in the aftermath of the big-spending Muldoon years and the financial trouble the country found itself in.

Has New Zealand’s economy matured to the point that we can relax that approach?

Or are there some fundamental economic principles here, that we ignore at our peril?

Last week Labour decided it’s the former.

While the numbers are much smaller, this is different to the big spending unleashed during the pandemic.

Criticism of pandemic stimulus never landed with the bulk of the electorate because what Labour was doing was entirely in line with every other major Government in the world - including conservative regimes in the UK and Australia.

It looked radical because the numbers were big, but it was essentially an orthodox economic response to disaster.

That’s why RBNZ Governor Adrian Orr (who is actually far more orthodox than the anti-woke brigade gives him credit for) was on board.

I think the reason National was unable to get much traction through the pandemic years was that they couldn’t have done things much differently.

The policy choices were limited and any debate was really about the style of stimulus - not the substance.

The public largely understood that.

The problem for the Opposition is that they have spent the pandemic crying wolf on fiscal policy. Now we have a meaningful shift in fiscal approach and they are struggling to find anything new to say.

Things are different now though. Labour has made a big decision about our economic approach.

To put it in terms that our sports-loving Finance Minister likes to use, the standard model in rugby, when you are on defence, is to keep the ball tight with your forwards and only let it go to kick for touch.

Labour has decided to run in it from inside its own half.

That can be exciting and can yield amazing results. But it is not without risk.

As S&P Global Ratings said on Thursday: “Don’t bloody drop it!”

Okay, they didn’t say it exactly like that. They said something about being at risk of running out of headroom.

In our imaginary rugby analogy, they warned that, while we aren’t actually on our own goal line yet, we are back on the 22-metre line and need to be careful.

There are some unorthodox economists who have made a good case for breaking away from the fiscal constraints we have imposed on ourselves for 30 years.

They argue that we’ve shackled ourselves to unrealistically tight rules and should just borrow big to invest in the economy and, in doing so, supercharge it.

There are also some (often older) economists whose hawkish views were forged in the fiscal fires of the 1980s and early 90s - when the inflationary excesses of the Muldoon years were tamed.

Those guys will really hate this Budget.

But I suspect a lot of the mainstream market economists (the ones who work at the banks and try to stay politically neutral) will be feeling a bit nervous about this approach.

I’ll admit I’m nervous too.

I’m just not sure yet whether that’s because of the bias I carry from the economic trauma of the 70s and 80s.

My experience through those years, and the painful cure through the 1990s, makes me very wary of fiscal austerity as an economic tool.

But if you run a deficit too long, then you back yourself into the kind of corner that makes a really horrible cost-cutting Budget unavoidable.

Grant Robertson is my age. I can’t believe he isn’t wrestling with some of these same thoughts.

Labour is taking a risk. It is betting that we have time on our side to rebalance the economy more slowly than we might have in the past.

If the world keeps healing and global inflation keeps falling then it might prove a shrewd approach.

But it does leave us vulnerable.

What if the war in Ukraine escalates and oil prices surge again? What if New Zealand faces another natural disaster? Or Wall Street give us another GFC?

Who knows? Robert Muldoon’s economic plans might have worked if the world hadn’t experienced a second oil shock in 1979. He, and New Zealand, didn’t get lucky back then.

Perhaps we will this time.