New Zealand was once one of the world’s most prosperous countries but it’s been (mainly) down hill since the 60s. Danyl McLauchlan identifies what’s gone wrong and the changes needed to keep us afloat.
In 1937, the philosopher Karl Popper fled Austria ahead of its Anschluss with Nazi Germany, eventually finding his way to New Zealand and a teaching position at Canterbury University.
During his time here, Popper wrote his most famous book, The Open Society and its Enemies, a celebration of liberal democracy, one of the 20th century’s most influential works of political philosophy.
It was inspired, in part, by his impressions of New Zealand, which he later described as “the best-governed country in the world”. Economic and social data seemed to support this. During the postwar era, we enjoyed one of the highest per capita incomes in the world: higher than the UK and the rest of Western Europe. A cradle-to-grave welfare system delivered longer life expectancies and near-zero unemployment. When we congratulated ourselves on being the best country in the world for a child to grow up in, there was a wealth of evidence to prove it.
The decades since have been a period of steady relative decline. By 1996, our GDP per capita fell below the OECD average. Although we think of ourselves as a trading nation, exports as a percentage of GDP have declined since the 2010s: we are now one of the lowest-ranked OECD nations for trade-openness.
Our productivity has been falling relative to the OECD and has remained stagnant in real terms since 2012. We are being overtaken by more dynamic economies in Europe and East Asia. In a recent Curia poll for the Taxpayers Union, 53% of respondents said they thought the country was “moving in the wrong direction”. Outwards migration has never been higher.
What has gone wrong? For politicians, the nation’s problems can always be attributed to the government preceding them. For our intelligentsia, all of our failings can be attributed to former finance ministers Roger Douglas and Ruth Richardson and their economic reforms of the 80s and 90s (Read the 1984 Revolution series here).
Many economists note the external damage inflicted by Britain’s 1973 entry into what became the European Union and the oil crises of that decade. But the indicators of our decline preceded the neoliberal revolution and have endured after it, unsolved by governments of the left and the right.
Command and control
Australia was also affected by the shocks of the 1970s; it’s not still complaining about them 50 years later. Maybe our problems are deeper? New Zealand is an unusual nation both in the arrangement of our government and the structure of our economy – perhaps this radical divergence from the standard operating procedures of other developed nations is holding us back?
“We have a powerful unitary government with no upper house, no checks and balances to speak of, and a very small Parliament,” says Sir Geoffrey Palmer, a former prime minister, former head of the Law Commission, a key architect of the introduction of the MMP voting system and a lifelong campaigner against this country’s constitutional arrangements.
Laws are passed by Parliament and interpreted by the judiciary, but nearly all of the power sits with the executive – government ministers and the heads of state services. We are “an executive paradise, not a democratic paradise,” Palmer argues, and he believes this creates a constitutional landscape where governments can act impulsively, and with little accountability, degrading the quality of legislation. “There’s too much politics in New Zealand and not enough governance.”
When Britain’s Parliament granted self-government to its colony with the New Zealand Constitution Act in 1852, the act’s designers followed standard liberal principles, with checks and balances to hold politicians accountable and subsidiarity – meaning a separation between local and central government so that decisions could be made at a lower level of authority, closer to the people they affected.
Britain, Australia, Canada and the US have maintained those features of democracy, with devolution to federal states or, in the UK, local councils. All of them have bicameral parliaments: an upper house is a check against overreach and poor-quality legislation. New Zealand abolished its provinces in 1876 and its upper house – the Legislative Council – was disbanded by the first National government in 1951.
Over time, our executives have become relentlessly operational, with ministers involved in the minutiae of policy implementation to generate “announceables”: new stories that generate positive media, denying the opposition the chance to fill that slot with stories critical of the government.
This is why the current Minister of Transport travels the country setting speed limits on specific roads, and former health minister Shane Reti suggested which cancer drugs should be funded and how many beds a new hospital should contain. For Palmer, this short-term focus prevents ministers from addressing the deeper, more systemic problems facing the country.
“Ministers get down and dirty into every item of detail … The casual approach to making decisions has increased enormously, and they are made too quickly to be sound.”
The broken centre
In 2010, then local government minister Rodney Hide and environment minister Nick Smith sacked the elected council of Environment Canterbury, the district’s regional council. They replaced it with appointed commissioners and elected members were not fully reinstated until 2019. Liberal democracies are not supposed to work like this; in most developed nations, local government delivers the majority of public services.
The OECD ranks the taxation and spending ratios of central and local government, and New Zealand is second only to Greece in favouring central government.
Many New Zealanders dislike Wellington – the city itself and the politicians and bureaucrats who rule it – but few loathe it with the depth and passion of Auckland Mayor Wayne Brown. He points out he has 20 councillors (”I probably only need 12″) and the city has almost twice that number of MPs, including List MPs – “but nobody knows who they are. I’m over-governed and over-centralised.”
For Brown, this is a systemic problem. “Comparing us to peer nations across the OECD – they have devolved government. Local people would make better decisions than central government people.
“Look at Kāinga Ora. It’s an absolutely disgusting waste of money. My council wouldn’t have made anything like that big of a mess.”
He also rails against the mega-ministry, Business, Innovation and Employment, created by former National MP and economic development minister Steven Joyce.
“Steven Joyce was the Joseph Stalin of New Zealand. Everything he touched has been a disaster. MBIE is a disaster.”
And they’re expensive disasters: Kāinga Ora’s operational expenditure is $2.5 billion a year; MBIE’s is $1.28b.
“If I had my way, the first thing I’d do is reduce the cost of central government. It never seems to come down.”
To him, a key problem with centralised government is homogenisation: policy settings – like council parking fines – must be consistent across the country. “But there’s almost no area where we actually want consistency.”
Parking fines meted out by councils are set by the Ministry of Transport, starting at $20 for exceeding the limit on a meter for less than 30 minutes. Brown argues in some parts of Auckland that’s a very high rate, while in others it’s the cost of a gin-and-tonic. “There’s nobody in Auckland that’s clever enough to set parking fines, apparently, but some morons in the Ministry of Transport can.”
And Brown rejects the argument that the dysfunction evident in some local councils disqualifies a more devolved system of government. “Just because Wellington is obviously inept at almost everything it does as a council, the mayor of Kaipara or the mayor of Gore shouldn’t be penalised for that.”
Into the labyrinth
In late January, Prime Minister Christopher Luxon announced a cabinet reshuffle in which he anointed Rangitata MP James Meager Minister for the South Island, a portfolio invented specifically for the occasion. Meager is also Minister for Hunting and Fishing – another new portfolio, created in late 2023 by the incoming coalition, alongside the space and digitising government portfolios.
The coalition has also created a number of new state organisations. There’s Invest New Zealand, spun out of an office at Trade and Enterprise, David Seymour’s new Ministry of Regulation, a National Infrastructure Funding and Financing agency.
Luxon’s predecessors Jacinda Ardern and Chris Hipkins were even more prolific, creating an Office for Māori Crown Relations, a Ministry for Disabled People, a Ministry of Housing and Urban Development, a Ministry for Ethnic Communities, a Cancer Control Agency, an independent Children’s Monitor, the National Emergency Management Agency, an Infrastructure Commission, a Criminal Cases Review Commission, a Social Wellbeing Agency, Health New Zealand and the since-disestablished Māori Health Authority.
This short-term focus prevents ministers from addressing the systemic problems facing the country.
Last May, pro-free-market lobby group the New Zealand Initiative published a study contrasting the complexity of our central government with similar-sized democracies (below). Titled, “Cabinet Congestion: the growth of a ministerial maze”, it found that “compared with the combined average of Denmark, Singapore, Norway, Ireland and Finland, we have 50% more ministers, 156% more departments, and 280% more portfolios.”
The report describes “a chaotic spiderweb of responsibility”, concluding “our ministers are frequently spread too thin, leaving them ill-equipped to undertake serious reform. The fragmented lines of reporting resulting from so many agencies reporting to multiple ministers pose co-ordination, accountability and resourcing problems. Important portfolios such as Environment and Tertiary Education often end up on the executive’s periphery”.
The report’s author, Max Salmon, believes the mess visualised in the government’s organisational chart functions as a metaphor for the disorganisation that exists in the nation’s legislative environment, and the public service regulating it.
Disturbingly, the state of the government has worsened even in the short time since Salmon conducted his research. There are more state agencies, more portfolios and even more reporting lines. In 2023, MBIE cross-reported to 15 different ministers; now it is 18.
Salmon told the Listener the mess at the heart of our government is “the result of political desires having their way with government structure in the absence of two key things: regulations to control their interference and a sufficiently powerful political actor who cares enough to reform it”.
Ministerial maze
The report by lobby group the New Zealand initiative compares state sector reporting lines in New Zealand with comparable countries, including Norway (below). It describes a “chaotic spider web of responsibility”.
Saving the nation
The most famous campaign ad in New Zealand’s political history was Robert Muldoon’s Dancing Cossacks cartoon. Released during the 1975 election, it warned New Zealanders that if they re-elected a Labour government, its new mandatory superannuation savings scheme would transform the nation into a communist state. The scare tactics worked: Muldoon became prime minister, repealed Labour’s scheme and introduced National Superannuation, a pay-as-you-go model funded out of existing taxation.
It works perfectly, so long as life expectancies don’t rise dramatically as birth rates decline, leaving the scheme reliant on a shrinking number of workers funding a growing number of retirees. Unfortunately, we’re well into this scenario: Treasury estimates the scheme will consume 20% of the government’s entire tax revenue by 2035.
Labour’s “socialist” policy – designed by Roger Douglas, something of a noted non-socialist – compelled every worker to contribute 4% of their salary to a personal retirement savings account: this was matched by employers and paid into a central fund managed by the state.
Other peer nations New Zealand likes to compare itself with – Canada, the UK, Singapore, Ireland, Denmark, the Netherlands, Norway, Sweden, Finland – have all introduced mandatory retirement savings schemes with some combination of state and employer contributions.
Helen Clark’s government finally introduced KiwiSaver in 2007, but it’s a voluntary scheme, with low minimum contribution rates, which were scaled back by the subsequent National government. Neither Labour nor National have indicated any interest in expanding it.
Robert MacCulloch, who holds the Matthew S Abel Chair of Macroeconomics at the University of Auckland, argues our ultralight retirement savings framework has dire consequences.
Nearly a quarter of Kiwis have no private savings when they retire, says MacCulloch, and KiwiSaver balances across all ages average just $30,000. “Kiwis save only a few percent of household income. Meanwhile, all Australians have retirement savings accounts, with average balances of $300,000.”
About $110b is invested in all KiwiSaver accounts. Australia has $3.5 trillion in retirement savings. For MacCulloch, this explains much of the wealth differential between the two countries.
Though many economists and politicians lament our productivity decline, he notes our total factor productivity (including labour, capital, energy, materials and purchased services) tracks closely with Australia’s in recent decades.
What is killing us is the growing gap in GDP per worker. “Whereas Australians invested and have built up capital, Kiwis did not. We have less capital to work with compared to them. Our roads are harder to drive, our transport and technical equipment suffers underinvestment and buildings have become run down.”
The government is very aware that the nation is not capital intensive enough, but, MacCulloch notes, “they seem to overlook the basic reality that we don’t have enough capital because we’re not saving anything”.
He warns this political inability to tackle our savings shortfall is a symptom of a broader problem: the absence of long-term, structural economic planning. Instead of enacting policies that encourage and facilitate increased domestic savings, our political leaders focus on short-term fixes and partisan blame games.
“Luxon and [Finance Minister Nicola] Willis talk about having a high-wage, high-skill economy, but they’re completely anti-savings. How dare they say they want to copy Singapore or Australia? They’re saying, ‘We like the Singapore model and we’re bringing it to New Zealand but we’re not going to do any of the things that pay for it.’”
Tax, of course
Even the way we tax retirement savings is based on short-term thinking, distinct from the best practice of incentivising contributions to encourage savings and then taxing at the point of withdrawal. New Zealand taxes you when you contribute, based on your income. There is little incentive to save but there is a huge incentive to invest in residential property, courtesy of our much-debated lack of a capital gains tax. We’re one of the few OECD countries not to tax capital gains on property.
Lisa Marriott, professor of taxation at Victoria University of Wellington, sighs wearily as she repeats the critique of legions of accountants, economists and international bodies over the decades – that our low growth and low productivity are connected to “our over-investment in unproductive residential rental properties, and that’s all driven through the tax system”.
The loophole has huge implications for the fairness of our system. It makes the government heavily reliant on income tax for revenue – ours is the second-highest as a proportion of tax revenue in the OECD and more low-income earners are being dragged into higher taxation rates through “bracket creep” to compensate for the lack of revenue from taxing wealth.
National is firmly opposed to taxing capital gains; Labour campaigned on introducing some form of capital gains tax last time it was in opposition then ruled it out in government. It is now reconsidering.
Unfree markets
Like the tax system, our lack of competition across key market sectors has been debated for decades. A sequence of national and international studies highlighted market failures across fuel prices, banking and groceries.
Sue Chetwin was chief executive at Consumer New Zealand for 13 years. Since early last year, she has chaired the Grocery Action Group, a lobby group which aims to persuade supermarkets to lower grocery prices.
“All of the poor behaviour that flows from the consolidation of these industries negatively affects consumers,” Chetwin told the Listener. “In groceries in particular, New Zealanders are paying some of the highest prices in the world, but at the same time we are a big producer of food.”
The lack of competition also shows up in banking, she says, where the Financial Markets Authority has prosecuted most of the major banks “for essentially ripping off their customers over fees or failing to honour marketed discounts”.
Chetwin blames this on the weakness of our anti-competition laws, describing New Zealand as a soft touch.
“Even the OECD sees it that way. This has allowed essential industries across the board to consolidate their positions through takeovers, leading to a serious reduction in competition. Worldwide, this is also a problem with Big Tech companies, but it is particularly stark in a small country like New Zealand.
“If you look at Ireland, as an example of a grocery market, there are five big players, and all have about 20% of the market. Australia has had [ongoing] investigations into supermarkets. It considers there is a lack of competition in its market even through there are four major players which combined have 60% of the market. We have two with more than 80% of the market.”
Progress on improving competition has been agonisingly slow, even though polls identify the cost of living as the primary issue for voters. The current coalition government and its predecessor have failed to deliver meaningful change to our high levels of market concentration and lack of regulation.
Political scientist Bryce Edwards is director of the Integrity Institute, a think tank that studies the influence of vested interests on the political system. He attributes the lack of progress in this area to the enormous influence of the lobbying industry.
Again, the issue has been flagged by the OECD, which recently ranked New Zealand 34th out of 38 in its regulation of attempts to influence policy-making.
The organisation noted, “New Zealand is not close to the frontier of international best practice in terms of regulating lobbying and/or cooling off periods between the public and the private sector, which does not foster a level playing field.”
As usual, the countries we hope to emulate – Ireland, Norway, Sweden, Australia – are at the opposite end of the distribution to us.
Edwards believes we can see the visible evidence of this in the behaviour of recent governments. Ardern employed lobbyist GJ Thompson as chief of staff; Hipkins poached Andrew Kirton from a firm that lobbied for the liquor industry. It works both ways: former Labour ministers Kris Faafoi and Kiri Allan transitioned directly to lobbying in the private sector.
The current government’s fast-track legislation exempts specified development projects from some consenting and environmental hurdles, but it denies any conflict of interest in companies that donated to coalition parties being included in the scheme. Edwards argues, “It is hard to imagine a more direct conflict of interest than accepting money from a donor then changing the law on their behalf.”
For Edwards, many of the failures of the New Zealand Model amplify each other. With little regulation and a powerful and largely unaccountable central government, there is a single point of failure for industry and corporate capture. That is what locks in the lack of competition – and that is where you get the low growth and low productivity.
He notes a recent attempt by the Ministry of Justice to introduce more robust regulations around lobbying was captured by the lobbying industry, who negotiated a voluntary code of conduct instead of any meaningful reform.
“The public gets to vote once every three years, but the lobbyists dictate policy and regulation on a day-to-day basis.”
Closing down
Seen from this perspective, New Zealand’s underperformance relative to other developed democracies is no mystery. We are over-centralised, with an overpowered executive focused on the extremely short term presiding over a public service that is a sprawling, over-complicated maze.
We have a tax system that strongly rewards residential property over productive investment, leading to two decades of debt-fuelled house price inflation instead of investment to maintain infrastructure or build a high-value export economy.
Key market sectors are dominated by anti-competitive oligarchies which control policy via an unregulated lobbying industry that frustrates any attempts at meaningful reform.
In the mid-20th century, New Zealand was known as “the social laboratory of the world”: it had spent the preceding decades pioneering progressive social, economic and political reforms that were then taken up by other nations.
For philosopher Karl Popper, this was one of the hallmarks of an open society “that is never static but is always capable of learning from its mistakes and adapting to new circumstances”.
Since then, our trajectory has been an uneven shift away from that open society towards a more closed framework that is resistant to improvement.
To fix the democratic deficit, Sir Geoffrey Palmer advocates for a larger Parliament and expanding the power of select committees, allowing them more scope and scrutiny to hold the executive to account.
Mayors like Auckland’s Brown advocate for greater devolution of services and spending to local government. The public sector should be simplified, the tax system changed to incentivise savings and productive investment. Markets and lobbyists should be properly regulated.
These changes don’t have a left-wing or right-wing slant. They would deliver a radical change to our politics and our economy but they are utterly conventional. We would merely be doing what other sensible developed economies already do.