The 1984 election, 40 years ago this month, marked a momentous shift in direction for a country on the brink of bankruptcy. In the first of two articles, Danyl McLauchlan traces a political upheaval whose economic and social effects continue to define us 40 years on.
It happens every 40 or 50 years: the usually placid and gentle stream of New Zealand politics swells and bursts its banks, sweeping complacent politicians and established conventions out to sea. Five decades after the signing of the Treaty of Waitangi saw the election of the radical liberal government of the 1890s: it introduced women’s suffrage, broke up the landed oligarchies that dominated the economy and declared that the nation was a dominion instead of a colony. Forty years after that, the first Labour government took office and constructed the cradle-to-grave welfare state.
These were nation-building projects with egalitarian and humanitarian goals. Socialism, Michael Joseph Savage explained, was “applied Christianity”. People’s lives could be made better through the benevolent power of government.
The revolution of the 1980s dismantled this tradition. It saw the welfare state as sclerotic, dying, dragging the country down with it. Government was the problem rather than the solution and most of its functions could be improved upon by the private sector: entrepreneurship, access to global capital, free markets: these would make us richer and freer.
Fear and loathing
The ideology driving the revolution had different names: it was sometimes called monetarism, neoclassical economics or the new right or, in New Zealand, Rogernomics. Over time, it would come to be known as neoliberalism.
In 1981, the Listener published a poem by Bill Manhire called Wellington. Part of it read:
And down on Lambton Quay
the lads in cars go past, it’s raining
and the boys from Beehive Real Estate
are breaking someone’s arm.
In the original version, the boys were from Muldoon Real Estate but back then, the Listener was owned by the government and the government was dominated by Robert Muldoon, who radiated the cruelty and menace captured in the poem and who did not take criticism well – especially if it came from poets or other communist-adjacent quarters. The line was quietly changed.
Muldoon had served as finance minister under Keith Holyoake and Jack Marshall, performing well during a period of economic crisis – a slump in global wool prices. He took over the National Party during its three years in opposition then served nearly nine years as both finance minister and prime minister.
A brilliant but ruthless politician, he claimed to represent “the ordinary bloke”: this was a decent New Zealand fellow, working or middle class, who was under constant threat from a range of enemies – big business, Māori radicals, liberal intellectuals, foreign investment, feminists, anti-apartheid activists, the anti-war movement, Soviet agents in the trade unions. Only “Rob” could protect his blokes from these perils, and he did so via extensive economic and regulatory interventions, personally setting wages and prices, subsidies, interest rates, import tariffs and industry standards while ruling via an increasingly authoritarian style of government. A visiting Australian financial journalist described New Zealand as “an economy of fear”.
In the mid-20th century, our export trade was highly dependent on shipping wool, meat and dairy to Great Britain. In the 1970s, Britain entered the European common market. This, followed by a series of oil shocks and a slump in food commodity prices, triggered a prolonged recession.
Governments of the 70s and early 80s responded by subsidising exports, expanding the welfare system and trying to achieve energy independence via a sequence of massive industrial projects: the infamous “Think Big” strategy. All of these were paid for via government debt, accompanied by optimistic predictions that things would turn around. Neoliberals called this the politics of borrow, regulate and hope.
By 1981, Muldoon was at war with members of his own party, who pointed out that National existed to defend private property and individual freedom and to fight against the socialist inclinations of Labour, not to implement a more radical version of state socialism. He also faced dissent from his younger backbench MPs, who were being warned by Treasury and Reserve Bank officials that economic forecasts were bleak – inflation was at 15%, growth was low, unemployment was rising and every year more of the budget was allocated to servicing government debt.
Muldoon had long since stopped paying attention to any official advisers. By the time he declared a snap election in 1984, his enemies were closing in. Sectors of the business community had turned against him. The property developer Bob Jones – a former friend of Muldoon’s – formed his own political party to campaign against him.
For a long time, Muldoon’s greatest strength had been the weakness of Labour after the death in office of Norman Kirk; lifeless, out of ideas. But a new generation of politicians were modernising Labour’s campaign machine and a caucus coup in February 1983 installed David Lange as party leader. Labour won the snap election by a landslide, but when Muldoon called to congratulate Lange on election night he croaked, “I’ve got bad news for you tomorrow. Heh, heh, heh.”
The currency crisis
In the early 1980s, both the Australian and New Zealand dollars were fixed to a weighted basket of currencies: the pound, the yen, the US dollar. This provided stability and predictability in international trade. If you were buying or selling internationally you knew how much the transaction would cost in your local currency. One NZ dollar was US80c. Simple. To maintain the fixed value on international markets, the central banks of both nations held substantial foreign currency reserves, buying and selling to keep the rate steady. But both economies were running trade deficits: they were spending a lot more than they were earning, and borrowing to make up the difference.
The best way to fix that was to devalue the currencies. This makes your exports cheaper for international buyers, and buying imported goods gets a lot more expensive for your greedy citizens. When the Hawke government came to power in Australia in 1983, it immediately devalued the Australian dollar. When Muldoon announced the snap election here, currency speculators predicted that if Labour won, it would do the same – so any New Zealand dollars they held would decline in value. They began selling them.
The Reserve Bank had been begging Muldoon to devalue for years. He’d refused. As the campaign progressed and the likelihood of a Labour victory grew, the run on the dollar became more intense. In the week before the election, over a billion dollars left the country. The bank was forced to sell at the rate that was fixed, and doing so depleted its foreign currency reserves. If it couldn’t honour foreign exchange transactions then the value of the dollar on international markets would crash, setting off a cascade of economic catastrophes.
On the Sunday morning after the election, officials from the bank and prime minister’s office agreed that the currency market could not open unless there was a devaluation. Muldoon still refused to devalue. He knew the government was carrying a lot of foreign debt and a devaluation would increase the cost of servicing that debt. It would also lead to an increase in the price of imports – especially petroleum – and even higher inflation. Muldoon called Lange and, after a long and furious tirade, instructed him to sign a joint statement stating categorically that the dollar would not be devalued. Lange refused.
Legally, Muldoon was still prime minister until the writ for the election was returned – a period of about 12 days. There was a constitutional convention that the outgoing government would implement important instructions from the incoming one, but Muldoon refused to implement Lange’s.
The currency markets were closed on Monday, which Lange and Muldoon spent delivering duelling media interviews. When they opened on Tuesday, the sell-off was so intense Lange recalled, “We actually were reduced to asking our diplomatic posts abroad how much money they could draw down on their credit cards!”
On Wednesday, Muldoon’s caucus threatened to remove him as prime minister and finance minister, and he finally agreed to Lange’s demands. The value of the dollar was reduced by 20%, and the foreign exchange dealers who’d sold it at 80c against the US bought it back at 60c, at enormous profit to themselves but great cost to the New Zealand public. Defending the currency cost about $2.1 billion ($8.34b in 2024 dollars); the devaluation increased the government’s overseas debt by $2.9b.
Labour thought the crisis was engineered by Muldoon – spoiler tactics, deliberately wrecking the country to make it impossible for his enemies to govern – but the new regime quickly turned it to its advantage. It became proof of the fragility of the status quo and the urgent need for change.
The day before the devaluation, Labour chose its cabinet. Lange would become foreign minister: he would be overseas for much of the next three years. Roger Douglas would be minister of finance.
Enter Roger Douglas
The elected member for Manurewa, Douglas was Labour royalty. His grandfather, Bill Anderton, was an MP in the first Labour government and minister of internal affairs in the second; his father, Norman Douglas, held the seat of Auckland Central for five terms. An accountant by training, Roger Douglas entered Parliament in 1969. When he was appointed to cabinet (as broadcasting minister) three years later, aged 34, he was the youngest cabinet minister in 50 years.
Two years into the term, following Kirk’s death, he was given the coveted housing portfolio. “Most politicians want to be something,” the political journalist Colin James observed. “Roger Douglas wanted to do interesting things.” In 1972, Douglas produced a private member’s bill that led to the introduction of compulsory superannuation in 1974. It came under attack during the 1975 campaign in the most famous political attack ad in New Zealand history, the dancing Cossacks, which alleged that Labour’s policy was turning the nation into a communist state.
The superannuation scheme was scrapped when the government changed, replaced with Muldoon’s eye-wateringly expensive pay-as-you-go national super scheme.
The third Labour government was not a successful project: incompetent ministers, economic mismanagement, a charismatic leader who died after 20 months in office, a devastating election loss after a single term.
Douglas spent his early years in opposition brooding over these failures. What went wrong? Why wasn’t the party leadership interested in diagnosing either the nation’s problems or its own inability to solve them? What was the point of getting back into government if Labour just failed at everything all over again? He found a small band of younger MPs who were sympathetic to his ideas: Richard Prebble, Michael Bassett, Mike Moore and David Lange.
Douglas always claimed to have the same aims as the first Labour government, simply different ways of achieving them. He liked to quote a speech delivered by Michael Joseph Savage: “The standard of living must depend on the volume of production as well as on equitable distribution, for we cannot consume or exchange for other goods what has not been produced.”
In Douglas’s view, Labour and National were too focused on the equitable distribution part of this equation – and this was mostly just taking more of people’s income in tax every year and giving it back as election bribes. They’d abandoned the more difficult problem of increasing the volume of production to then redistribute.
Instead, they’d built a bloated administrative state overseeing a private sector dominated by a handful of incumbents who stifled all competition, making profits via government subsidies and monopoly rents. The result was a low-productivity, low-growth economy organised around a primary export sector that cost a billion dollars a year in subsidies.
The public was insulated from the deteriorating economy by a welfare system that was funded through borrowing. Inflation was (barely) kept at bay by keeping the value of the dollar at an artificially high rate, and, towards the end of Muldoon’s regime, by literally freezing wages, prices and interest rates.
It was only a matter of time before the whole thing came crashing down. By 1978, Douglas was warning the nation there were “no soft options ahead”.
What were the solutions? It’s standard practice for Treasury to second officials into the main opposition party as well as working for the government, and in the late 1970s, a younger generation of officials were rising through the department’s ranks. Many had won scholarships to international universities and breathed in the heady air of the dazzling new theories overturning decades of Keynesian consensus.
These officials saw themselves as economists rather than mere public servants. More than merely carrying out the orders of the government of the day, their task was to save the nation from its depredations. With neoliberal governments rising to power in the UK under Margaret Thatcher, the US under Ronald Reagan and Australia under Bob Hawke and Treasurer Paul Keating, they saw the answers to New Zealand’s problems: deregulation, privatisation and global free markets rather than state monopolies. Crushing inflation no matter the cost. As Thatcher was fond of saying, “There was no alternative.”
By the time of the snap election, Douglas had been persuaded by these ideas and he became the central figure in a confederacy of fellow travellers, some occupying senior positions in the public service, others influential in the business community. Members of the Labour caucus grew increasingly nervous about the unorthodox policy ideas leaking out of this group.
During the campaign there was a conflict between Labour’s policy committee and Douglas so the economic manifesto was written up by Geoffrey Palmer. Muldoon referred to this document as “a bucket full of jellyfish” – a document so insipid and vague it could have meant anything. Douglas was delighted with it: it gave him full scope to do whatever he wanted.
Shock treatment
In the early 1980s, the government guaranteed farmers a set price for their meat. This incentivised them to breed and slaughter many more sheep and lambs than the export market could support. By 1984, they were selling at about a tenth of the cost of production, which was then turned into a handsome profit for the farmer, paid for by the government. Treasury estimated that 30% of farmer incomes came from the taxpayer in the form of subsidies, low interest loans, guaranteed prices or debt write-offs.
On November 8, 1984, Douglas stood in the House and read his first Budget, and the chamber gasped as he abolished about a billion dollars a year of transfers to the agricultural sector. Gone, just like that. When people talk about the speed and savagery of New Zealand’s neoliberal revolution, this is what many who lived through it have in mind. Farm incomes fell by 30%, costs rose by 30%, interest rates on farm loans went from single digits to 20%. Land values halved, sending many farms under. The agricultural sector plunged into a deep and prolonged recession.
That was not all. Douglas imposed a surcharge tax on superannuation – retirees on high incomes would pay a higher tax on their pension payments. For Muldoon himself, this surtax amounted to 91 cents in the dollar, a number he repeated in astonishment throughout the Budget debate (the surtax was waived by National in 1998). The top income tax rate was reduced from 66 to 48 cents per dollar and this would be offset by a new consumption tax on goods and services.
Government spending was slashed across the board. The complex import licensing scheme would be phased out – under Muldoon you needed to get permission from Treasury to subscribe to an international magazine or take money overseas. If you wanted to import a product that was manufactured locally you paid an enormous tariff to disincentivise competition. State-supplied electricity and coal would be charged at market rates (the state owned nearly the entire energy sector. This would change).
In his book Unfinished Business – the manifesto for the Act party later co-founded by Douglas – he summarised his blitzkreig-style approach to reform. “Do not try to advance a step at a time. Define your objectives clearly and move towards them in quantum leaps … Once the programme begins to be implemented, do not stop until you have completed it. The fire of opponents is much less accurate if they have to shoot at a rapidly moving target.”
The revolution rolled on. The exchange rate was floated in March 1985: market forces would determine the value of the dollar, not central planners. The finance sector was deregulated. The Bank of New Zealand was partially privatised.
Political commentator Bruce Jesson noted that the primary effect of Douglas’s reforms was the transformation of New Zealand from an economy dominated by production to an economy dominated by finance. This would have enormous consequences, many of them catastrophic. But these lay in the future.
But how?
Douglas’s Budget was the most radical any government had delivered in 50 years. It was unlike anything ever produced by a Labour finance minister, and ever since, many of Labour’s members have struggled to understand how their beloved left-wing social democratic party – forged in the fires of the union movement – could be captured by the radical right.
One of the conventional wisdoms of New Zealand politics is that you can run the government with five people. Five senior ministers working in concert can dominate the handful of cabinet committees that decide policy. The cabal at the heart of the fourth Labour government’s economic reforms consisted of Lange, Palmer, Douglas, Prebble and David Caygill.
Lange was overseas frequently or otherwise diverted by his interest in racing cars, singing in choirs, his health problems, his complicated private life. Palmer was primarily concerned with constitutional reform. This gave Douglas, Prebble and Caygill carte blanche.
Their policies were ratified by cabinet and because the cabinet was large and bound by collective responsibility, they needed the support of only a handful of backbenchers to enjoy a majority in the caucus.
The party president at the time was Margaret Wilson, whose priority was a second term in government; she wanted to avoid any sign of party disunity.
With no upper house, there were no other constraints. Geoffrey Palmer subsequently referred to this absence of checks and balances as “unbridled power”.
In their books about this era, James and Jesson both argued that much of Labour’s caucus were indifferent to Douglas’s revolution. Many of them came to politics through the anti-war movement, through branches at the universities rather than the trade unions. They were interested in new-left causes: peace activism, second-wave feminism, gay rights.
For figures like Ann Hercus, Fran Wilde and Helen Clark, the serious work was the decriminalisation of homosexuality, the establishment of ministries for women and the environment, expanding the scope of the Waitangi Tribunal, ending bilateral relations with apartheid South Africa and – most vitally – the withdrawal from the Anzus alliance.
There was a deep hostility towards the US in the generation of left-wing politicians who’d grown up protesting against the Vietnam War. For them, the signature policy achievement was the anti-nuclear legislation and establishment of our independent foreign policy. For decades, the mainstream left celebrated Lange as our greatest post-war prime minister, glowing with pride at his victory in the Oxford Union debate. It’s only recently that Labour MPs have claimed that listening to Douglas deliver his Budgets traumatised them as children.
There was some dissent within the ranks. MP Jim Anderton, who, as former president of the party was largely responsible for its modernisation, resigned in 1989 – “I did not leave the Labour Party, the Labour Party left me.” He founded NewLabour and in 1999 became deputy prime minister as leader of the Alliance in Helen Clark’s first term.
The most vocal critics outside Parliament were the activist Sue Bradford and Auckland University academics Susan St John and Jane Kelsey. Economist Brian Easton waged an extended campaign against “the Rogernomes” via his Listener column. Jesson raged at them in Metro. But the government could brush them all aside because it was popular.
In March 1985 – just four months after that epochal first Budget – a TV One-Heylen poll had Labour at 49%, nine points ahead of National. In 1987, it reached an astonishing 61% support, and it became the first Labour government since 1946 to win re-election.
Towards prosperity
Labour nearly won Remuera that year – the wealthiest electorate in the country – and this deepened Lange’s suspicions that his party might be losing touch with its traditional values. There were other clues. Earlier that year, Douglas had approached Lange about an election-year Budget even more radical than his previous ones.
It would increase GST and flatten income tax to a single bracket of 15%; introduce user-pays in hospitals and schools and sell off most of the government’s assets. These ideas were not well received and Douglas had to be content with the partial privatisation of NZ Steel, PetroCorp and Air New Zealand.
On Budget night, he proudly declared that Treasury had forecast the first Budget surplus in 35 years. Unemployment and inflation were trending down.
The voters of Remuera had good reason to cherish the Labour government: New Zealand’s share market had risen about 600% in value in five years – one of the best performances in the world. Some people had lost their jobs, invested their severance payments with a broker and made more now than they had before. By that time, 40% of the population had invested in the market.
Some of the nation’s entrepreneurs and business leaders – Ron Brierley, Michael Fay and David Richwhite, Alan Gibbs – were becoming extremely rich, and they were outspoken supporters of Douglas’s reforms. It later emerged they were advising him, alongside Roger Kerr, the head of the Business Roundtable, the nation’s most influential lobby group.
While Lange toured the nation explaining that the revolution was over, the economic reforms were complete and assuring government workers their jobs were safe, Douglas ran a parallel campaign explaining that the revolution had only just begun. He published a book titled Towards Prosperity, warning the nation that it had a long way to go; there were many challenges ahead – but if the nation followed his advice “the rewards would be immensely satisfying”.
On September 16, 1987, the new Parliament convened and Douglas retained the finance portfolio. Two days later, New Zealand’s share market reached an all-time high.
Next week: As the sharemarket crashes and unemployment rises, Roger Douglas doubles down on neoliberal reforms.
