The British Fabian socialists loved New Zealand. After a visit in 1898 Beatrice Webb declared that if she had to bring up a family outside of Great Britain she would choose New Zealand. She had seen a commendable degree of comfort and independence among the working population, liked the country’s new Arbitration Court, approved of New Zealanders’ ‘free and easy tone’ and endorsed what she believed to be a search for equality. While she found a lack of originality in the country’s educational system and New Zealand’s politicians were ‘Vulgar’, the acidulous Webb was delighted to find ‘no millionaires and hardly any slums, among a people characterised by homely refinement, and by a large measure of vigorous public spirit’.1 Webb’s faith in the capacity of politicians to build a new world had been enhanced by her trip down under. Thirty-six years later, her fellow Fabian, George Bernard Shaw, was nearly as fulsome. Calling New Zealand’s pioneering welfare state ‘communism’, he told audiences that the Government should extend bread subsidies to cover milk as well, thus keeping the necessities of life within everyone’s reach. Shaw sailed from the country declaring: ‘If I were beginning life, I am not sure that I would not start in New Zealand.’2
Enthusiasm for New Zealand’s state activity was not confined to a handful of British social reformers. Towards the end of the nineteenth century there was a steady stream of visitors from other parts of the world. Many liked what they saw. In 1899 the American reformer, Henry Demarest Lloyd, was most impressed by the lack of strikes in New Zealand. He, too, noticed an egalitarian streak and pronounced New Zealand to be an ‘“experiment station” of advanced legislation. Reforms that others have been only talking about, New Zealand has done ….’ One newspaper observed that Lloyd seemed intent on ‘New Zealandising the rest of the world’.3 Frank Parsons, a friend of Lloyd’s, wrote about ‘the Aurora Socialis of New Zealand’, describing the antipodean country as ‘the birth place of the 20th Century’. Parsons liked New Zealand because of its progressive taxation, its labour legislation and its old age pensions.4 The American Socialist Party, which reached its zenith in the American presidential election of 1912, often ran articles about New Zealand in its newspaper, Appeal toReason.5 One leading American socialist, Charles Edward Russell, thought he detected in New Zealand a commendable determination to have ‘less wealth and more health’.6 To outside reformers, New Zealand was a social engineer’s dream.
Explaining why this remote colony had embarked on so much more state activity than other countries also intrigued observers. The British lawyer and historian, James Bryce, noted that from the earliest days of colonisation New Zealanders had developed a very direct form of democracy designed to wring maximum benefits from the Government.7 In 1904 a French political scientist, Andre Siegfried, observed a ‘perfect mania for appealing to the State’. First the New Zealand Company and then provincial and central Government were expected to help colonists. Governments were able to involve themselves in so many aspects of life because New Zealand enjoyed a simple democracy, lacked ‘reactionary influences’ and experienced only the feeblest conservative tendencies. According to Siegfried, New Zealand’s ‘simple’ society lacked the ‘inextricable tangle of interests, traditions and prejudices’ that complicated the political process in older societies. He concluded: ‘When a colonial finds himself face to face with some difficulty it is almost always to the State that he first appeals. The Government is thus brought to perform functions which in the old countries would lie within the province of private initiative.’8
These early observers from Europe occasionally used the word ‘socialism’ to describe New Zealand’s state intervention, yet they detected no consistent ideology. Siegfried found the absence of revolutionary ideas ‘striking’: ‘As for the idea of revolution, the New Zealander has little sympathy with it. The word does not seem to be part of his political vocabulary.’9 Siegfried’s fellow countryman, André Métin, concluded that both Australia and New Zealand practised ‘socialism without doctrines’.10 He was, of course, comparing the antipodean lack of interest in theory with the ferment of ideas sweeping Europe at the time, neglecting to note, perhaps, that pragmatic interventionism was itself in the process of becoming something akin to a South Seas ideology. A willingness to experiment with the State’s powers underpinned colonial socialism in Australia and New Zealand, just as it did in several other new societies.11
New Zealand scholars have also examined the country’s passion for state activity, concluding that it was based on little more than a popular feeling that government intervention seemed likely to produce worthwhile results. An early and influential scholar, J. B. Condliffe, was inclined to feel it was ‘colonial opportunism’ that drove governments.12 Keith Sinclair, in his influential History of New Zealand (1959), argued that state intervention was more deeply based and referred to the settlers’ ‘idealisation of the State’. He noted that state activity began early and had bipartisan acceptance: ‘The Conservatives were at one with the local radicals in the alacrity with which they founded state enterprises and extended state control.’ Sinclair attributes to some (but by no means all) politicians an egalitarian purpose behind their use of the State.13 He dedicated his book to J. C. Beaglehole, among others. However, Beaglehole was nearer to Condliffe in his assessment and doubted whether New Zealanders were moved at all by theory. Somewhat cynically he observed that they were ‘on the average … fifty years behind the Old World in social thought’. He added that ‘of few [New Zealand] ministers can it be said that they have brooded over any coherent body of principle’.14
Sinclair’s view has tended to dominate more recent scholarship. Others have noted that there was at least some social imperative behind aspects of Edward Gibbon Wakefield’s plans for ‘scientifically controlled’ colonisation. In the 1840s Wakefield sought to ensure that the evils of English society were not reproduced, although he expected – over-optimistically as it turned out – that there would be a reasonable number of wealthy people among his first settlers.15 Fifty years later, both Richard John Seddon and his successor as Prime Minister, Sir Joseph Ward, were even more convinced that New Zealand must not become a class-based society. ‘God’s Own Country’, as Seddon often described the young nation, was to be democratically based; politicians should ensure that no interest group got the upper hand. The historian David Hamer notes that most Liberals in the era 1891–1912 saw the State as the embodiment of the people. Few felt any need to justify state intervention, regarding it as ‘a distinctively New Zealand way of dealing with social problems’.16 One Liberal reformer, William Pember Reeves, went further and labelled himself a ‘socialist’, referring to influences that he drew on from abroad. But he was quick to concede that his socialism was ‘experimental, not theoretical’.17
Another historian, Erik Olssen, has written about the later ‘political discourse’ that developed after World War I in working-class Dunedin, concluding that while most wanted a ‘just social order’, few workers would have called themselves Marxists, let alone Bolsheviks.18 In the 1920s and 1930s a handful of supporters of the New Zealand Labour Party read some of the works of Karl Marx. Ormond Wilson, who was MP for Rangitikei 1935-38, had been a student of G. D. H. Cole at Oxford and observed that consciously or unconsciously, Marxist dogma influenced some of Labour’s thinking in the 1930s.19 However, there was nothing revolutionary about the Labour Party; during the Great Depression its leaders were constantly at war with Communist Party ideologues who preached class revolution.20 The Labour Party retained the word ‘socialisation’ among its policy objectives until 1951 but the historian, Bruce Brown, notes that by then it had been ‘forgotten in practice’.21 The party now stated that its goal was to ‘educate the public in the principles of co-operation and socialism’. The Federation of Labour occasionally talked about socialism. Significantly, however, unionists in the 1940s and 1950s nicknamed K. M. Baxter, the Federation’s secretary, ‘Karl Marx’ because they found his frequent references to the socialist theoretician amusing.22
In the early years of the twentieth century many intellectual influences were brought to bear on New Zealand’s political reformers. None dominated. In his earlier days H. E. Holland, the leader of the Labour Party from 1919 to 1933, referred to himself occasionally as a ‘militant’ or a ‘revolutionary socialist’. Yet his reading, writing and speeches reveal an eclectic mind that was equally intrigued by the works of Edward Bellamy, Sidney Webb, J. A. Hobson or treatises on Chinese history, Canadian workers’ compensation, or currency reform.23 It could never be said of Holland’s successor, M. J. Savage, that he was an ideologue; if his mind fastened on the works of any theorists they were those who wrote glibly about what Savage quaintly labelled ‘the money system’. Immediately after Labour won its first election in November 1935, Savage stated that his goal was simply to ‘begin where Seddon left off’.24 To an interviewer he said that the chief problem of the time was one of fair distribution rather than production. He aimed to ‘make security a reality’ for people.25 Savage’s biographer, Barry Gustafson, notes that he was ‘not interested in abstract theories but in practical measures’.26 Keith Sinclair concluded that Savage ‘smelt of the church bazaar and not at all of the barricades’.27
Close observers of Labour governments between 1935 and 1975 cannot help but notice that few if any of their interventions were ideologically driven. Peter Fraser was the most widely read member of Savage’s Cabinet. By this time he used the word ‘socialism’ only occasionally; there seems to be no mention of it in his election pamphlets. When he did talk of socialism, Fraser defined it loosely. He is said to have referred to the introduction of ‘free’ milk in schools in 1937 as ‘one of the most progressive instalments of socialism New Zealand had ever had’. In fact, there was no ideological imperative for ‘free milk’; it owed more to the growing local enthusiasm for better childhood nutrition at the time than to any left-wing philosophy.28 Sinclair described Walter Nash’s concept of socialism as being ‘applied Christianity’, a term that was also used occasionally in the late 1930s by Savage.29 W. B. Sutch noted the non-ideological approach to decisions taken by the Labour Government in 1936, its first year in office.30 He served in the offices of two Ministers of Finance during the 1930s and confessed that as far as he could see there was no theory at all guiding Labour’s housing policy in the late 1930s.31 Soon after the Labour Party came to power in 1935, one influential MP, E. J. Howard, declared that the new Government’s intention was simply ‘to make New Zealand a place where the underdog could enjoy comfort and happiness’.32 By the 1970s early socialist dogma in Britain had dissipated into a vague egalitarianism: the ideas that drove New Zealand’s reformers had never been much more than that.
By the time he became Prime Minister in 1972, Norman Kirk’s capacious but untrained mind was filled with inspirations gleaned from many sources. As he and his growing family shifted about the country in search of work in the 1940s, Kirk spent his spare time at public libraries reading everything he could lay his hands on. His nationally delivered pamphlet for the 1969 election was entitled This Man Kirk. It noted that he was ‘impatient with “isms” and political doctrines’, and had only one overriding belief: ‘that people matter most’.33 Members of the Third Labour Government that Kirk led for twenty months shared a common belief that governments could usefully intervene on behalf of those sections of the population that were less able to look after themselves. This was little different from the attitudes of Seddon and Ward at the turn of the century, or Savage and Fraser, who followed them in the 1930s and 1940s.
However, from time to time some politicians argued that Labour’s policies should be more clearly underpinned by a set of philosophical principles. At the same time as the Australian Labor Party was debating its ‘socialist objective’ in 1977, delegates to the New Zealand Labour Party conference that year – against the better judgement of their leader Bill Rowling – grappled with the meaning of the term ‘democratic socialism’, which some thought should be affixed to the party. There was no resolution to the debate. Subsequent discussion scarcely developed beyond a series of speeches to party branches by a senior member who was subsequently a minister, F. D. O’Flynn QC. He conceded that the term ‘socialism’ was now seldom debated within the party and was usually avoided by Labour MPs.34
Meanwhile, most conservative politicians talked free enterprise on the campaign stump. However, they were no less prepared to use the State on behalf of those they deemed deserving. Farmers and businessmen received help from the governments of W. F. Massey, Gordon Coates, Sidney Holland, Keith Holyoake and Robert Muldoon, and each of those ministries continued with the state ownership and management of the many trading enterprises they inherited. The early use of price controls during World War I, the establishment of producer marketing boards in the 1920s, the introduction of Family Allowances in 1927, restraints on mortgagees’ rights during the Great Depression, continuing use of controls and subsidies to restrain consumer prices after 1949 and use of tariff protection and import controls to further the goal of full employment were examples of the State being used by so-called conservative administrations to ensure ‘fairness’ for all classes and ‘the well-being of the country as a whole’.35 The National Party’s general objectives in 1936 made no mention of ‘conservatism’, speaking instead about the new party’s desire to ‘pursue a policy of progressive and humanitarian legislation’.36 Robert Muldoon proudly declared in the 1970s: ‘The National Party has never been a bunch of bloody-minded right wing Tories! Never!’37 The doctrines of Adam Smith, Friedrich Hayek or even Quintin Hogg were as foreign to the National Party as those of Marx and Engels were to Labour. By 1984 the term ‘socialist’ was as likely to be used of Muldoon as of any Labour politician.38 The pragmatic economic and social interventions of successive New Zealand governments in the 144 years after the signing of the Treaty of Waitangi became part of New Zealand’s historical folklore. State spending as a proportion of GDP grew slowly at first. In 1924 it constituted 14 per cent of GDP. After another world war and a raft of interventions by the First Labour Government (1935-49) this had doubled to 28 per cent. Further bursts of activity during the next 35 years raised the Government’s share of economic activity to 41 per cent of GDP in 1983-84.39 By the 1950s and 1960s election campaigns had become auctions where parties tried to outdo each other with competing promises to spend the taxpayers’ money.
History books have tended to concentrate on health and welfare interventions and on those pieces of legislation that influenced the labour market, such as compulsory arbitration. A nostalgic hankering after those earlier days of big government permeates much modern academic writing about New Zealand’s welfare state. Academics still write enthusiastically about the incrementalism of state activity, as well as its increasing cost to the taxpayer. The more daring concede that by 1984 some changes to methods of benefit delivery were needed.40 No one, however, has examined whether incremental interventionism, whatever its short term benefits to particular groups, was a reliable basis for long-term prosperity. There is no study of the myriad of reasons behind the many acts of government intervention during our history. Nor has anyone attempted to analyse whether the social engineering goals pursued by politicians at the point of intervention were achieved – or could have been – over the medium or longer term.
One or two writers have argued that there were occasional doctrinal influences on New Zealand’s interventionist past. Concentrating on the land reforms of Jock McKenzie in the 1890s, particularly his generous leasehold legislation, historian Tom Brooking argues that some of New Zealand’s settlers were subject, consciously or otherwise, to nineteenth-century European discourse about land tenure and the evils of monopoly.41 Given the speed with which McKenzie’s goals faded as pound signs flashed before the eyes of the beneficiaries of his legislation, one can only conclude that few of them shared his ideological passion.
A careful study of most state activity fails to reveal any consistent philosophical input from any source. This certainly became an underlying problem with the interventionist state. Structures erected of bricks that vary in size and shape are often called ‘jerry built’: made to sell, but not to last. They are seldom elegant and have difficulty standing up to stress. Constant improvisation became a problem with New Zealand’s state edifice. Endless tinkering eventually produced diminishing returns and brought statism into disrepute with many New Zealanders. This book concludes that by the 1980s some layers of well-intended intervention conflicted with others and that an over-regulated, over-legislated society had become virtually ungovernable. Which is not to say that New Zealand would necessarily have fared better had its haphazard state activity been more philosophically consistent. Nowhere in the world has socialism, with or without doctrines, proved a panacea for modern times.
The State in New Zealand makes no claim to be a study of all state activity since 1840; so extensive has been the scope of intervention that such could not be contemplated within one volume. An early account entitled State Socialism in New Zealand, published in 1910 when state spending approximated 10 per cent of GDP, ran to more than 300 pages.42 This book analyses the rationale for much state activity and attempts to discuss the effects over time of the public’s early belief in government omnipotence. The book further notes the mounting unsustainability of the structure as successive governments added to it. Difficulties first became noticeable during the fiscal crisis of the 1880s, when politicians found it hard to borrow abroad to sustain the works programmes on which many settlers had come to depend. During the Great Depression of the 1930s it was clear that New Zealand’s cost structure and heavy debt level were seriously out of kilter with its income.
After 1945 there followed another two decades of good export receipts accompanied by more and more state spending. They were years of boundless optimism about social progress; there was faith in the benign power of the State to improve people’s lives.43 Politics was dominated by great expectations. Both major political parties made ‘full employment’ rather than international economic competitiveness their first priority, and used up much of New Zealand’s seed corn in the process. In practice, full employment resulted in a high level of job vacancies. By now a centralised labour market existed; wages were set between 1940 and 1968 by General Wage Orders and national awards and then in later years by regulations and budget pronouncements. One commentator has noted that after 1968 ‘the economy [was] exposed to a leapfrogging of prices, wages and markups’ and that it was soon locked into a wage-price spiral. In earlier times, Arbitration Court awards took into account the overall state of the economy, but did not reflect regionally differing cost structures. After 1968 politicians frequently intervened in the wage-settlement process without any of the previous restraints that had governed wage-setting. The profitability of New Zealand’s exports was further imperilled.44 Labour legislation that had been put in place in earlier times to assist unions in their time of weakness was now making workplace flexibility difficult. Employers found themselves locked into patterns of production that they might otherwise have shucked off in the hope of retaining a competitive edge.
What gave a critical edge to these developments was that after 1965 New Zealand’s commodity exports sold on a generally declining world market and the country’s relative export income began a long, downward trajectory. A crisis of some kind could not long be averted. Successive ministries spent time devising incentives and plans in frantic attempts to speed manufacturing growth and to diversify New Zealand’s traditionally limited range of exports and market destinations.45 Success proved elusive.
In 1950 New Zealand was cutting with the grain of world opinion; other developed countries were now doing more of what New Zealanders had been engaged in for half a century. But some of New Zealand’s politicians began to experience doubts. Keith Holyoake’s National Government (1960-72) concluded that several aspects of the State’s apparatus needed reform. Ministers embarked on piecemeal change, but only with the greatest trepidation, fearing a political backlash. There were tentative moves to open New Zealand to the wider world when the country joined the International Monetary Fund in 1961 and began a substantial review of tariffs. But changes that ensued were generally too little and too late; some conflicted with those protective devices that governments retained. Moreover, the country’s overseas earnings and its domestic growth rate were seldom enough to sustain more generous social policies. Every time ministers of finance sought to accelerate growth, the highly centralised system – like a clapped-out car – overheated, leaving balance-of-payments crises behind at most elections between 1949 and 1984.46 In 1979 the Department of Trade and Industry frankly described New Zealand’s basic economic problem as ‘the inability of the economy to grow without creating balance of payments difficulties and inflation’.47
By the late 1970s, constant intervention and mounting government expenditure were retarding, rather than stimulating economic growth.48 In too many cases for comfort, the long-term economic and social consequences of the State’s activity had come to outweigh the benefits once so confidently anticipated. The earlier public perception of politicians’ omnipotence, of their capacity to fulfil the contract between citizen and government, flagged. Betrayal was in the air. In 1975 politicians’ standing with the public, once so great that people would travel hundreds of kilometres to hear them, was not much higher than that of used-car salesmen. It got worse.49
The rest of the world had slowly joined New Zealand’s movement towards state activity; in many cases others edged back from it somewhat earlier. However, state involvement in the New Zealand economy intensified in the late 1970s. Under the government of Robert Muldoon (1975-84), interventionism reached the stage where many aspects of the New Zealand economy were out of touch with the world marketplace. Four hundred Acts of Parliament and approximately 1000 sets of Regulations, plus an array of subsidies and tax breaks, tariff protection and exchange controls, as well as restrictions on the exporting of meat, wool and dairy products, were coupled with a high level of government investment in social policy. Each was an integral part of a very complex yet vulnerable political economy; every new intervention seemed to necessitate another.50 Any moves in a more liberal direction – and there were several during Muldoon’s years -usually placed extra stress on those control mechanisms that remained.
Beginning in the late 1940s and intensifying over subsequent years was a trend towards more and more key decisions being made by politicians and bureaucrats in Wellington, rather than by private individuals. In the 1950s New Zealand’s economy was labelled a ‘mixed economy’, part private, part state.51 By the early 1980s under Muldoon it more closely resembled a ‘command economy’, one in which the State was the all powerful player. As Malcolm Fraser, Prime Minister of Australia at the time, later observed, ‘a fabric of intervention was established [by Muldoon] which was bound to fail’.52 By the time of the 1984 election effective economic power rested in the hands of the Prime Minister, who was his own Minister of Finance. One of his close colleagues has observed that by this time Muldoon seemed to be suffering from ‘arteriosclerosis in thought and action’.53 So did the system he constantly endeavoured to fine tune. Donald Brash, who became Governor of New Zealand’s Reserve Bank in 1988, describes New Zealand as having reached a bureaucratic ‘sort of serfdom’ by 1984.54 Another economist has observed that New Zealand’s vulnerable economy had ‘fallen only just short of the whole Soviet “hog”’.55 Jim Sutton, a backbencher in the Labour Government elected in July that year, claimed that the economy was being run like a Polish shipyard, where most incentives for economic activity pointed in the wrong direction.56
Looking back over New Zealand’s history, it is clear that during the early days of colonisation when the State’s activity accounted for approximately 10 per cent of the economy, the results were largely beneficial. Prior to World War I much of the business of government centred on what today would be called the provision of’public goods’ – education, law and order and public works. State enticements to migrate were an essential part of the settlement process. They built up expectations among migrants. So far was New Zealand removed from the sources of private capital investment that governments took a direct part in creating the transport and telecommunications infrastructure; they produced electricity, built schools and funded hospitals. Without these, economic development and rising living standards would have moved at a slower pace. Economists agree that by 1900 New Zealand was ‘one of the most prosperous nations on earth’.57 It had a healthy private sector, a highly literate population by world standards, and its health statistics were among the best in the world. State activity which was still on a relatively small scale had played a major part in bringing this about. Moreover, various rudimentary forms of assistance to agriculture – help with settling and developing the land, a variety of advisory services, and livestock inspection at freezing works and on farms – enabled New Zealand to perform very profitably as ‘Britain’s outlying farm’ during two world wars and beyond.58
However, the developing culture of state activity encouraged governments to go further than was prudent. They entered the insurance industry, encouraged or established trading enterprises such as flax and timber milling, bought and operated bus services and involved themselves in coal mining, tree nurseries, salt making and the management of tourist and health resorts. Eventually they set up airlines and a shipping corporation as well. Some state ventures enjoyed a modicum of financial success. The telecommunication section of the New Zealand Post Office made money, despite the fact that for political reasons it usually carried more staff than was needed to perform effectively. But the Post Office was always short of development capital. For more than half a century customers put up with waiting lists for telephone connections. Electricity generation and the two airlines, National Airways Corporation and Tasman Empire Airways Limited, also constantly requested more state investment, but managed to post profits, as did both Government Life Insurance and State Insurance.
With railways it was a different story. Having invested more than £60 million by 1935 in tracks and rolling stock, a government department continued to run the service except for three brief periods of board or commission control in 1889-94, 1931-36 and 1953-56. For most of the time after the early 1920s Railways was a financial sump hole. Services declined despite governments giving monopoly status to rail for longdistance haulage. Rolling stock became antique and by 1981 the service was grossly over-staffed because successive governments had also been using Railways as an employment agency.59 The Government’s investment in tourism was a constant drain on the taxpayer too and the New Zealand Shipping Corporation, after its formation in 1973, was never more than a financial embarrassment. The state-owned coolstore which opened in Bahrain in 1979 to help penetrate Middle Eastern markets turned into a $30-million white elephant. It was built in the wrong place and suffered from poor management. It made losses for each year of its operation, and they totalled more than $10 million by the end of 1984.60
Adding to successive governments’ accumulated losses were the large sums of money lent over more than half a century to a wide range of private companies for specific purposes at concessionary interest rates. Where the companies survived, much was written off by the State and the residual owners, rather than the wider public, usually became the beneficiaries of the Government’s historical largesse. No section of the community failed to tap into New Zealand’s benevolent state.
So active had the State become by the late 1940s, that a leap-frogging process had begun with interest rates; such a great deal of money was being sucked up to pay for government projects that the private sector was obliged to pay higher rates to attract investment.61 When the Holland Government in 1950 sought to attract private investors to buy the National Airways Corporation and endeavoured to lure international capital to build what became the Tasman Pulp and Paper Company, it discovered there was some hesitation about investing in a country where the State bulked so large in the economy. An agency that had stimulated private endeavour in the 1860s was by now its control agent as well, something that now deterred, rather than encouraged, private initiative.
However, in a world where state activity was still viewed as effective, New Zealand governments vigorously pressed ahead. They became planners, flinders and controllers of more and more economic activity. ‘Fine tuning’ the economy was a term often used by later ministers of finance. This further discouraged private endeavour. Even in agriculture, from which the overwhelming bulk of New Zealand’s export income still flowed, much state effort eventually became self-defeating. By the early 1980s government payments to farmers encouraged them to keep doing what they had always done, rather than to adapt to the rapidly changing signals from the world’s marketplace.
After 1935 huge intellectual and financial investment was put into diversifying the New Zealand economy through industrial development. It produced jobs, although they were often at the expense of employment in other sectors. In spite of frequent declarations from ministers that local manufacturing industries must be competitive, a large proportion of them survived only because of their high degree of protection. By 1980, after decades of government stimulation, New Zealand’s manufactured exports provided only a relatively small portion of the country’s overseas earnings. And since high interest rates, ratcheting labour costs, tariffs and import controls and a variety of regulations made manufactured goods for local consumption much more costly to produce than alternatives available on the world market, they contributed to New Zealand’s high and growing domestic cost structure. Farmers complained that government policy had made motor vehicles among the dearest in the world.62 The same was true of consumer durables. A country with an economy that was historically vulnerable to the slightest ripple in international trade had saddled itself with costs that were significantly in excess of its customers’.
State provision of social services, particularly in education and health, grew tentatively after the abolition of provincial government in 1876. David Thomson has shown that in a relatively young society there was a reluctance by governments to become involved with help to indigents, and a desire to make individuals and communities pay a significant share of the costs of their hospitals and charitable aid. Initially, politicians preferred to encourage friendly societies rather than embark on state provision of welfare.63 After 1891 government policy lurched erratically between schemes designed to coerce, or encourage people to save for their old age, and an increasing level of dependence on the State. Friendly societies, public service superannuation schemes that were established between 1893 and 1908, the National Provident Fund (1911) and Labour’s New Zealand Superannuation Corporation of 1974 were designed to encourage personal thrift. Old Age Pensions (1898), Widows’ Benefits (1911), Universal Superannuation (1938), the Domestic Purposes Benefit (1973) and National Superannuation (1976) were all posited on a belief that the taxpayer, not the individual, should provide for particular categories of people in need. For more than a century there was no ideological consistency to policy governing welfare, although state provision gradually gained the upper hand. By 1980 retirement benefits alone had become one of the biggest items in the nation’s rapidly expanding annual budget.
Some politicians and bureaucrats began to realise in the 1920s that the State was unable adequately to control its social expenditure. Rising hospital costs were a particular concern. In 1949 the First Labour Government which did so much to raise popular expectations of a ‘free’ health service, contemplated drastic centralisation of hospital services to control runaway expenditure.64 A heavily bureaucratic ministry and sizeable provider workforces were emerging and they overwhelmed the Third Labour Government’s efforts to control expenditure when it issued a White Paper on hospital reform in 1974. Providers, press and politicians conspired to let the expenditure juggernaut roll on. Efforts to apply the brakes or reassess policy goals were usually too little and too late. After 1960 New Zealand’s place as a leader in health and educational statistics began a steady downwards trajectory. The original purpose of the State’s involvement got lost in a maelstrom of provider disputes, some territorial, others about levels of remuneration and conditions of service. The basic problem was that the economy was not growing at a sufficient rate to sustain the expanding expectations of so many.
As the economy slowed, new experiments in state welfare after 1970 added an extra budgetary burden. They produced social consequences that were unintended by the politicians.65 Middle-class capture of much social spending became a feature of New Zealand’s ageing welfare state, as it did in other countries. Successive governments found their desire to reform was circumscribed by middle-class expectations, provider capture of decision-making and media manipulation by people within the delivery ‘industries’ that had been suckled by the State for many years.
This escalating level of government activity in an economy that was very dependent on world commodity prices and unfettered access to European markets eventually depressed living standards. After 1960 governments tried to arrest, but in practice contributed to, New Zealand’s relative economic decline. Politicians were torn between taking hard decisions that could build for the future and enticing voters at pending elections. The latter option always commended itself. The result was predictable. Still rated in the top few countries in terms of per capita income in the middle 1950s, New Zealand began to experience a prolonged period where growth was below the OECD average. Between 1960 and 1984 other OECD countries grew their economies 2 per cent per year more rapidly than New Zealand. By 1985 the country’s per capita income was less than 65 per cent of the OECD average and had sunk to twenty-first in the world. The British political economist, Edmund Dell, has pointed out that after 1945, Britain saw its standard of living trail countries that had lagged behind it for at least two centuries.66 New Zealand experienced an even faster relative decline.
New Zealand had become one of the developed world’s economic laggards. Pressure groups that expected much of the omnipotent State found themselves squabbling over a diminishing cake. In the 1970s the Government tried to maintain big spending by borrowing but it pushed the country’s underlying rate of inflation to a point that was significantly above the average of the OECD nations. A draconian wage-price freeze in June 1982 failed to suppress inflation.67 It has been estimated that when rising tax burdens and inflation are factored into the equation, workers’ take home pay had been declining for many years before 1984.68 The growing budget deficit and overseas debt caused pressure on the country’s exchange rate, despite efforts to peg it. Major international agencies lowered New Zealand’s credit ratings. During the election campaign in 1984 the Reserve Bank was obliged to borrow $1.7 billion in four weeks to prop up the currency because capital was flowing out of the country.69
Within 24 hours of the election result on the night of 14 July 1984 the Governor of the New Zealand Reserve Bank closed the foreign exchange market. It remained closed for four days, by which time the new Labour administration, not yet sworn into office, had prevailed upon the outgoing regime to devalue the currency by 20 per cent and remove various currency controls. A crisis had enveloped a century and a half of state experimentation in New Zealand, just a few years before more rigid socialist economies in Eastern Europe collapsed for similar reasons. The turn-of-century fairyland of the British Fabians and American radicals had long since lost its tinsel. New Zealand was soon being heralded as a leader in market reforms that are everywhere expected to dominate the twenty-first century.
In 1984 the Fourth Labour Government began a zero-based exercise that questioned the State’s involvement in many aspects of New Zealand life. It scrutinised the various beneficiaries of state activity, concluding that all too often they were no longer the people whom the original intervention was designed to assist. Changes that ensued meant that New Zealand was unlikely ever to be the same again. One hundred and forty-four years of interventionism had run its course. What Robert Skidelsky has called ‘shock therapy’ brought to an end many of the seemingly inevitable results of the ‘age of collectivism’.70
Having said that, this book is not intended as a defence for the changes that occurred after July 1984. The incoming government was faced with tough choices and the jury is still out on whether it chose correctly. What this book does argue, however, is that escalating state expenditure could not be met by constant fiddling with an antiquated, jerry-built economic structure such as existed in the middle of 1984. Any government wishing to pursue the goals of economic growth and better living standards for ordinary people had to make radical changes. Critics may well argue that this conclusion gains from hindsight. Good history, of course, always does. More to the point, as Edmund Dell has pointed out in his study of British economic management after 1945, a great deal that can be seen today could also be seen yesterday. ‘Fear of exploiting the benefit of hindsight’, he says, ‘is a great, but often unjustified, protector of reputations. Experience can be shattering and educative but many of the lessons that can be learnt from experience should have been learnt before.’71 New Zealand is no exception. As early as 1951, T. N. Gibbs sounded a number of warnings about risky spending policies in his Ministerial Inquiry on Taxation. No one listened. Given New Zealand’s constant degree of vulnerability to overseas fluctuations from most of which we have proved unable to shield ourselves, we need to be alert to economic trends, domestic as well as foreign, and be able to calculate the cumulative effects over time of policy decisions that may seem attractive at the point they are taken. The real question before us now is whether we collectively have enough sense to ensure that we do not have to learn these lessons all over again.
This book originated in a chance conversation I had in 1993 with Roger Kerr, Executive Director of the New Zealand Business Roundtable. In response to a question about my writing, I told him that I intended to recount the story of the Fourth Labour Government after 1984, but that I first had to understand how it was that New Zealand had come to the stage where drastic restructuring had become a matter of urgency. Roger Kerr suggested that I might undertake that initial study; the Business Roundtable would pay some of the expenses involved in researching such a big project. I agreed to the proposition, although it was understood that the book would be mine and would not be subject to editorial direction from the Business Roundtable. Roger Kerr probably disagrees with some of the conclusions I have reached and if it were his book, he might well draw different inferences from the material I unearthed. While he has read the manuscript and has proved to be a most careful proofreader, at no point has he, or any other member of the Business Roundtable, sought to interfere or to change the text. This, of course, is in the spirit of the original agreement and I am grateful for their forbearance.
As always when preparing a book of this scope, one incurs many debts. Simon Sheppard worked with me in a research capacity for several months. Paul Goldsmith read and commented on the full text and helped at a couple of points with some intricate pieces of archival research. Professor Gary Hawke of Victoria University of Wellington also read the manuscript and made many helpful suggestions. Both Professor Barry Gustafson of the University of Auckland and Brian Easton also read it and volunteered suggestions, many of which I accepted. Dr Bryce Wilkinson read much of the manuscript and made some penetrating comments about its overall shape. Dr John Martin of the Historical Branch of Internal Affairs perused several early chapters and gave helpful advice. David Bold, a Ph.D student at the University of Auckland, was a mine of information about the development of New Zealand’s steel industry and located some photographs for me. Joan McCracken and her staff at the Alexander Turnbull Library assisted with many other photographs. My wife Judith read and discussed drafts of the book, and, as always, made shrewd observations about its structure.
In the course of my research I interviewed many participants in the events I was describing. Of special assistance was Professor Geoffrey Schmitt who, besides having an early career in the bureaucracy, was later an academic and served for some years as CEO of Tasman Pulp and Paper Ltd. The son of an influential Secretary of the Department of Industries and Commerce, he was able to provide much valuable information about the public service in the 1940s and 1950s. Sir James Fletcher, Sir Frank Holmes, Sir Roger Douglas, Rt Hons R. J. Tizard, Jonathan Hunt and Frank O’Flynn, Hon. J. K. McLay, Alan Gibbs, Brian Chamberlin and Ian Lythgoe generously agreed to be interviewed. I had earlier been able to question Sir Arnold Normeyer, Sir Tom Skinner, Sir Terence McCombs, Norman Douglas, Samuel Leathern and Henry May, all of whom willingly shared their judgements on events during their careers. Access to interviews conducted by Michael King twenty years ago with several politicians and bureaucrats proved helpful. Hon. Simon Upton has often discussed some of the issues dealt with in this book, as has Hon. Derek Quigley, as well as many of my former colleagues in the Labour Party. My own voluminous notes and jottings during a political career that spanned the years 1966 to 1990 occasionally proved helpful.
While preparing the book I spent hundreds of hours in the National Archives with the papers of various government departments, especially those of Prime Minister, Treasury, Industries and Commerce, Internal Affairs, Agriculture, Foreign Affairs, Housing, Electricity, Civil Aviation, Mines and Tourism. Alison Neville of Treasury helped me to access several of that department’s more recent files. Many archivists at National Archives assisted my efforts to penetrate the inadequate finding aids. Trade magazines and union publications were also perused, as well as some private papers of individuals who played a role in political activities. I can claim to be the first person to have attempted to relate the contents of such a large number of untouched bureaucratic files about business and financial matters to New Zealand’s wider historical picture. Whatever mistakes there are in the book – and there are bound to be many – are mine. The book is dedicated to those hardy souls who have been big enough to question whether big government can produce the best outcomes for ordinary New Zealanders. Tony Blair recently observed that the only true defenders of the welfare state are those who are prepared to reform it. To those who have put countless hours into trying to devise better ways of ensuring a fairer society for ordinary people, this book has special relevance.
MICHAEL BASSETT
Auckland, June 1998