Introduction
I’m delighted to be here today to share with you some of New Zealand’s experience with public sector reform. These reforms are an important part of our recent history. They are something that I am proud to say that I have been a part of – both the reforms and my parliamentary career began with the 1984 election. The key aspect of the reforms was a vision to lessen the size of the Government’s footprint on the economy. It didn’t necessarily involve reducing the overall size of Government – Government expenditure as a proportion of GDP remains substantial at about 35 percent of GDP, about what it was in 1990 – but it did involve trying to minimise the distortions that Government activity imposed on other economic activity.
We worked therefore to decrease the amount of regulation. We got Government out of the business of doing business. We decreased many taxes and also eliminated distorting payments like industry or agriculture subsidies.
Hand in hand with these innovations, we increased transparency and accountability in the public sector.
I think that countries around the world can learn lessons from New Zealand’s experience, but I’m not here to lecture anybody about how to manage a country.
While there are lessons to be learned from the New Zealand reforms, it is clear to me that the approach taken by New Zealand may not be right for every country.
And we recognise that reform is an ongoing process. In fact New Zealanders recently voted for a change of Government and for a fresh look at the way governance has been approached over the last 15 years.
I’ll discuss the new Government’s approach later in my presentation. But first I want to give you a feel for the hole that New Zealand dug itself into between the 1960s and the 1980s. Then I want to tell you about how we dug ourselves out.
History
The fact that consecutive New Zealand Governments were able to so decisively reform the New Zealand public sector and economy is largely a function of the fact that governance in New Zealand was so poor in the years leading up to 1984.
When I look back, I can’t help but think of the story of the Russian Commissar visiting a Soviet collective farm. Apparently, the Commissar, as part of a routine inspection, demanded of one of the workers: "How was the crop this year?"
"Oh, we had a fantastic harvest" was the reply. "Many many potatoes. So many potatoes, in fact, that if you piled them up in the sky, they would touch the feet of God!"
The Commissar scolded "there is no God, Comrade"
The worker retorted "there aren’t any potatoes either".
Looking back 35 years, New Zealand was like that. We had a virtual command economy. All sectors of the economy were heavily regulated. Productivity was hardly an issue.
The public sector was enormous. The Government owned all radio and television stations. The only airline. The telephone company. A special permit was required to carry goods by road for more than 40 miles because the Government owned the railways too.
There were few checks and balances on Government. The executive branch of Government dominated Parliament and was granted enormous regulation making powers by legislation dating back to the depression.
The public sector was unchecked by formally developed goals, performance measures or accountability mechanisms.
Of course we were a very rich country at that stage – New Zealand had one of the highest standards of living in the OECD. There were plenty of jobs for everyone and we had a guaranteed market in the United Kingdom for virtually all that we could produce.
The turning point was 1973, the year of the first oil shock – and more importantly for New Zealand, the year that Britain entered the European Community. The access that we’d previously enjoyed began to evaporate. But instead of biting the bullet and changing, we procrastinated.
We hoped the problems would go away.
The Government sector took an even greater role in the economy. We started subsidising industry and agriculture more heavily. The Government "thought big" with massive energy projects.
Of course, as is frequently the case when bureaucrats get to run the economy, some of the decisions made were detached from reality – we built for example the worlds first (and only) gas-to-gasoline refinery. Neat technology, but fairly useless in a world where you can refine gasoline from relatively abundant oil.
Government debt accumulated – it almost got out of control and ended up touching 77 percent of GDP.
(As a slight aside, I often can’t help reflecting that Canadian Government debt – when you combine Federal and Provincial debt – represents about 93 percent of Canadian GDP!)
Government froze wages and prices in an attempt to control inflation.
By 1984 the public sector, like much of the rest of the economy, had grown fat and lazy. A famous New Zealand play – "Glide Time" – captured the mood well in 1977.
In one scene an experienced bureaucrat – John – explained to the new lad Michael that he "must learn the Public Service Corridor Walk".
"The what" asks Michael.
"The corridor walk" replies John, "the secret is you always have a piece of paper in your hand. And look worried. If you do that you can go [down town] to Courtney Place and back and no one will mind".
With no focus on outputs, the assumption was that was that if you looked busy, then you probably were.
Of course a flabby economy and flabby institutions can only be sustained for just so long.
At the time of the change of Government in 1984, it was clear to the incoming administration that a devaluation of New Zealand’s currency was required. The outgoing Government, however, refused to act. It was unclear whether they had to – New Zealand’s constitutional arrangements were ambiguous on the point.
A serious run on New Zealand’s currency occurred.
Thus a constitutional crisis coincided with a financial crisis and people realised that things in New Zealand had to change.
Fundamental reform was no longer merely desirable. It was absolutely necessary.
Reforms
And so the reforms began. There followed, according to David Henderson, an experienced OECD observer, "one of the most notable episodes of liberalisation that history has to offer".
On top of the economic reforms, I might add, there were also remarkable constitutional and governance reforms as well.
Very little of the public sector remained untouched. Nothing was sacred.
As well, the private sector learned to cope without government assistance.
Local government was reformed and restructured.
The position of Government, and even the electoral system were fundamentally reformed.
These reforms were not just a matter of policy but also of law. The principal measures are safeguarded by Acts of Parliament.
These Acts, amongst other things, ensure that the operations of the public sector are transparent as possible, so that information about it can be acquired at low cost, and economic decisions thereby rendered are more rational and efficient.
I’ll refer to these Acts further as I go on.
Let me touch on some of the areas of reform.
[Economy]
Many of the reforms focussed on important aspects of the economy.
[Financial Liberalisation]
Some of the earliest reforms were in the financial sector.
All controls on wages, prices, credit, dividends and foreign exchange were freed up. The New Zealand dollar was floated.
There are no longer any limits on banks’ lending, or any requirement for them to invest in government stocks. Banking was opened up to full international competition.
[Trade]
Other reforms related to trade.
Quantitative import licensing was completely phased out. Tariffs are no longer applied on any goods except textiles clothing and footwear. These tariffs are due to be removed.
[Agriculture & Industry]
All agricultural and industry subsidies were abolished. Monopoly areas like the taxi industry, coastal shipping, domestic air services, prohibition of private sector electricity generation were all abolished.
[Labour Markets]
Another crucial part in the reform was the liberalisation of the labour market. Many of the early reforms failed to show too many gains until flexibility was introduced into this fundamental aspect of the economy.
An Employment Contracts Act transformed industrial relations law to simple law of contract. It totally removed compulsory unionism and placed labour contracts on the same basis as other commercial contracts.
While many benefits have been realised through the reform of industrial relations legislation – for example in the eight years before the legislation was introduced, the average working days lost per year was 519,000 – since then it has been more like 69,000 – it is recognised that further work in this area is required.
The labour market is one of the new Government’s priorities. The new Government wants to ensure a "fair deal" for employees while stimulating further productivity growth.
To this end they plan – next week, I understand – to introduce an Employment Relations Bill which will try to address the perceived imbalance in contract negotiations between the power of employers and that of the most vulnerable workers.
But this rebalancing of our employment relations legislation is not designed to turn back the gains of the past decade – our Labour Minister, Margaret Wilson, recently promised that "good employers will find little difference between the old and the new legislation".
[Public Sector]
While restructuring of the economy generally was fundamental to the reform, some of the most far reaching innovations occurred in the public sector.
The reforms touched on virtually every aspect of Government life from the operation of the Executive, Parliament and the public service to the approach to taxation and the way Government spends.
[Taxation]
Let me begin with taxes. Taxation levels were reduced over the period of the reform, the tax base has been broadened and compliance requirements have been fundamentally simplified.
The top level of income tax rates fell from 66 percent and now stands at 39 percent. Company tax fell from 48 percent to 33 percent. Estate taxes have been abolished.
There is no capital gains tax but a Fringe Benefit Tax was introduced to ensure all forms of income both in cash and kind were treated equally.
A resident withholding tax was introduced on interest and dividends and a comprehensive GST replaced all sales and wholesale taxes.
The result is a taxation system which is broad based and effective, but which is also relatively simple and efficient and which imposes relatively low compliance costs.
[Income Support and Social Services]
Reform was also directed to income support and social services. Eligibility for some forms of assistance was changed. Some benefits were cut. The way in which state health care was provided was changed.
Out of these changes has grown one of the great myths about the New Zealand reforms – that we became really mean with respect social spending.
Looking at the evidence, however, quite a different picture is painted. New Zealand still has one of the most generous social spending frameworks in the OECD.
In 1999, seventy percent of the New Zealand Government’s expenditure – some 25 percent of GDP – was directed at social spending.
If I might contrast the Canadian experience, it appears that Canada’s expenditure on the same services amounted in recent years to just over 22 percent of GDP.
And the new New Zealand government’s priorities include more spending on social services.
New Zealand retains a significant role for Government in social spending. Our reforms have simply made social expenditure more transparent, efficient and better targeted.
[Government Departments]
Some of the most far reaching reforms occurred in the public service.
In 1984, the Treasury reported to the incoming Labour Government that the public sector exhibited a series of fundamental weaknesses:
- Most departments had no clearly defined goals or management plan;
- There were too few effective control mechanisms to review the performance of departments in meeting their required outputs.
- Departmental managements had little freedom to change the way their departments operated to meet their goals, especially in staffing matters.
- Too much emphasis was placed on control of inputs; and
- There were no effective review mechanisms for dealing with poor performance by senior management.
The reforms targeted directly these shortcomings.
The State Sector Act for the first time clearly defined the role of government and the role of the public service.
The Government’s role is to define and set public policy. The public Service’s role is to implement that policy.
Under the State Sector Act, all appointees to top government positions are now on term contracts. All chief executives have greater decision making autonomy than previously. They undergo a demanding appointment process run by the State Services Commission – they are now consequently not political appointments.
A Minister is no longer able to interfere in the day to day running of a Department. The Chief Executive of the Department has a contract with the Government, through which the Government purchases from the department a particular set of outputs.
Note here the focus on outputs rather than inputs – we look at the results that are generated rather than at the cost of production. Outputs are agreed at the beginning. A Minister and his or her Department will then agree on the purchase price.
Chief Executives are chosen on the basis of a worldwide advertising – no longer automatic promotion from within – they are on contract. They are the employer and they have full control of all the resources available. Consequently, the departments, not the Treasury, are now responsible for their own financial operations.
The Government moved to cash and accrual accounting. As well each department has a capital charge system, whereby a capital levy based on investment is charged. This is designed to encourage economising on use of assets and appears to have been very successful.
The key guiding principles in all the public sector reforms have been – transparency, consistency and withdrawal of the state from activities that can be more efficiently and effectively performed by the community or private enterprise.
That’s occurred across the board. As well as the structural reforms, the Government has also acted decisively to strengthen the management of the public sector and to ensure the transparency and accountability of the business of the State.
I think I can claim that all the reforms have made New Zealand’s system of government more comprehensible and accessible – without doubt we now have one of the most open systems in the world.
Of course, there’s room for further work. The public service undoubtedly spends a great deal of time generating what seems to be an ever-more-complicated set of estimates and reports.
The inefficiencies created by the close scrutiny to which the state sector has been subjected has been recognised by consecutive Governments.
The State Services Minister under the last Administration speculated in one of his last speeches from that position that we might have created a "veritable Babel’s tower" with a "completely alien language of inputs, outputs and outcomes".
Our new Prime Minister, Helen Clark, recently concurred with former Minister Upton.
She has made clear that she wants "meaningful reporting" from public servants.
"The things I want to know are: what tasks have we set ourselves, are they being done, when can they be implemented, what are the timelines".
The challenge in our ongoing reform of the state sector is, therefore, to deliver information about the performance of the public service that can be easily measured up against the Administrations goals and objectives.
Clearly, the new Government will demand even higher standards of transparency and accountability from the public sector.
It wasn’t just the core public service that was touched by the reforms. There was also a rethink about the scale and role of the public sector more generally.
Corporatisation and privatisation of government occurred on a wide scale as we attempted to get the public sector out of doing things that could be more efficiently and cost-effectively achieved in the private sector.
The restructuring of the public sector has seen some quite startling results.
Most of the old government departments, particularly New Zealand Post and Railways used to run at substantial losses – in spite of their monopoly situation.
State Coal for example, had run at a loss for 20 successive years – now set up on a corporate model, but still owned by the State – it has increased productivity by 60 percent and cut prices by 20 percent.
There were other spectacular gains. Telecom – corporatised then sold to private enterprise – increased productivity by 85 percent and increased profits by 300 percent. It has reduced telephone costs to users by 21 percent.
And – at 98.8 percent – New Zealand has the highest proportion of digital-quality lines in the world next to Hong Kong.
While Telecom initially reduced staff by 47 percent, the other upside is that now – with healthy competition – the telecommunications sector has grown and actually employs 33,000 people; 11,000 more than when the restructuring began! And these are real jobs!
Railways is now owned by the US rail company Wisconsin Central. Over the course of its restructuring it cut freight rates by 50 percent, reduced staff by 60 percent and now makes profits instead of substantial losses.
Over the previous 30 years it had accumulated $1.5 billion in debts. This had to be written off by the Government, as owners. The trains now run to time, give a much better service and don’t lose freight, which they regularly used to do.
The corporatisation of the New Zealand ports, and the culture change that followed was little short of remarkable.
Today most of New Zealand’s ports pay the same rate of pay whether the work is in normal time or not. Ship turnaround times have dropped dramatically.
Once it took 12 or 13 days to load, in normal working hours only, a 27,000 cubic metre cargo of logs, and it took 44 men to do the job.
Today working around the clock, it takes 4 men 30 hours.
[Monetary & Fiscal Policy]
All the reforms on their own could not guarantee that government expenditure wouldn’t get out of control again. That debt levels would be allowed to increase for political expediency. That the Government of the day wouldn’t heat the economy in election year to assist its re-election chances. That opposition parties, would not campaign on promises they couldn’t honour since either they were unaware of the true state of the economy, or didn’t care.
These risks, hopefully, have been overcome by some critically important pieces of legislation locking in the key aspects of the reforms.
Of course it’s always up to Parliament to change legislation. But the architects of the reforms recognised that its often tough for politicians to mess with Statutes.
One important example of this legislation is the Reserve Bank Act which sets up our central bank as a fully independent body – transparent and accountable. Its key principle is to ensure price stability.
The Act gives monetary policy the sole task of achieving and maintaining stability in the general level of prices. The Government and the Governor of the Reserve Bank determine and sign an agreement as to the appropriate inflation target. With the Bank’s operating independence from Government goes accountability, and the need for transparency.
Public Finance Act complements the regime created by the State Sector Act – which I’ve already talked about. Having placed upon our public-servants a much higher level of accountability and required performance, you then have to ensure you have a world class highly effective and transparent means of being able to control accounting and financing.
This Act introduced accrual accounting, which means all government agencies and departments now work on a full accrual accounting basis, thereby ensuring it is easier for the Government to determine what it is purchasing from departments by way of specifying them as outputs.
The Financial Reporting Act places a legal responsibility on the Minister of Finance to report publicly a monthly report of expenditure and income items that are pertinent to the public accounts. The Financial Reporting Act also ensures investors and business really know the true state of the Crown accounts at that particular time.
The final unique piece of legislation is the Fiscal Responsibility Act. This Act in essence says "Right, now you have cleaned up New Zealand’s mess. Don’t let it happen again."
It requires the Government to achieve a prudent level of public debt, maintain levels of Crown net wealth that provides a buffer against adverse shocks, manage prudently the Crown’s risks and provide a reasonable degree of stability and predicability on future tax rates.
As well as these guidelines, the Act requires the Government to publicise regularly the present and projected budgetary position. Again this ensures that everyone – public, investors – know what’s happening and that there are no nasty surprises, and what the future projections are. It ensures investment certainty.
Together this legislation creates a framework guaranteeing clarity, transparency, certainty and responsibility in the way the Government manages its affairs.
[Local Government]
As I commented earlier, local government was not left aside from the restructuring process. Efficiencies in local government are very important because the high cost of local government impacts on consumer spending and local business profits.
When I was first elected to the New Zealand Parliament in 1984, my constituency, having around 25,000 registered voters, had 8 local authorities and several other layers of semi regional government dealing with such areas as soil & water, urban transport, ports and hospital boards.
In the late 1980s, the Government set up a special committee with the power to restructure local government. As a result my electorate ended up with just 2 local authorities and a totally redefined Regional Authority, which covers nearly a third of the South Island.
Some areas have now what is known as a "unitary council" – that combines one local and regional authority into one.
Today, local government meets most of the same requirements of openness and efficiency that central government does. Local government works departments have been turned into trading enterprises, and all major works have to have public tenders called.
[Constitutional Reform]
It’s important to remember that the period of economic and public sector reform in New Zealand was accompanied by a similar era of constitutional change. I mentioned earlier that the crisis which precipitated the beginning of the reforms was both financial and constitutional in nature. The solution was equally multifaceted.
In the mid 1980s New Zealand adopted a Constitution Act and a Bill of Rights Act.
Neither of these documents changed the fact that New Zealand is without a written constitution, but they enacted fundamental reforms by removing the residual law making power of the British Parliament, by clarifying the powers of out-going and incoming Governments and by establishing bench marks in terms of the personal rights and freedoms of New Zealanders.
Reforms were also made to the functioning of Parliament.
New, more open and transparent committee processes were adopted to give the public better access to the legislative process. The regulation making authority of the executive was re-examined and subjected to greater discipline.
More recently, considerable innovations have been made to New Zealand’s treaty-making process. These involve greater Parliamentary scrutiny and a greater opportunity for public comment.
As with other reforms, these changes are designed to ensure greater transparency and better public awareness about the activities of the executive.
In one of the most remarkable changes, New Zealanders voted in the 1990s to move away from the first-past-the-post electoral system that we, like Canada, inherited from Britain.
We moved to a European style system of Proportional Representation where the final make up of Parliament is determined by the proportion of the vote that each Party gets.
Such reforms were supported by New Zealanders on the basis that they wanted a more representative and transparent system of government.
We have just had our second PR election and certainly the Parliament is more representative than it used to be!
[A New Government]
Our second PR election also delivered us a new Government. The incumbent National led "conservative" coalition was replaced by a Labour – Alliance minority coalition Government which sees itself as much more towards the left of the political spectrum.
One of the questions I’ve been asked a lot over the last few months is how this will effect the reforms that have been put in place over the last 15 years.
I’d like to make some final comments today therefore on New Zealand’s likely direction over the coming years.
It was Alice in Wonderland, was it not, who asked the Cat: "would you tell me please which way I ought to go from here ?"
"That depends a good deal on where you want to get to", said the Cat.
Clearly the new Government has a different philosophical approach from its predecessor – but I’m quite positive that it wants to get to the same destination.
Economic growth, more jobs, a more effective public sector remain priorities for this administration.
It may be, however, that they choose a slightly different path.
As I’ve already mentioned, the new Government favours greater spending in social areas.
It is not averse to assisting with the development of industry and exporters.
It will reverse some of the previous Governments initiatives in Accident Compensation.
It has indicated that it is unwilling to privatise Crown assets that the previous administration had earmarked from privatisation.
It has also slightly increased the progressivity of our income tax regime.
But the new Administration is not out to throw the baby out with the bath water.
It was, you will recall, the Labour Party that started the reform ball rolling in 1984.
Most of New Zealand’s reforms have an economic policy dimension. And this Government does desire to take a more hands on approach to the New Zealand economy.
Nevertheless, most of the reforms – particularly those affecting the public sector – are not about actual economic policy outcomes, but about the processes through which Administration-mandated outcomes are delivered.
The last decade has demonstrated that the New Zealand public policy environment is more effective than it was previously in delivering the outcomes that have been required of it by Ministers.
Certainly, there is no mood in the new Administration to go back to the bad-old-days of the "Public Service Corridor Walk" that Roger Hall described in "Glide-Time".
It’s also clear that while the new Government plans to take less of a hands-off approach to the economy, they will also remain fiscally prudent.
The new Finance Minister, Dr Michael Cullen, has noted that while the new Government intends to spend more, it still expects to maintain substantial budget surpluses.
With the exception of continued reform to the labour market legislation I described earlier, the new Government has indicated no plans to change any of the pillars of New Zealand’s reformed public policy environment:
- The Reserve Bank will continue to operate independently to maintain price stability.
- The State Sector will continue to operate on the basis of existing structures, within the constraints of the State Sector and Public Finance Acts.
- The Government will continue to issue regular accurate and transparent financial reports and will continue to operate within the guidelines of the Financial Reporting and Fiscal Responsibility Acts.
- So, while the public policy scoreboard may end up looking different, the rules by which the game is played – that is to say, the essence of the reforms – will, by my assessment, remain the same.
[Conclusion]
Let me begin to draw things to a conclusion.
When New Zealand began its reforms – and you must remember we were in a recession in 1984 – the experts said it was totally flawed.
A letter was published in New Zealand’s major daily newspaper signed by 15 academic economists saying, "we wish to state in the strongest possible terms our view that in the present state of the economy, and in the midst of an international recession, the deficit cutting strategy is fatally flawed. It can only depress the economy further".
They were proved to be terribly, delightfully wrong.
The changes over the last 15 years have delivered solid results for New Zealand.
- After 23 years of deficit budgeting New Zealand is now in its seventh straight year of budget surplus.
- Despite a brief downturn during the Asian Financial crisis, the New Zealand economy has grown by about a third in the last decade. Between 1960 and 1980 our growth rate averaged a measly 1.4 percent.
- Inflation has been consistently between Zero and 2.7 percent since 1991.
- Unemployment dropped from 11 percent in 1990 to just over 6 percent now.
- Like the economy generally, New Zealand export earnings have grown by more than a third in the last ten years.
- Public debt – which hit 77 percent of GDP in 1987 is now less than 22 percent of GDP – and none of this debt is denominated in foreign currency.
The reforms in New Zealand were successful and have delivered New Zealand an economic and public policy environment that is vastly superior to what went before.
Of course the new New Zealand Government is going to make changes to the way things have been managed – this is what New Zealand voted for in the recent election.
But it would be unthinkable that we would turn our back on the benefits delivered by the reforms. There will be no turning the clock back.
I want to finish my comments today with two thoughts that I have spent a lot of time reflecting on.
The first is a remarkable story from New Zealand’s recent history.
On 2 October 1995, the price of a postage stamp went down – from 45-40 cents, where it has stayed ever since.
Without the dramatic change in policy in the previous 10 years, there is no way that this price reduction would have been possible. The Post Office would simply have remained a government department, perennially making losses, oblivious to the disciplines of competition and efficiency.
This sums up for me the effectiveness of New Zealand’s reforms.
My second closing thought is one of my favourite quotations. It sums up for me much of the philosophy underlying our reforms. It comes from Abraham Lincoln.
"You cannot strengthen the weak by weakening the strong.
You cannot help small men by tearing down big men.
You cannot help the poor by destroying the rich.
You cannot lift the wage earner by pulling down the wage payer.
You cannot keep out of trouble by spending more than your income.
You cannot further the brotherhood of man by inciting class hatred.
You cannot establish security on borrowed money.
You cannot build character and courage by taking away a man’s initiative.
You cannot help men permanently by doing for them what they could and should do themselves"
Thank you very much.
