Kiwis are tolerating moderate austerity

22:17, May 18 2012
John Key
TESTING THE AFTER: Prime Minister John Key is due to visit Britain early next month and will no doubt catch up with his old mate, David Cameron, to gauge the public mood in the wake of Cameron's 83 billion (NZ$172.8b) savings package, which has included slashing 490,000 public sector jobs and a rise in the retirement age from 65 to 66 by 2020.

Can National keep delivering austerity budgets and still win elections?

The experience overseas suggests not – but then comparing New Zealand's plight with the likes of Europe, where cuts have driven hundreds of thousands of people to the streets in protest, is like comparing a yappy poodle with a snarling alsatian.

In Greece, for instance, austerity measures such as property taxes and the suspension of 30,000 civil servants on partial pay has caused a political crisis, sparked a wave of crippling strikes and threatened to drive the country out of the eurozone. Greece faces years more of austerity measures under the stringent terms of a bailout package and unemployment is close to 20 per cent. No wonder the Greeks are feeling angry.

In Italy, Silvio Berlusconi was toppled after a two-decade reign over a 70 billion (NZ$116b) package that included increases in healthcare fees, and cuts to family tax benefits and pensions. But even under a new government the fallout from the great recession continues – austerity remains the order of the day with measures including higher wealth taxes, a rise in pension ages and a public sector hiring freeze.

The Irish tiger has been similarly humbled and there have been 5 per cent cuts to public service pay packets, social welfare has been reduced, their GST equivalent, VAT, rose to 23 per cent and police stations have been closed.

In Portugal and Spain spending cuts have been matched by crippling unemployment of well above 20 per cent at times, with young people hit particularly hard.


Britain, even though it looks positively stable compared with many of its European counterparts, hasn't escaped the pain. The Conservative government led by David Cameron has seen its popularity tumble over the biggest cuts in state spending since World War II.

Prime Minister John Key is due to visit Britain early next month and will no doubt catch up with his old mate, Cameron. He will be able to gauge firsthand the public mood in the wake of Cameron's 83b (NZ$172.8b) savings package, which has included slashing 490,000 public sector jobs and a rise in the retirement age from 65 to 66 by 2020.

Key may also ponder how quickly the public mood can turn against austerity measures even in the face of a general public appetite for restraint.

So far National's savings drive is austerity with a small "a" – there have been cuts, although nothing on the scale of those seen in Europe, largely because we have already been through the pain of cutting our coat to suit our cloth. Give or take a bit here and there, successive government's have run comparatively tight ships since the restructuring of the 1980s and 1990s – and that has allowed National to take a far gentler path back to surplus. It has shifted around and reprioritised about $9b in spending, and while that has caused pain on a personal level to thousands of public servants who have lost their jobs, there has been no obvious or widespread loss of services.

Sacred cows such as Working for Families and interest-free student loans have been tweaked, without being savaged, and while KiwiSaver has been a bigger casualty of the Government's savings drive, it continues to attract generous government subsidies.

There are signs that things are getting tougher; in the slew of pre-Budget announcements ahead of Budget day next week, the tradeoffs have been much more explicit than previously – and deliberately so in some cases. The $2 hike in prescription charges announced by Health Minister Tony Ryall this week, for instance, was presented as a necessary evil so extra money could be found to fund more cancer services and elective surgery.

With the rise capped at a maximum $40 per family a year, most people would consider that reasonable.

Key has signalled more such measures in the upcoming budget. He has not spelt out which areas might be subject to more user-pays, but areas in which the Government is known to be looking at tweaking the tax system include the extent to which bach owners will still be able to leverage off the tax system by renting them out for a few weeks a year. There is also work being done on perks such as company cars.

But while these sorts of measures might be an annoyance, they do not cause widespread pain.

And in a perverse way, Europe helps Bill English's cause. It maintains a sense of crisis while the sight of workers marching in the streets only underscores the gentle and low-fuss nature of our own austerity drive.

This is why Labour has struggled so far to run a coherent argument against National's management of the books – the danger has always been that protesting any cuts to date look not only shrill, but profligate. To voters, less is more at the moment.

But where the rubber might start to hit the road is in measures such as this week's increase in class sizes, which brings the cost-cutting drive far closer to the average Kiwi home than most of the other measures to date.

It resonates in a way that restructuring obscure government departments never will.

A quiet revolution in the public service, meanwhile – more contact centres, fewer bums on seats in the regions – could also start to sheet home the shape of the cuts to the public service.

But National has played smart to date, helped along no doubt by the presence of old hands such as English and Ryall, who wore the backlash of cuts in the 1990s and know how it feels to fall out of favour with the electorate when your government starts to look too mean. In 1999, that backlash enabled Labour to win an election on the back of promises to restore the public service, reduce user-pays and raise taxes on the wealthy. It took nine years and a world-wide recession for the pendulum to swing back in the other direction.

The pendulum will eventually swing against spending cuts as well, but that tipping point has not yet been reached. And unless next week's Budget breaches Bill English's well-established no-surprises rule, that probably won't come next week.

The Press