Budget lessons from New Zealand


The reforming New Zealand Finance Minister, Ruth Richardson, was in London giving a lecture for Reform, and I went along. It was a refreshing call for honest and limited government, and why the benefits of that are worth the pain of the inevitable pruning back. Government has grown too big, too intrusive and too bureaucratic, she believes, and it has smothered personal freedom and responsibility. But electors are getting angry at working hard to create wealth, only to see the political elites making all the decisions on how to spend it.

Changing this requires radicalism, says Richardson. You need a team of leaders with a clear view of the proper role and limits of the state. You need to work out practical ways of devolving decision-making down to localities and families. You need to start early. And you need to show results. You won't get a second chance: "You can only use your political capital once," she says.

So what is on her agenda for reform? All those universal and middle-class benefits must go. The resources of the welfare state should be targeted on those it is supposed to help – the poor, not the middle classes who do so nicely out of it. You need to identify what the core functions of government are, and eliminate the clutter of all the rest. And for those core functions, you need to use market principles. There should be no easy presumption that schools, hospitals and the like can only be provided by governments. Let private suppliers compete with public suppliers, contract out functions to private and voluntary groups, and give users the budgetary and decision-making power.

Richardson is also famous for insisting on honest government finances – such as complete disclosure of the economic situation before elections: no more governments trying to pretend things are better than they are, no more oppositions smooth-talking us when they know they will have to make brutal cuts after an election. It needs an Office of Budget Responsibility, right enough: but, says Richardson, that body must ruthlessly safeguard its independence. Citizens, she thinks, should control the limits to the tax burden through referenda. Income from work or capital should be treated equally, and the tax system must be simple. Social benefits must not just be targeted, but should be time-limited, so that relying on state support is not a long-term option. Regulation should be based on principle and the rule of law, not the arbitrary rule of officials, however well-intentioned.

The Spending Review on 20 October will be the test of whether the UK government has understood these lessons of experience.