Are we really getting back to "normal"?
Colin James's column for the Press for 13 March 2010
The Reserve Bank again flagged on Thursday that it will start raising its official cash rate mid-2010 or thereabouts. We are getting back to "normal". Or are we?
The Clark government thought "normal" was the post-2000 boom when the Treasury's revenue estimates were falsified monthly by waves of unexpected cash (actually at base funded by excessive consumer and house-buyer borrowing). So, claiming Treasury authority for its view, it spent up, in part to outbid John Key's 2005 promise of cornucopian tax cuts.
Then came the 2007-08 earthquake. We fell off the alpine surpluses into swampy deficits.
That has given Bill English both a mission -- to downsize the state -- and a rationale -- to keep the lid on tight in case the world sours again.
For 15 months English has been pushing public service bosses to reprioritise activities, drop lower-priority ones, find efficiencies within their enterprises, pool resources such as IT and contract out. In December he talked of a spending cap in future budgets. "Lead assessors" are combing departments' management practices. A productivity commission, coming soon, will get into the act.
Anne Tolley's $25 million cut in supposedly useless head office Ministry of Education staff fits the English bill -- though she understated the proportion her cut represents of "head office" by including the special education part which is concerned mainly with delivery.
Another downsizing is to shovel some small agencies together or into bigger ones.
There is good reason to do some of that. As John Key said on Monday, this country has many more agencies than most comparable countries. That is the legacy of Treasury agency theorists in the 1980s, some of whom are advising this government, who separated out the policy, regulation, funding and delivery activities into distinct agencies. That left the Ministries of Transport and Justice below critical mass.
The Clark government put some bits back together, notably Work and Income and Child, Youth and Family back into then skinny Ministry of Social Policy, special education back into the Ministry of Education, some justice elements back into the department and the roads agencies into one entity.
This week's move to link the science ministry, which does policy, and foundation, which does funding, makes sense if the Crown research institutes taskforce's funding proposals are implemented.
But there are other factors than cost or a tidy organisation chart.
Pushing Archives and the National Library into the ministry of everything else (alias the Internal Affairs Department) to save some accounting and IT shekels (which could be done without mergers) risks compromising their distinctive, important roles as keepers of history and heritage.
Folding the State Services Commission into the Department of Prime Minister and Cabinet, a proposal which surfaced in February, would strike at a core constitutional principle established in 1912 -- a public service independent of patronage-prone politicians.
Murray McCully's shunting of New Zealand Aid back into the Foreign Ministry last year ignored the modern concept of aid as having distinct objectives beyond diplomacy and trade. His next move, which went to a cabinet committee in February, is a New Zealand Inc linking offshore activities.
Moreover, while reorganisation can cut costs and improve management, there is a downside: it puts jobs on the line, damages morale, temporarily reduces productivity, sometimes compromises operational capacity and loses institutional knowledge, forcing the costly reinvention of many wheels.
The Health Department's repeated reorganisations are an example. Since 2008 it has gone through yet another upheaval. The chief executive bailed out this week.
But in behind all this is a gnawing doubt English cannot dismiss: we can't be sure the world is heading back to "normal". (Though Labour, pushing more spending, is acting as if it is sure.)
China and most of Asia are doing fine, though some distortions are developing and resource constraints lie ahead. The United States, Japan and Europe have to unwind big fiscal and monetary imbalances and that unwinding will slow their return to full, or even reasonable, economic health.
At home consumer credit and spending are weak and household balance sheets are still distorted by the 2000s debt binge. Business is not yet investing, harbouring reserves against another quake. The banks are typically requiring stronger security for loans and charging far above Bollard's super-low official cash rate.
At most total output will only get back to 2007 levels in the September quarter. Even then, because the population rose by 2.8 per cent between June 2007 and December 2009, there will still be less per person.
And even if there is not another shock, "normal" -- when we get there -- may not be what "normal" was. The world has changed and we still don't know exactly in what way.
So the pressure will stay on English and on public servants.