Two days before Christmas Treasury Secretary John Whitehead announced a cleanout of his top ranks. This day of the long knives was a step in the Treasury’s bid to regain premier status under a government which wants a “step-change” in economic performance.
Whitehead replaced all four deputy secretaries with two new deputy chief executives, one from the Prime Minister’s Department and one from Britain, and two new deputy secretaries. He appointed a chief economist, also British. Crown business and “state sector performance” monitoring got a new boss. There is a new chief accountant.
While the reconstruction was not ministerially mandated, Bill English is known to have been privately unenthusiastic about the quality, suppleness and imaginativeness of the Treasury’s research, thinking and advice after three decades of formulaic free-market neoliberalism and a decade of Labour-led governments’ dilution of its influence.
English set himself an ambitious task: to correct a badly unbalanced economy, reflected in very high indebtedness to foreigners, to lift its capacity to pay better wages through investment and innovation, to reform a distorted and counterproductive tax system, to ease the business regulatory environment and to redefine the state’s appropriate share of the economy.
Whitehead (whose contract has 15 months to run) set himself a goal some time back of getting his mandarins more externally engaged and lifting No 1 The Terrace back into a leadership role in major policymaking.
Hence the tax working group, serviced by officials but drawn from outside the government — Whitehead (under Michael Cullen) initiated the February 2009 conference which prompted the group’s appointment. Its report last week, while not radical, has given English and John Key the ingredients for a “world-class tax system” they allege they want.
The capital markets development taskforce, which Lianne Dalziel set up and which reported last month, was also private-sector, though serviced by officials.
English has gone further down the private advice route, with an unofficial kitchen cabinet of non-government economists and an official Infrastructure Advisory Board of outsiders. He drove the engagement of private sector advisers for ministers on managing budgets. His personal economic adviser, Paul Dyer, is an outsider, formerly of the two biggest funds managers, AMP and the Superannuation Fund.
But ad hoc private sector groups have limits. English needs a Treasury that is up with modern international economic theory — in part the rationale for the new post of chief economist — and can apply that with rigour to local conditions in a rapidly changing global economy. Behavioural economists are challenging orthodox mathematics-friendly assumptions that people always rationally pursue their best interests. “Green growth” economics has still to take firm shape but if it does it would mesh well with the New Zealand brand.
Thirty years ago the Treasury had a special unit schooled in cutting-edge American free-market economic thinking which powered the 1980s reforms. Nowadays it is the Ministry of Economic Development which has on retainer Philip McCann, one of the world’s leading spatial economists, a branch of economics which seeks to answer why brilliant innovators are drawn to some (mostly big) places despite the internet’s assumed capacity to collapse distance (yes for routine activities, no for non-routine activities, McCann says).
But will the government welcome bright, risky ideas from Whitehead’s shiny new team? So far its messages have been mixed.
Key’s opening speech to Parliament on February 9 and English’s Budget in May will be the tests. This is Key’s big year, the year he makes — or ducks — the big decisions that will shape his government through this and the next term.
Key’s core test will be his response to the tax group’s recommendations, which leave him no excuse for timidity. If he decides to trust his antennae and instincts and use his huge political capital, wide acceptability and capacity to connect to build a genuine “world-class tax system”, he would likely carry the public (and nervy doubters in his cabinet) with him. Witness the lack of fuss over the Maori flag.
The Key who took large, well-calculated risks after thorough due diligence to accumulate a sizable fortune might have been expected to replicate that in politics. That younger risk-taking Key might also have recognised that this year’s big decisions are not about today’s issues but tomorrow’s: the post-crunch, China-rising, new-communications, mass-migration and maybe greening world. Old ideas won’t do, just as they didn’t do in the 1980s.
There are flashes of that Key in his off-the-cuff addresses. But more often a poll-focused Key has looked as if he is still doing due diligence on the politics, trying to work out the risk odds.
By May we will know how his calculations have turned out — and whether middle age has overtaken him.