Ruth Richardson and fiscal austerity in New Zealand

Responding to finance minister Ruth Richardson’s May 1991 budget which cut government spending, 15 academic economists from the University of Auckland wrote a letter to the editor of the New Zealand Herald on 6 June 1991. It read: “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 and because of this it will be to a considerable extent self-defeating.”

In fact, strong real GDP and employment growth commenced from the time the letter was written. A 1995 article by Victoria University economists Kunhong Kim, Bob Buckle and Viv Hall dates the June quarter of 1991 as a trough in New Zealand’s business cycle for GDP. Real GDP in 1995 was 17% higher than in 1991. Unemployment fell from 11% of the labour force in September 1991 to 6.1% in September 1995.

Far from being self-defeating in fiscal terms, the outcome of the budget was to turn a deficit of 2.7% of GDP in the year to June 1991 into a surplus of 0.9% of GDP by the year ended June 1994.

That is from Roger Kerr.  For the pointer I thank Steve Hanke and Mark Skousen.  For a different point of view, here is Paul Krugman.


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