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Treasury

by Malcolm McKinnon

From humble but vital beginnings as the government’s bookkeeper, Treasury has grown to have a major influence on the economic management of New Zealand.


The Treasury, 1840 to 1935

New Zealand’s Treasury department was established in 1840 as part of Lieutenant Governor William Hobson’s administration, along with a customs department and a colonial secretary’s office. Its longevity is testimony to the indispensable nature of the work of keeping the government’s accounts. However, the Treasury has gone through many different phases since 1840. At times it has been primarily a bookkeeper; at other times, notably in the 1980s, it has wielded immense influence both within the government and in the wider society.

Follow the money

Lieutenant Governor William Hobson embarked from Sydney on the Herald on 19 January 1840, charged with establishing a colony in New Zealand. How was he to pay for this enterprise, or indeed pay for himself? The British government lent £5,000, of which £3,000 was deposited to the credit of the Bank of Australasia in Sydney. The balance was gold coin. On 16 January George Cooper, just appointed colonial treasurer, informed Hobson that ‘the money is to be taken out of the Treasury chest at Six o Clock tomorrow morning and ... taken on board immediately after in strong boxes provided for it.’1

A modest organisation

Through the 19th century the senior official was the colonial treasurer, who carried out much of the work. In 1856 the treasurer became a minister in a cabinet government, but remained directly responsible for overseeing the accounts, preparing an annual financial statement and a budget for the forthcoming year, exactly as the treasurer of an incorporated society might do in the early 21st century.

Treasury kept the books but had neither the resources nor the authority to police spending. That was the task of the comptroller and auditor general, the office held for over 30 years by former politician James FitzGerald.

Bookkeeper or beast of burden?

Colonial Treasurer Charles Richmond addressed Parliament in May 1858 on his delay in presenting a financial statement: ‘The mechanical difficulties were very considerable, and, when honorable members desired to have everything at once, they forgot the amount of work to be accomplished. … He therefore hoped that honorable members would have a little mercy, and not ride the willing horse to death.’2

In 1866 the Treasury had a staff of nine in Wellington and 14 outside Wellington (a sub-treasurer in each province, and six others). The abolition of the provincial system in 1876 put an end to the sub-treasurers, but the staff in Wellington steadily expanded to about 40 in 1880.

The tasks of government expanded in the 1890s – but Treasury’s influence did not. Major departments such as lands, labour, railways and post and telegraph remained firmly in the hands of their ministers and heads of department. Surpluses underpinned the system – from 1892 to 1908, revenue each year exceeded expenditure by a substantial margin.

Treasury influence grows, 1914–35

The Treasury raised £43 million in New Zealand to finance the country’s war effort in 1914–18. This, coupled with the forceful personality of Treasury Secretary G. F. C. Campbell, enhanced the department’s role. Campbell’s successor, James Esson, was equally influential in the harsh fiscal climate which accompanied the post-war recession of 1921–23. Treasury’s rise in status coincided with the rise of accountancy, which had been statutorily recognised as a profession in 1908.

Through the rest of the 1920s Treasury collaborated with the tax department, with Parliament’s public accounts committee and with business interests in seeking to apply business practices to government commercial enterprises, in particular the Post Office and the railways. Treasury also lobbied for a central bank, which could be expected to follow ‘sound’ money policies.

Treasury was able to secure the government’s endorsement of a role it had first played in the post-war downturn, that of surveillance over all government spending. A cabinet minute of 13 October 1930 stated that new proposals being submitted for ministerial or cabinet consideration were to be accompanied by a Treasury report.

Going up, going down

G. F. C. Campbell was the last secretary to the Treasury to be ‘promoted’ to auditor general on departing the Treasury – a position in which he served from 1922 until his death in 1937. Subsequent auditors general were drawn from the upper but not the top ranks of Treasury officials – control of public finances had shifted from Parliament to the bureaucracy.

Treasury gained this role as the fiscal implications of the economic depression hit home, with a £3 million deficit in the government’s accounts expected for 1930–31. Over the next three years Treasury’s senior officials were at the heart of government efforts to balance the budget, including the massive expenditure cuts of 1932. Treasury was less happy with emergency measures that seemingly breached commercial practice, such as mortgage relief, near-compulsory conversion of loans to lower interest rates, and government intervention in setting the value of the New Zealand pound.

Footnotes
  1. Quoted in Malcolm McKinnon, Treasury: the New Zealand Treasury, 1840–2000. Auckland: Auckland University Press in association with the Ministry for Culture and Heritage, 2003, p. 25. Back
  2. New Zealand Parliamentary Debates, 1856–58, p. 457. Back

Treasury and the welfare state, 1935–1980

A new government

The election of a Labour government in 1935 transformed the political and human landscape in which Treasury operated. Not one member of the new government had held office before and some of them had been imprisoned for sedition in the First World War. They were committed to socialism – albeit undecided about the exact form that should take.

However, through the 14 years of Labour government, the relationship between department and government was cordial. In the person of Bernard Ashwin (assistant secretary then secretary), Treasury had a chief determined to get on with the government. Ashwin recognised that if the government lacked confidence in him, he would only forfeit influence.

It suited the Labour government to maintain ‘Treasury control’ – the role the Treasury had acquired in 1930 of reporting on all new policies.

Snooker and cabbages

Bernard Ashwin was known for his skill in negotiation. He once allowed a decision on an extra quarter-penny in the price of wartime butter for the UK to be settled by a snooker game. When negotiating wartime financial terms with the United States, Ashwin talked about cabbages on the family farm for supply to US armed forces. The vegetables were a metaphor for New Zealand’s contribution to the war effort. ‘If ever a New Zealander starts talking about cabbages’, one US negotiator was heard to say, ‘you might as well give him what he wants and save your time.’1

Bernard Ashwin

Ashwin and the government did not always agree. Ashwin vigorously opposed Labour’s proposed health scheme, which he felt would be unsustainable. He probably did not approve of Finance Minister Walter Nash’s decision to revalue the New Zealand pound to parity with British sterling in 1948 – a decision Nash made entirely on his own.

Ashwin was most influential between 1942 and 1945 (the second half of the Second World War), when he, along with William Marshall (representing employer interests) and Federation of Labour president F. P. Walsh, ran the economic stabilisation commission and effectively the entire economy. With the return to peace this economic co-ordination waned. It was revived in the 1950s in the form of an officials’ committee on economic policy reporting to a cabinet committee on economic policy. Both were serviced by Treasury.

Fictionalising Henry Lang

One-time Treasury employee William Maughan wrote a novel about the department, featuring a thinly disguised portrait of Secretary to the Treasury Henry Lang: ‘Carter wondered about [him] as he made the tea. Benjamin Kohl was all right once you really got to know him but did anyone know him? After all you could hardly say you knew a person if you didn’t know what school he went to. Come to think of it, no one even knew where he came from. Some said he was the son of a Lebanese scrap merchant, others a Peruvian … there was no doubt the man was a foreigner. He was olive-coloured, tricky and wore rings. What’s more he played the fiddle and listened to the National Orchestra. No good ever came from people like that.’2

Henry Lang

Henry Lang, secretary to the Treasury from 1969 to 1976, took the process further, making Treasury not just one of a number of agencies contributing to economic policy advice but the lead one in what was known commonly as ‘economic management’.

Lang’s most important relationship was with National Party politician Robert Muldoon, who was minister of finance from 1967 to 1972 and from the end of 1975 (when he was also prime minister). Lang also worked closely with the Reserve Bank and with the semi-official Monetary and Economic Council (chaired by close friend and Victoria University professor of money and banking Frank Holmes).

Economic management in action

Economic management was a complex task. Growth strategies which might allow the economy to escape its ‘balance of payments constraint’ collided with policies designed to deal with that constraint in the short term but liable to trigger unemployment or inflation. ‘The price-wage spiral is rapidly reaching the point where our competitive position in export markets will be undermined,’ argued a 1970 Treasury report. ‘Demand for imports will rise to unmanageable proportions … fiscal policy now needs to be tough.’3

The most severe test of economic management came about as a result of external circumstances – the dramatic fivefold increase in the oil price in late 1973, which plunged New Zealand’s balance of payments into massive deficit. The Labour government opted for borrowing rather than deflation or devaluation, but the need to address domestic economic management brought Treasury and the government into alignment.

National was elected in 1975 and embarked on a deflationary policy which Treasury broadly supported. This was coupled with an incomes policy seeking to relate incomes to movements in wages and prices, which was more or less personally negotiated by Muldoon with Tom Skinner, president of the Federation of Labour.

Liberalisation or ‘Think Big’?

Under Noel Lough, secretary from 1976 to 1980, Treasury advocated liberalisation as the best way of surmounting economic difficulties. In the wake of the 1978 election the government implemented a number of Treasury-supported measures including a flexible (but not floating) exchange rate, fewer controls on overseas investment, deregulation of the meat-freezing industry and liberalisation of restrictions on shop trading hours from 1980.

Treasury also advised on the major investment projects, collectively called ‘Think Big’, that were designed to make New Zealand more self-reliant in energy and less reliant on petroleum from the unstable Middle East. Treasury cautioned against commitment to projects where long-term profitability was debatable, but its opinions made little headway given the support from Prime Minister Muldoon (also Treasury’s own minister), and the newly formed Ministry of Energy and its minister, Bill Birch.

Footnotes
  1. Quoted in Malcolm McKinnon, Treasury: the New Zealand Treasury, 1840–2000. Auckland: Auckland University Press in association with the Ministry for Culture and Heritage, 2003, p. 176. Back
  2. William Maughan, Good and faithful servants. Feilding: Waiata and Imperial Publishing Company, 1974, p. 23. Back
  3. Quoted in Malcolm McKinnon, Treasury: the New Zealand Treasury, 1840–2000. Auckland: Auckland University Press in association with the Ministry for Culture and Heritage, 2003, p. 245. Back

Economic management since 1980

Changing definitions of economic management

In the 1960s Treasury took on the task of what was called economic management alongside its longer-established role of financial management. In the 1980s the idea of economic management changed dramatically as confidence in the ability of government to ‘manage’ the economy faltered. To varying degrees, economists, officials and politicians returned to the idea that economic decision-making should be left to the individuals, firms and state-owned businesses that made up the economy rather than ‘second guessed’ by government.

1981–84

In 1981 election briefing papers Treasury had argued more forcefully than before that the price system had not been allowed ‘to reflect sufficiently the true worth to the country of the resources employed in many areas.’1 However, Prime Minister Robert Muldoon imposed a wage-price freeze as an anti-inflationary measure. The 1984 election campaign and result (a Labour Party victory) precipitated a run on the dollar, which was then devalued.

Thatcher, Reagan and anti-nukes

Treasury’s economic strategy in the 1980s is often identified as ‘Thatcherite’ or ‘Reaganite’ – influenced by the economic-liberalisation policies pursued in the United Kingdom and the United States respectively. However, in contrast to British Prime Minister Margaret Thatcher and US President Ronald Reagan, Treasury’s stance was little influenced by social conservatism and patriotism. It co-existed quite happily with the fourth Labour government’s anti-nuclear weapons stance – despite the difficulties this created with traditional allies.

1984–87

The new minister of finance, Roger Douglas, disliked economic privilege, whether exercised by governments, businesses or workers. This overlapped with Treasury’s support for liberalisation.

Between 1984 and 1986 Treasury officials drove dramatic reductions in industry protection and assistance. The price of the New Zealand dollar was left to the market (‘floating’). Taxes were lowered (leading to less tax avoidance) and made more consistent, including a universal goods and services tax – GST – initially set at 10%.

1987–90

Labour’s re-election in September 1987 gave Treasury an opportunity to advance both economic liberalisation and the reform of government, but many Labour supporters were unconvinced.

Stormy weather

Forecasting was one area where Treasury got into trouble on a number of occasions, for instance when its forecast budget deficit for 1988–89 ballooned from an estimated $1.8 billion. Minister of Finance Roger Douglas commented, ‘We’d done all this work and we felt we’d got on top of the position when all of a sudden we were faced with this deficit of $3.2 billion.’2 After he’d made the blowout public, Prime Minister David Lange was asked, ‘If a manager in a private enterprise made an error in his forecasting of that scale, he’d either be down the road or in receivership so quickly you wouldn’t be able to see him. Why shouldn’t that apply to Mr Scott [Treasury secretary Graham Scott] at the Treasury?’3

A further tax (and benefit) reform package was worked out, in part within Treasury, but Prime Minister David Lange announced in January 1988 that the changes would not proceed. With other differences mounting up, Douglas resigned 11 months later.

Treasury supported the Reserve Bank Act 1989, which gave the bank independence from government policy. It shared in the unpopularity fostered by the bank’s anti-inflationary monetary policy and consequent high unemployment.

1990–93

The National government elected in October 1990 passed the Employment Contracts Act, which deregulated the labour market on lines that Treasury wanted, but the law was mostly devised and implemented by the Labour Department, with Bill Birch now its minister.

More brickbats

Treasury’s involvement in, and its association in the public mind with, the 1990–91 cuts in public spending and in benefit rates deepened its unpopularity. It was attacked for what was seen as inappropriately lavish spending on the Treasury secretary’s office and a too-generous pay package for economic analysts – which was subsequently withdrawn.

Minister of Finance Ruth Richardson wanted to both cut government spending and ‘redesign’ the welfare state. The former involved Treasury in two main phases – the announcement in December 1990 of the ‘economic and social initiative’ and the 1991 budget in May. In the six weeks leading up to the December announcements Treasury produced 39 substantial ‘budget’ reports.

1993–99

The Fiscal Responsibility Act 1994 attempted to bind governments to fiscal balance, in the same way that the Reserve Bank Act 1989 had embedded a ‘sound money’ policy.

Bill Birch followed Richardson as minister of finance at the end of 1993. He was sympathetic to the ‘Treasury line’ promoting international linkages, a more productive labour force and a competitive and entrepreneurial economy. Birch, a key ally of Prime Minister Jim Bolger, remained minister until the defeat of the National-led government in the 1999 election.

1999–2008

The Labour-led government elected at the end of 1999 emphasised ‘inclusive’ growth. Both Finance Minister Michael Cullen and Prime Minister Helen Clark kept Treasury at arm’s length. A variety of measures were pursued despite Treasury scepticism, for example the Working for Families tax and benefit package.

The economic climate was relatively benign and there was stability at the top in the staff of both the department and of the minister and his office. The Treasury briefing for the incoming government after the 2008 election saw productivity primarily in micro-economic and regulatory terms, much as it had in the 1990s.

2008–11

The election of a National government in October 2008 coincided with the global financial crisis – although New Zealand’s economy had in fact suffered a downturn earlier in the year. Through the crisis Treasury managed the retail deposit guarantee scheme, introduced late in 2008 to protect the bank deposits of ordinary New Zealanders, and organised a short-term credit guarantee for exporters through the New Zealand export credit office.

In its first ever statement on the long-term fiscal position, at the end of 2006, Treasury expected government budget surpluses to last 25 years – but by 2008–9 the government’s accounts were $5.9 billion in deficit. Treasury managed a borrowing programme to fund the deficit.

Micro-economic strategy was longer-term. The tax working group, which sought to rebalance tax policy, though at arm’s length from Treasury, was strongly supported by it. Treasury managed the establishment of a Productivity Commission which started operations in April 2011.

Footnotes
  1. Quoted in Malcolm McKinnon, Treasury: the New Zealand Treasury, 1840–2000. Auckland: Auckland University Press in association with the Ministry for Culture and Heritage, 2003, p. 303. Back
  2. Quoted in Treasury, p. 338. Back
  3. Quoted in Treasury, p. 343. Back

Treasury and the state sector since 1980

From the 1960s computers had opened up new possibilities not just for the control of public spending but also for evaluating spending, though practice proved more difficult than the theory, in part because governments frequently overrode Treasury advice.

Managing government-owned businesses

One consequence of the ‘Think Big’ programme of 1979–81 was to turn attention to the management of government business activity. It was argued that the market would ensure efficiency in ways that governments could not.

The State-Owned Enterprises Act 1986 was implemented by the State Services Commission but informed by Treasury thinking and advice. Departments such as Forestry and Lands and Survey were broken up into commercial arms (corporations) and service arms. The Ministry of Works was completely ‘corporatised’.

Selling government businesses

Between 1988 and 1993 many corporations – among them Petrocorp, Postbank, Air New Zealand, New Zealand Steel, Telecom, the Bank of New Zealand and New Zealand Rail – were sold to private interests. For governments the immediate appeal was cash. For Treasury it was to overcome a contradiction – for many Treasury advisors ‘corporatisation’ was an unsatisfactory halfway house, because the government was the only shareholder and a lender of last resort. But after 1993 the pace of privatisation eased, in part because there was less to privatise.

State-sector reorganisation

The State Sector Act 1988 and the Public Finance Act 1989 aimed to enhance efficiency in the core state sector by devolving management and financial responsibility. Again, Treasury concepts, advice and officials drove it.

Pushing the envelope

In the mid-1990s Treasury reckoned on a figure of around $1 billion to meet all claims under the Treaty of Waitangi redress process, and the government settled on this as a guideline. Protests erupted throughout the country over what became known as the ‘fiscal envelope’. Nonetheless, major settlements were reached with Tainui and Ngāi Tahu in 1995 and 1996. In the mid-2000s Treasury was again involved in treaty matters, notably the financial package underpinning the central North Island forests settlement.

Treasury itself changed. The establishment of the Debt Management Office (DMO) professionalised the management of government debt. Decentralisation ended Treasury’s role as the accounting agency for central government. The number of staff doing routine accounting (rather than investigative work) fell from 100 to just six, and by 1991 around half the staff (totalling about 330) were economic or financial analysts. Consistent with the spirit of the age, Treasury also grappled with gender and ethnic representation within its own ranks.

Redesigning the welfare state

Treasury endorsed the reform of the welfare state promoted by the National government elected in 1990. National set up Crown health enterprises – a health-sector equivalent of corporatisation – but they were unpopular with interest groups. Treasury sought more school autonomy and parental choice in education but these moves were also resisted.

Treasury saw universal national superannuation, introduced by the National government in 1975, as a legitimate target for reform, but for governments it was a ‘no go’ area. Other benefits were cut – widening the gap between benefits and wages was expected to encourage beneficiaries into work.

1999–2011

The Labour-led government that took office at the end of 1999 did not share Treasury’s sceptical view of state-owned businesses. A majority shareholding was acquired in Air New Zealand after business difficulties brought it to the brink of bankruptcy in 2001. Mindful that all trading banks were overseas-owned, the government set up Kiwibank, piggybacking a branch network on the back of New Zealand Post outlets. The rail network was repurchased in 2004 and the rolling stock in 2008, at which point KiwiRail was established to run both. Labour replaced Crown health enterprises with elected district health boards.

The National-led government that took office at the end of 2008 did not reverse these decisions. However, Treasury was encouraged to take the lead in ‘improving state sector performance’, along with the two other central agencies, the Department of the Prime Minister and Cabinet and the State Services Commission – thus re-establishing patterns from the 1980s and 1990s.

A National Infrastructure Unit established within Treasury was committed to developing a national infrastructure plan which would present ‘a high-level view of New Zealand’s infrastructure needs’ up to around 2030. It was the first time the state sector had taken an overview of infrastructure since the disestablishment of the Ministry of Works in 1987.


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How to cite this page: Malcolm McKinnon, 'Treasury', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/treasury/print (accessed 16 October 2018)

Story by Malcolm McKinnon, published 20 Jun 2012