A email debate with Max Rashbrooke, published in The Spinoff (Auckland), 6 October 2026
As election season debate inevitably focuses on the economy and spending, researcher Max Rashbrooke and The New Zealand Initiative’s Oliver Hartwich conduct their own debate on whether the next government needs to tighten its belt or loosen the purse strings.
To: max123
From: oliver456
Hi Max,
I guess we could play this according to the stereotype. I am the cold-hearted neoliberal for whom no state is small enough. You are the bleeding-heart progressive who always finds something else for the state to do.
Except we know each other well enough to know that we are not these caricatures. We are probably much closer than people who do not know us would believe.
Still, let me start with a question of definition. Can we even say what makes a state big or small, or does that change over time?
Take John Maynard Keynes, whom the left now treats as its patron saint. He reckoned that taxes of about 25% of national income were as much as post-war Britain could easily bear. Were he alive today, I might offer him a job at The New Zealand Initiative.
In 2019, the year of Jacinda Ardern’s Wellbeing Budget, core government spending was 28% of GDP. Seven years on, it is 32.6%, and we are told we have just lived through austerity. If this is austerity, it is remarkably well-funded.
Not all of the increase is ideology, of course. An ageing population will need more for super and health. But that still does not tell us where the ceiling is.
So, Max, what is your number? At what share of GDP is the government spending too much?
To: oliver456
From: max123
Hi Oliver,
Thank you for this elegant entrée to the debate – and for your wise warning against stereotypes. I occasionally encounter conservatives who think the ideal tax rate is always “less than I’m currently paying”, and I suppose I should avoid the parallel fate of arguing that the ideally sized state is always “larger than it is now”.
Conversely, we shouldn’t forget that Keynes was sceptical of “madmen in authority” who followed the dictates of “some academic scribbler of a few years back”. He wouldn’t have wanted his own edicts followed slavishly. And the few OECD countries that keep state spending under 25% of GDP are hardly paragons of good order and ever-increasing human development: the likes of Mexico (18%), Turkey (23%) and indeed the US (25%).
At the other end of the scale, the OECD’s biggest government, relative to its economy, is Denmark’s, consuming a whopping 43% of GDP. And the country is famously well-governed: Francis Fukuyama once described the task of statecraft as “getting to Denmark”.
All that said, I’m not sure the debate should start with the question, “What is the right number?” As a classically pragmatic Kiwi, I start by asking, “What needs to be done?” What public problems, in other words, does government need to solve?
There are, I think, plenty of public problems – collective issues not likely to be fixed by communities or markets – that the New Zealand government should address. (Indeed it would be a brave person who argued that the government is currently on top of all the issues it faces!) And if that is so, it is likely to need more resources to apply to the task.
To: max123
From: oliver456
Hi Max,
Fair enough on Keynes. He would not want to be followed slavishly. But he knew how powerful ideas are, and on that he and Friedrich Hayek agreed. Hayek even had a name for people like us, who pass those ideas on. He called us “second-hand dealers in ideas”.
One quibble, though. Your numbers for Mexico, Turkey and the US appear to be tax revenue. On IMF figures, the American government spends almost 38% of GDP. And for every Mexico there is a Switzerland, which spends 32% and runs rather well. Denmark spends 47%, by the way, but France and Finland spend 57%. Nobody talks about getting to France.
Still, I share your admiration for Denmark. In 2019, The New Zealand Initiative took a delegation of business leaders there. Over lunch, the chief executive of Maersk told us he paid a very high share of his salary in income tax and was happy to, because Danish healthcare and schools were excellent. Few in our group would have volunteered to pay more tax at home. They did not think our state spends their money that well.
Yet Denmark is no socialist paradise. It ranks among the 10 most economically free countries in the world. It has no statutory minimum wage and liberal rules on hiring and firing. And it got rich before it built its welfare state. As late as 1970, the Danish state spent less than 25% of GDP.
I also agree there are plenty of unsolved problems. But government is not the solution to all of them. Where it is, it does not automatically need more money. That would only follow if everything the state already funds deserved to stay.
Nor am I letting you off the hook on the number. Surveying the research on rich countries, Andreas Bergh and Magnus Henrekson found that a government 10 percentage points of GDP larger goes with annual growth between half a point and a full point lower. Beyond a certain size, the state crowds out the private activity that pays for it.
High-tax countries like Denmark get away with a big state because of high social trust and unusually free markets elsewhere. That trust took generations to build, and no government can create it by decree. We cannot become Denmark simply by wanting to.
So, Max, should the state not first show that it spends its current 32.6% well before it asks for more?
To: oliver456
From: max123
Hi Oliver,
We certainly are “second-hand dealers in ideas”. Statistics, too! I was indeed quoting tax revenues not spending (apologies) – although if the two are to balance (I live in hope…), then the former ultimately determines the latter.
I also note that the IMF numbers you quote for other countries are inconsistent with your 32.6% for New Zealand. (The IMF has us just shy of 42%.) Then there is the “core” spending vs “general” spending distinction. This exchange could, I fear, get lost in the thicket of numbers!
Setting all that aside, I’m unconvinced that larger governments harm economic development, at least within reasonable bounds. The famed economic historian Peter Lindert summarised his life’s research by noting, drily, “It is well known that higher taxes and [welfare] transfers reduce productivity. Well known – but unsupported by statistics and history.”
A 2011 meta-review by our own Treasury concluded that “no measure of government spending appears to affect growth in a significant way”. Indeed, much state spending – on high-quality infrastructure, or reducing poverty’s scarring effects on young children – is good for growth. And, I note with pleasure, you accept that high-spending Denmark has much to offer. (Including its exceptionally high GDP per hour worked.)
Your Maersk anecdote is intriguing; I too have heard well-off Kiwis say they want the state to run better before they entrust it with more funds. And I am not wholly unsympathetic here. I have previously argued that all programmes approved by Cabinet should be compulsorily evaluated, and that we should put frontline public sector workers in charge of finding efficiencies.
But I am wholly unconvinced that these efficiencies will save so much that we can forgo further spending increases. The Association of Salaried Medical Specialists has shown that our crisis-stricken health system gets roughly $4bn a year less than European ones do (adjusted for GDP). We spend half the OECD average on funding top-ups for poorer schools and welfare-to-work programmes. The Treasury estimates we could halve child poverty (which costs us c.$14bn a year) by spending $3bn extra a year on social services. The amounts needed for managed retreat and other climate adaptation measures are potentially vast.
These are, to me, quintessentially governmental expenditures: I do not think any other form of spending could effectively substitute for them. So, to answer your well-judged final question, I do not believe it is a choice between spending better and spending more. We will have to do both.
Over to you!
To: max123
From: oliver456
Hi Max,
It seems we are both second-hand dealers in statistics, and not always careful ones. You quoted tax for spending. I mixed core and general government. Call it one-all.
Your Treasury quote comes from a passage summing up some early studies. But the paper’s own conclusion is that “there is strong evidence that taxes reduce economic growth”. And you said yourself that taxes ultimately determine spending.
As for Peter Lindert, the economic historian whom you quote, he found that big welfare states do not seem to cost their countries growth. He calls it the “free lunch” puzzle.
Yet the catch is how those countries pay for it. According to Lindert, they tax wages and spending heavily, but savings and investment more lightly. He calls the mix “pro-growth”. But he also calls it “regressive”, meaning it falls hardest on ordinary earners. Denmark is the textbook case here, with a 25% GST on almost everything and a top income tax rate that starts at 30% above the average wage. Everyone pays, not just the rich.
Now, you mention health as an area crying out for more funding. People may find it surprising that we, the free-market New Zealand Initiative, hosted one of the architects of Obamacare earlier this year. But it was even more surprising to hear Dr Ezekiel Emanuel tell us that our New Zealand health system is “solidly middle” and that we spend “exactly par” with the OECD.
Our health workforce problems, he said, come from “inefficiency and maldistribution”, not a lack of doctors. He thought a little more money for salaries would be reasonable. Fair enough. But, Emanuel added, “more spending alone will not fix the system’s problems”.
Where you and I agree is on evaluating every programme Cabinet approves. It is one reason The New Zealand Initiative has called for more than a decade for an independent Parliamentary Budget Office. The Greens have long pushed for one too, and the last Labour government planned to set one up. I really hope we will finally get there in the next parliament.
Incidentally, and this might amuse you, I have been at this even longer. In 2007, when I still worked in London, I co-authored the proposal that became Britain’s Office for Budget Responsibility. Liz Truss sidelined it, and we all know how that ended for her. Wouldn’t it be nice to have such an office here?
I know this will be my last email as you are about to head overseas. I have enjoyed our exchange enormously, especially finding something we agree on. Safe travels, and have a great time.
To: oliver456
From: max123
Hi Oliver,
Now we have got onto taxation – a famously contentious subject, hardly inclined to generate agreement! I suspect that if taxes were that bad for growth, we would not find – as LSE researchers did in a large 2023 study – that tax cuts on high earners have no pro-growth effect.
OECD and IMF research last decade also suggested that reducing economic disparities – which relies partly on tax and spending – is good for growth, as more equal countries are more stable and have less poverty.
More generally, one can simply look not just to the Scandinavians, but also the Dutch and others, to observe the effects of high taxes and big governments, and the result looks pretty good. Large collective investments in health, education and welfare generate strong economies, high productivity, and low rates of social problems. What’s not to like?
I would concede one point: these states do not get there solely by taxing the rich more. The middle classes pay more, too. But as you earlier noted, they also get better public services in return.
Inland Revenue research, meanwhile, suggests our wealthiest citizens pay a tax rate of 9%, less than half the average Kiwi, mostly because they take their income as untaxed capital gains. A well-designed, comprehensive capital gains tax – to which I know from earlier debates you are not opposed! – could thus raise billions of dollars a year, with no discernible negative effects.
I am entertained by your long engagement with parliamentary costings units, and glad we have found agreement there. But I have still not heard anything that makes me think a touch more efficiency could pay for the massive spending demands I have previously outlined.
As you noted in your first message, “An ageing population will need more for super and health.” Trying to push spending back down to 30% of GDP, which would be near the lower end of the OECD, seems foolish in this context. Nor do the various forms of privatisation magically create extra money: they just require people to pay via user fees rather than through taxation, and the former will often be less efficient and equitable than collective provision.
We live in risky times, globally speaking, and as various thinkers have observed, governments are the ultimate risk-management mechanism, a way to cushion blows beyond an individual’s control and share the burden of losses. In future we are likely to need more, not less, of this insurance.
But I hope we can also have more, not less, of this kind of exchange. I too have enjoyed it immensely. Until next time, then!
