The Treasury today released a research paper that assesses the evolution and recent performance of New Zealand’s fiscal institutions and fiscal policy-making framework.
The working paper, entitled Fiscal Institutions in New Zealand and the Question of a Spending Cap, evolved out of work on the potential costs and benefits of a cap on the rate of growth in government spending.
The working paper, Fiscal Institutions in New Zealand and the Question of a Spending Cap, presents a range of indicators on New Zealand’s recent fiscal performance. It outlines the series of revenue surprises during the extended economic upturn of the last decade, the faster-than-planned repayment of net debt, and the drivers of the increase in government spending as a share of GDP since 2004. It also explains the evolution of the budget management process in New Zealand.
Drawing on international experience with spending rules, the paper examines how a cap could be designed to strengthen New Zealand’s fiscal policy framework. It also outlines the communication challenges and potential confusion that might arise from amending that framework to incorporate an explicit cap on total spending. The paper also traverses other measures for improving the management of government spending.
The Government announced in Fiscal Strategy Report 2010 that it would not introduce a formal cap on spending growth, as many of the benefits can be achieved through its $1.1 billion limit on the annual Operating Allowance. The focus is therefore on incremental and ongoing improvements to the current approach to managing expense increases.
New Zealand’s fiscal policy framework is centred on the Public Finance Act and its principles of responsible fiscal management that relate to maintaining prudent levels of public debt and running fiscal surpluses on average over time. That framework, combined with an extended period of economic growth, contributed to New Zealand entering the economic recession of 2008-2009 and the global financial crisis with historically and internationally low levels of public debt.
The views expressed in this working paper are those of the four authors – Tracy Mears, Gary Blick, Tim Hampton and John Janssen – and are presented to inform and stimulate wider debate.