John Whitehead, Secretary to the Treasury
Secretary to the Treasury John Whitehead underscored in a speech yesterday the importance of open and informed debate about fiscal policy choices – and the importance of being transparent about the trade-offs implicit in those choices.
According to Mr Whitehead, "A number of fiscal strategies are possible, and reasonable - but it's not as simple as 'spend the surplus'”.
Mr Whitehead set out three areas for assessing fiscal policy options:
- Sustainability – the ability to keep doing what we're doing as time passes, including in the face of an ageing population. Maintaining current policy settings would imply big increases in government spending over time. Avoiding high debt levels will require difficult choices about taxes and spending in the future, notwithstanding existing pre-funding. But small changes made earlier will be felt less severely.
- Structure – choices about how we raise money, and how we spend it. Structuring policies in ways that support growth will give us greater choices in the future.
- Stability – the extent to which fiscal policy affects broader economic conditions. The government is a significant player in the economy, and the interaction between fiscal and monetary policy is an important consideration –- particularly when inflation is high. But it's only one factor, and there will be times when the benefits from making changes to spending and taxes justify some short term discomfort in terms of interest rates and the exchange rate being higher for longer.
Mr Whitehead acknowledged that in recent years, surpluses have been higher than they needed to be to meet the level of pre-funding set out in the government’s fiscal strategy. But it’s really forecasts of future spending and taxes which matter when debating options open to governments.
And choices about the size of the future surplus and other fiscal policy settings such as debt levels should be made in the context of a strategy that recognises future fiscal pressures and the trade-offs we will inevitably be faced with.
Mr Whitehead went on to outline possible characteristics of a coherent strategy.
“It would see ongoing operating surpluses, but at levels lower than we’ve seen recently – and the adjustment would be spread over several years. It would see changes in spending and taxes contribute effectively to the government’s objectives, and in particular, support growth. It would see ongoing efforts to improve value for money in the public sector, and see government net financial assets as a share of GDP continuing to rise over the next few decades. And it would see us start to debate the sorts of changes we need to make to address the growth in spending as our population ages and gets richer.
“But this is only one scenario. The point is that those decisions should be made and debated in the context of an integrated, coherent strategy. This will make it easier for people to make the long term decisions needed to deliver higher living standards.”
Mr Whitehead's speech is available on the Treasury's new-look website at www.treasury.govt.nz/publications/media-speeches/speeches/fiscalpolicychoices/.