Strengthening the Fiscal Responsibility Provisions of the Public Finance Act 1989
The fiscal responsibility provisions in the Public Finance Act 1989 (PFA) have served New Zealand well by focusing on prudent levels of public debt. However, the current provisions have little power to curb increases in spending once this debt objective has been achieved, and to ensure governments consider the impacts of fiscal policy on future generations.
To address these concerns, the Government is proposing a number of changes to the fiscal responsibility provisions of the PFA, which will be introduced later this year and should come into effect from the 2013 Fiscal Strategy Report (FSR). The proposed changes will require governments to:
- consider the impact of fiscal policy on the economic cycle
- set out their priorities for revenue, spending and the balance sheet
- take into account the impact of fiscal policy decisions on future generations, and
- report on the successes and failures of past fiscal policy.
Some of the proposed PFA amendments simply codify existing good practice to ensure it continues in the future. This includes the publication of a revenue strategy (Annex 1) and an investment statement.
Other amendments have been implemented into this FSR ahead of being a legislative requirement. This includes an assessment of the National-led Government's fiscal performance during its first term in office (pages 9 and 10).
This Budget, the Government is also committing itself to a spending limit. The spending limit restricts growth in core government expenses (excluding Unemployment Benefits, debt-financing costs, asset impairments, and natural disasters) to no higher than the rate of inflation and population growth.
The spending limit sets out an upper bound on spending. The Government's current fiscal strategy will result in core Crown expenditure being considerably below the spending limit for at least the next 10 years (illustrated in the "Short-term Fiscal Intentions and Long-term Fiscal Objectives" section).
The Government is consulting with other political parties about the possible introduction of a more formal spending rule.
