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Fiscal Strategy

Page updated 15 May 2014

Fiscal policy is one tool a government has to achieve its economic and social objectives. The operation of fiscal policy is governed by the Public Finance Act 1989 (PFA).

The Act requires the Government to outline its fiscal policy intentions in the annual Fiscal Strategy Report (FSR). The FSR sets out the Government's long-term fiscal objectives relating to expenses, revenue, the operating balance, debt and net worth over a period of at least 10 years.

The Public Finance Act and Responsible Fiscal Management

The Public Finance Act 1989 (PFA) prescribes that the Government must pursue its policy objectives in accordance with the following principles:

(a) reducing total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future by ensuring that, until those levels have been achieved, total operating expenses in each financial year are less than total operating revenues in the same financial year
(b) once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues
(c) achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future
(d) managing prudently the fiscal risks facing the Government
(e) when formulating revenue strategy, having regard to efficiency and fairness, including the predictability and stability of tax rates
(f) when formulating fiscal strategy, having regard to the interaction between fiscal policy and monetary policy
(g) when formulating fiscal strategy, having regard to its likely impact on present and future generations
(h) ensuring that the Crown's resources are managed effectively and efficiently.

The PFA requires the Government to present, in each financial year, reports outlining Government's fiscal policy: the Budget Policy Statement (BPS) and the Fiscal Strategy Report (FSR). The BPS has a short run focus setting out policy goals that will guide the Government's Budget decisions and priorities. The FSR is presented with the Budget and must state the Government's long term objectives for fiscal policy over a period of at least 10 years and the Government's short term intentions for fiscal policy over a period of three years. The FSR must also provide projections of fiscal variables to show progress towards meeting the long-term objectives (Progress Outlooks).

In addition, the Treasury is required to publish, at least every four years, a Statement of the Long Term Fiscal Position. This has a horizon of at least 40 years and identifies how demographic and other changes may impact the fiscal position.

Fiscal Strategy of the Government

The current Government's fiscal goals - set out in the Fiscal Strategy Report 2014 – include:

  • returning to surplus in 2014/15
  • managing spending and revenue so that any changes in fiscal policy settings – and in particular changes to Budget allowances – do not have a material adverse impact on interest rates
  • reducing net debt to no higher than 20 per cent of GDP by 2020, and beyond 2020, maintaining net debt within a range of around 10 to 20 per cent of GDP over the economic cycle
  • effectively managing the size and composition of the Crown’s balance sheet
  • ensuring that the way Crown revenue is raised is efficient, stable and provides the right incentives within the economy, and
  • focusing on achieving better results as the main way of restraining future government expenditure.

Eliminating the fiscal deficit and reducing debt will help to:

  • restore the fiscal buffer against future adverse events and provide more options to deal with longer-term fiscal pressures,
  • increase national saving and support higher investment, and
  • reduce future borrowing and finance costs.

 

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