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Fiscal Strategy

Page updated 21 May 2015

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 2015 – include:

  1. Returning to surplus this year and maintaining surpluses in the future
  2. Reducing net government debt to 20 per cent of GDP by 2020, including repaying debt in dollar terms in 2017/18
  3. Further reducing Accident Compensation Corporation (ACC) levies on households and businesses
  4. Beginning to reduce income taxes from 2017 with a focus on low and middle-income earners, and
  5. Using any further fiscal headroom – including from positive revenue surprises – to get debt down to 20 per cent of GDP sooner than 2020

Beyond 2020, the Government intends to maintain net debt within a range of around 10 per cent to 20 per cent of GDP. Reducing government debt through higher public savings puts New Zealand in a better position to cope with the next economic shock or natural disaster. It helps to raise national savings, maintain credibility with international lenders, reduce finance costs and allow the internationally competitive sectors of the economy to grow.

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