The Treasury

Global Navigation

Personal tools

Treasury
Publication

New Zealand's Long-Term Fiscal Position [June 2006]

2   Fiscal Responsibility

This Statement is part of a suite of documents that the Public Finance Act requires the New Zealand government and its advisors to produce.[1]

The Act requires regular fiscal reporting, including fiscal strategy reports, budget policy statements and economic and fiscal updates. The reporting requirements promote fiscal transparency. The requirements of the Act are based on international best practice.

Part 2 of the Public Finance Act, which covers fiscal responsibility, is founded on two key planks: increased transparency and greater accountability. It achieves this by requiring governments to be explicit about their long-term fiscal objectives and short-term fiscal intentions, in line with the principles of responsible fiscal management. It also requires governments to report on a wide range of economic and fiscal information.

What is fiscal transparency?

Fiscal transparency is the full disclosure of all relevant fiscal information in a timely and systematic manner.

It has been described as “. . . openness toward the public at large about government structure and functions, fiscal policy intentions, public sector accounts, and projections. It involves ready access to reliable, comprehensive, timely, understandable, and internationally comparable information on government activities … so that the electorate and financial markets can accurately assess the government’s financial position and the true costs and benefits of government activities, including their present and future economic and social implications.” (Kopits and Symansky, 1998)

Principles of responsible fiscal management and reporting

The Act requires the government to pursue its policy objectives in accordance with the following principles:

  • 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
  • once prudent levels of total debt have been achieved, maintaining these levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues
  • 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
  • managing prudently the fiscal risks facing the government
  • pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.
  • The Act also imposes regular fiscal reporting obligations on Ministers and the Treasury. The reports and statements required include:
  • an annual fiscal strategy report
  • an annual budget policy statement
  • a periodic statement on the long-term fiscal position
  • regular economic and fiscal updates
  • an annual statement of tax-policy changes.

A key counterpart of these reporting requirements is parliamentary scrutiny of these reports and statements.

The current Government’s long-term fiscal objectives are set out in the Fiscal Strategy Report accompanying the 2006 Budget. Accompanying projections indicate progress towards these objectives. The Fiscal Strategy Report also states what level of debt the Government considers prudent and the timeframe for achieving the objectives.

In brief, the current objectives are:

  • manage total debt at prudent levels. This is defined as gross sovereign-issued debt being broadly stable at around 20% of GDP over the next 10 years
  • the operating surplus, on average, over the economic cycle is sufficient to meet the requirements for contributions to the New Zealand Superannuation Fund and ensure consistency with the debt objective.
  • increase net worth consistent with the operating balance objective
  • ensure sufficient revenue to meet the operating balance objective
  • ensure expenses are consistent with the operating balance objective.

The long-term debt objective is used as a constraint in the top-down projections later in the Statement.

International developments

New Zealand was one of the first countries to legislate principles of responsible fiscal management and to require a comprehensive suite of fiscal reports on a government’s short- and long-term fiscal outlook.

Since the passage of the original Fiscal Responsibility Act in 1994, two international institutions, the International Monetary Fund (IMF) and the OECD, have developed guidelines for jurisdictions attempting to improve fiscal transparency.

The IMF Code of Good Practices on Fiscal Transparency[2] (adopted in 1998 and revised in 2001) contains general principles around clarity of roles and responsibilities, public availability of information, open budget preparation and reporting, and independent assurances of integrity.

The OECD publication Best Practices for Budget Transparency[3] is designed as a reference tool for member and non-member countries to use in order to increase the degree of budget transparency in their respective countries.

These guidelines recommend that a report assessing the long-term sustainability of current government policies be released at least every five years, or when major changes are made to substantive revenue or expenditure programmes. The report should assess the budgetary implications of demographic and other potential developments over the long term. The IMF also suggests that countries should provide some indication of the sustainability of fiscal policy. The IMF notes that such an exercise can be demanding for some countries, especially as there is no internationally agreed set of rules for establishing fiscal sustainability.

Two jurisdictions, Australia and the United Kingdom, have used approaches similar to New Zealand’s in developing legislation that establishes guiding principles for fiscal policy and requiring a comprehensive suite of fiscal reports. Both these jurisdictions have long-term fiscal reporting provisions.

In Australia, the Charter of Budget Honesty Act 1998 aims to improve the Commonwealth Government’s accountability for fiscal policy formulation. The Charter requires that governments release annual fiscal strategy statements (usually with each budget) based on principles of sound fiscal management.

The Charter also requires the Commonwealth Government to produce every five years an “intergenerational report” assessing the long-term sustainability of current Government policies over 40 years.

The framework within which the United Kingdom Government formulates and implements fiscal policy (including debt management) is set out in The Code for Fiscal Stability (1998). The Code requires fiscal and debt-management policy to be formulated and implemented in accordance with a set of principles of fiscal management. A government must state explicitly its short- and long-term fiscal policy objectives and ensure these objectives are consistent with the fiscal principles embodied in the code. A government must also report regularly on progress in meeting its fiscal objectives.

The Code also requires the government to publish illustrative long-term fiscal projections, covering a horizon of at least 10 years. In practice, a 30-year horizon has been chosen. These projections are based on a top-down assessment of long-term fiscal sustainability and are published in the Fiscal Strategy Report, usually at the time of the budget.

The next chapter discusses long-term fiscal reporting and past New Zealand and overseas practice in more detail.

Notes

  • [1]The Treasury publication A Guide to the Public Finance Act provides more details. It is available on the Internet at: http://www.treasury.govt.nz/pfa/default.asp.
  • [2]http://www.imf.org/external/np/fad/trans/code.htm.
  • [3]http://www.oecd.org/LongAbstract/0,2546,en_2649_33735_1905251_1_1- _1_1 ,00.html.
Page top