The Treasury

Global Navigation

Personal tools

Getting a better mix in fiscal policy

Over the next decade, an achievable but ambitious fiscal strategy consistent with a desire to increase economic growth and better prepare for the long-term pressures associated with population ageing could include:

  • the maintenance of operating surpluses consistent with stable debt-GDP ratio and rising NZSF assets
  • an increased focus on policy initiatives to relieve constraints on growth, and
  • reducing tax rates over time as conditions permit.

Such a fiscal strategy will need to give tax options equal weight to operating and capital spending initiatives in the budget process. In addition, tax options may require more of a multi-year approach to budgeting.

Our view is that there is scope, especially over a two- to three-year timeframe, to move towards implementation of this strategy. Implementation is influenced by two factors.

  • Additional fiscal stimulus in the short term may exaggerate the economic cycle. The Pre-EFU forecasts highlight a number of areas where the economy is under pressure. These pressures are reflected in rising inflation and a widening deficit on the current account. With fiscal settings expected to add to these pressures over 2005/06 and with interest rates expected to continue to seek to restrain inflation, we caution against changes in fiscal settings that would materially add to the fiscal stimulus already in the pipeline for 2005/06 and 2006/07. The risk is that further material build-up of pressures in the economy may necessitate more of a monetary policy response than currently envisaged or induce a rapid and substantial market-led exchange rate depreciation.
  • Achieving a better fiscal policy mix without extra stimulus will require a focus on spending restraint. In the short term there is scope to redirect some of the $1.9 billion allocated for new initiatives in the next three Budgets into revenue initiatives. While some of this allocation is likely to be required to meet commitments as set out in the Specific Fiscal Risks of the Pre-EFU, Ministers do have real choices in allocating the balance. There is also scope to reprioritise or achieve efficiencies within existing baseline spending. However good information is required to make high-quality decisions. In our view, Ministers will need to make more active use of all available spending control levers to produce the desired outcomes. Fiscal management may also be supplemented by an appropriate long-term objective for expenses or revenues (but not both). The capital allowances are also under significant pressure and there is a clear need for prioritisation in that area.

Reprioritisation of existing and future expenditure

Achieving the necessary slowing in the rate of spending growth will require difficult choices informed by the incoming government’s priorities. The Treasury’s suggested fiscal strategy would require sustained reprioritisation across government spending, with a significant proportion of the amount for new operating initiatives being applied to tax reform. In order to achieve this, better public sector performance will be essential.

Recommendations

  • Maintain the current macroeconomic framework
  • Maintain a broad-based strategy to manage vulnerability risks and promote a sound savings environment
  • Maintain the current projected path of government savings and surpluses
  • Focus on improving the growth benefits from taxation and spending choices
  • Reduce the growth rate of expenditure to provide greater scope for tax and other measures that promote growth
Page top