Fiscal objectives (or fiscal anchors)
The existing fiscal focus has been on meeting the fiscal objectives over a 10-year rolling horizon and acknowledging that, should the pressures on expenditure become more acute, future expenditure growth in some key areas would need to slow in order to maintain debt at prudent levels and to ensure that New Zealanders are not excessively taxed.
The Public Finance Act (PFA) requires you to set fiscal objectives for a period of at least ten years, and short-term fiscal intentions for at least three years, and explain the consistency of these with the principles of responsible fiscal management (eg, prudent debt and the predictability about the level and stability of tax rates in future years). In the recent times, fiscal objectives have focused on:
- maintaining debt (GSID ex settlement cash) at around 20% of GDP
- making statutorily defined contributions to the NZS Fund, and
- keeping spending and revenues at around current levels.
These fiscal objectives have helped the government to strengthen the fiscal position. In particular, the debt objective has been a key fiscal anchor that has helped communicate the government's fiscal strategy and acted as a Budget management tool. We understand that your preferred fiscal strategy includes running debt 2% of GDP higher than current objective by spending more on infrastructure. Given updated PREFU forecasts discussed below, achieving this goal is likely to require lower projected operating deficits in the medium term.
Additionally, on its own the debt objective has not been effective at constraining expenditure growth (and is not designed to do so). Given your priority around disciplining government spending we think there would be merit in adopting an additional fiscal anchor in the form of a medium term expenditure or revenue constraint (eg, as a share of GDP). This would have benefits in terms of:
- signalling an intent to restrain the growth in spending and commitment to particular revenue levels to better manage expectations over the next three years and beyond
- increasing the contribution of fiscal policy to macroeconomic stability by providing more certainty and better supporting monetary policy over the longer term, and
- assisting the government to achieve a slowing in expenditure growth from current rates over the longer term to manage future spending pressures.
