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An Introduction to New Zealand's Fiscal Policy Framework

How does our fiscal policy framework operate?

New Zealand's fiscal responsibility provisions are set out in the Public Finance Act (PFA) and have three key elements:

  • The provisions specify a set of principles of responsible fiscal management in the conduct of fiscal policy.
  • The provisions require regular public reporting by governments on their short-term intentions and long-term objectives, and the extent to which these objectives and intentions are consistent with the principles of responsible fiscal management.
  • The provisions provide for regular and independent economic and fiscal reporting by the Treasury, including updates at Budget time and between budgets, a pre-election update, a statement on the long-term fiscal position at least every four years, and an investment statement on the Crown's balance sheet at least every four years.

New Zealand's fiscal policy framework is based on transparency. It emphasises disclosure of information rather than compliance with detailed rules set out in law. Behind this transparency-based framework is a judgment that a framework of this kind is likely to provide effective incentives for New Zealand governments to conduct responsible fiscal policy. The provisions require each government to come to its own decision about, among other things, what level of Crown debt is prudent. By setting their own targets, governments are more likely to commit to meeting them.

This transparency-based approach contrasts with the more common international approach of adopting legislated fiscal rules. A legislated rule specifies in the law a numerical limit or goal in respect of one or more budget aggregate. Fiscal rules are often expressed as limits on spending, revenue, budget balances, or debt.

Fiscal rules have become more popular internationally over the last decade or so. In 2009, of the 186 member countries of the International Monetary Fund (IMF), 80 had some sort of fiscal rule, up from only seven in 1990. In general, fiscal rules tend to be associated with improved fiscal performance relative to how well a particular country was performing prior to adopting a fiscal rule.

From time to time, the question arises as to whether we should adopt a legislated fiscal rule. Successive New Zealand governments have rejected any change to the status quo. This position reflects the judgements that:

  • Political commitment to a particular fiscal path is the most important factor that influences whether a government actually sticks to it. By requiring governments to come up with their own assessment of what constitutes good fiscal policy, New Zealand's fiscal responsibility provisions increase the likelihood that governments will then stick to the fiscal path they have set themselves.
  • A legislated fiscal rule will not necessarily reflect the government of the day's assessment of what constitutes good fiscal policy and, accordingly, is more likely to be breached when it does not align with the government of the day's fiscal priorities.
  • A transparency-based framework will usually be more flexible than a legislated fiscal rule. For example, a limit on Crown borrowing could require a government to cut spending even if the evidence suggests that doing so would have negative consequences for economic growth or living standards more generally.
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