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An Introduction to New Zealand's Fiscal Policy Framework

The principles of responsible fiscal management

At the core of the PFA's fiscal responsibility provisions are a set of principles of responsible fiscal management. These principles aim to capture the dimensions of good fiscal policy, which we might categorise as sustainability, stability, and structure:

Dimensions of responsible fiscal policy
Dimensions of responsible fiscal policy

While the principles of responsible fiscal management aim to produce a clear statement on what constitutes good fiscal policy, they do not prescribe any rigid approach to fiscal management. Nor do they set out targets or limits for spending, taxes, debt, or operating balances. Instead, the principles of responsible fiscal management use words like "prudent", which give governments considerable flexibility to determine the fiscal path that they judge to be consistent with the principles within the context of current and forecast economic decisions.

A summary of the principles of fiscal responsibility

To address fiscal sustainability, governments must:

  • Achieve and maintain prudent public debt levels.
  • Ensure that, on average, Crown operating expenses do not exceed Crown operating revenues.
  • Achieve and maintain levels of Crown net worth to provide a buffer against shocks.
  • Manage fiscal risks facing the Crown prudently.
  • Consider the likely impact of fiscal strategy on present and future generations.

To address economic stability, governments must:

  • Have regard to the interaction between fiscal policy and monetary policy.

To address fiscal structure, governments must:

  • When formulating revenue strategy, have regard to efficiency and equity, including the predictability and stability of tax rates.
  • Ensure that the Crown's resources are managed effectively and efficiently.
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