Appendix 1 Fiscal Responsibility Act
Fiscal Responsibility Act 1994
The Fiscal Responsibly Act 1994 introduced the principles of responsible fiscal management and aimed to improve fiscal transparency by requiring the presentation of a number of fiscal reports.
In many respects the Fiscal Responsibility Act formalised recently developed reporting practices and provided assurance that these practices would continue (for example, the practice of preparing budget reports for a three-year period). It also extended existing reporting practices (for example, by requiring fiscal forecasting on the basis of generally accepted accounting practice (GAAP)).
As noted earlier in this chapter, the requirements of the Act were partly prompted by New Zealand’s poor fiscal performance in the late 1980s and early 1990s.
The 1994 Act aimed to address these problems and achieve better fiscal outcomes by:
- strengthening the incentives on Ministers to co-operate in setting priorities and to follow an agreed fiscal strategy, and
- providing more regular information to the public on the medium-term fiscal outlook and the decisions that underpinned that outlook.
The principles of responsible fiscal management in action
The legislation has provided a framework for Ministers to make responsible fiscal decisions and helped Ministers to focus on the medium- and long-term impacts of current policies.
Although New Zealand’s fiscal position is affected by many factors outside the Government’s control, the principles of responsible fiscal management encourage Ministers to constantly review the likely impact of the economic outlook on the fiscal position and take appropriate action. Examples of the actions that Ministers have taken in order to manage New Zealand’s fiscal position include:
- reorganising the set of government rights and obligations that make up the balance sheet (for example, by fully hedging foreign currency debt and reconfiguring assets and liabilities)
- exerting greater fiscal control over levels of spending, and
- engaging in high-level prioritisation of spending (Warren and Barnes, 2003).
2004 Incorporation into the Public Finance Act
In 2004 the Fiscal Responsibility Act was incorporated into the Public Finance Act. The fundamental principles of the 1994 Act were retained. The intention of the merger was to consolidate legislation regarding public finance and make it more accessible. The merger also provided the opportunity to make some amendments to the Fiscal Responsibility Act.
The changes were introduced to align New Zealand’s fiscal reporting with best international practice after assessing legislation in the United Kingdom and Australia, reviewing the best practice guidelines issued by the IMF and OECD, and drawing on experience with the legislation since its introduction.
The 2004 changes are consistent with the overall requirements of the 1994 legislation However these changes did include a number of enhancements as set out below.
Summary of 2004 amendments
Key amendments included:
- a change in the focus of the budget policy statement from high-level fiscal strategy to budget strategy
- a requirement in the fiscal strategy report to disclose the time period to which the long-term fiscal objectives relate – being a minimum of 10 years
- a requirement for Treasury to produce periodic assessments of long-term fiscal issues – over a minimum 40 year period
- annual disclosure of changes in tax policies which will lead to material changes in revenue forecasts
- a requirement to disclose the methodology used to identify specific fiscal risks
- a requirement to report on the sensitivity of fiscal aggregates to changes in economic conditions, and
- removal of the requirement for a current year fiscal update as information is already provided in the regular monthly financial statements.