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1. Context

1.1 The fiscal responsibility provisions

  1. Part 2 of the Public Finance Act 1989 contains the fiscal responsibility provisions. At a high level, the provisions have three key dimensions:
    • First, the provisions specify a set of principles for responsible fiscal management in the conduct of fiscal policy.
    • Secondly, the provisions require regular public reporting by the government on the extent to which fiscal policy is consistent with those principles.
    • Thirdly, the provisions provide for regular and independent economic and fiscal updates by the Treasury, including a pre-election update and a statement on the long-term fiscal position at least every four years.
  2. The provisions require the government to set and pursue long-term fiscal objectives (≥ 10yrs) and short-term fiscal intentions (≥ 3yrs) for five variables: operating expenses; operating revenues; the balance between total operating expenses and total operating revenues; the level of total debt; and the level of total net worth.
  3. The government must explain how its objectives and intentions are in accordance with the principles of responsible fiscal management, which, among other things, require public debt to be reduced to, and then maintained at, ”prudent” levels. Table 1, below, presents the principles in full alongside similar sets from other countries.
  4. The provisions are not prescriptive of fiscal strategy. Rather, the provisions require governments to be transparent about their objectives and intentions, whether they have changed, and how they accord with responsible fiscal management.
  5. The provisions were developed against a backdrop of high public debt, caused by ongoing structural deficits. The aim was to address this poor fiscal performance by:
    • strengthening the incentives on Ministers to set budget 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.
  1. The provisions were widely seen as a world-leading and influential institutional reform when first enacted in the Fiscal Responsibility Act 1994. They have been cited as international best practice by agencies, such the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF).[1]
Table 1: Principles for fiscal policy in New Zealand, Australia and the United Kingdom
New Zealand - Public Finance Act 1989 Australia - Charter of Budget Honesty Act 1998 United Kingdom - Charter for Budget responsibility 2011

Principles of responsible fiscal management

The Government must pursue its policy objectives in accordance with the following principles:

  1. reducing total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future by ensuring that, until those levels have been achieved, total operating expenses in each financial year are less than total operating revenues in the same financial year; and
  2. once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues; and
  3. achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future; and
  4. managing prudently the fiscal risks facing the Government; and
  5. pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.

Principles of sound fiscal management

The principles of sound fiscal management are that the Government is to:

  1. manage financial risks faced by the Commonwealth prudently, having regard to economic circumstances, including by maintaining Commonwealth general government debt at prudent levels; and
  2. ensure that its fiscal policy contributes:
    1. to achieving adequate national saving; and
    2. to moderating cyclical fluctuations in economic activity, as appropriate, taking account of the economic risks facing the nation and the impact of those risks on the Government's fiscal position; and
  3. pursue spending and taxing policies that are consistent with a reasonable degree of stability and predictability in the level of the tax burden; and
  4. maintain the integrity of the tax system; and
  5. ensure that its policy decisions have regard to their financial effects on future generations.

The Treasury's objectives for fiscal policy are to:

  1. ensure sustainable public finances that support confidence in the economy, promote intergenerational fairness, and ensure the effectiveness of wider Government policy; and
  2. support and improve the effectiveness of monetary policy in stabilising economic fluctuations.

The Treasury's objective in relation to debt management policy is to minimise, over the long term, the costs of meeting the Government's financing needs, taking into account risk, while ensuring that debt management policy is consistent with the aims of monetary policy.

1.2 Dimensions of fiscal policy

  1. Good fiscal policy is about securing high and sustainable living standards - by managing fiscal aggregates and their impact on the wider economy. Fiscal aggregates is a term that is often used to describe operating revenue and expenses and their balance, as well as the assets, liabilities (including debt) and net worth of the Crown's balance sheet. Fiscal policy can be thought of as having three dimensions:
    1. fiscal sustainability - the maintenance of “prudent” debt levels over time or the affordability of funding current spending given current tax settings. This has been the main focus of the fiscal responsibility provisions;
    2. macroeconomic stability - the role of fiscal decisions (level, mix, timing) in supporting stability by not exacerbating economic cycles. Note that while the Reserve Bank has primary responsibility for stability in the sense of reducing the variance of output around trend in order to stabilise inflation, it is recognised that broader government policy (not only fiscal policy but also structural policies that affect saving and investment) has a greater influence on the average level of real interest rates and the exchange rate; and
    3. fiscal structure - a term that refers to the level and composition of tax revenue, expenses, and the balance sheet. Even within a sustainable fiscal strategy, there can be variation in the size of government and the ways in which a government raises and spends money. Evidence suggests that these differences can have an important impact on economic performance and living standards.
  2. Each dimension matters for economic performance via effects on private decision making, such as decisions about investment and labour force participation. Fiscal policy can, among other things, affect the level and stability of tax rates, inflation, national savings, real interest rates, exchange rates and the cost of capital.

Notes

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