4.5 Overall assessment of proposals

4.5.1 Compliance costs

77. None of the options discussed in this RIS would place any compliance costs on the public or on private businesses. This is because the options relate to the machinery of government and to the budget cycle. The options directly affect the government, and in particular the Minister of Finance in the setting and communication of budget priorities and the overarching fiscal strategy.
78. The options would also affect the Treasury as the lead advisor to the government on fiscal policy. The changes do not necessarily mean an increase in the volume of advice, but they will raise government and public expectations about the quality, scope and clarity of the Treasury's fiscal and economic advice.

4.5.2 Fiscal impact

Treasury's recommended changes

79. The changes recommended by the Treasury should assist with fiscal sustainability in terms of helping to keep debt under control. The economic stability dimension, the long-term inter-generational focus, and the immediate or short-term spending limit can all help to restrain discretionary spending that is inconsistent with sustainability and/or stability.
80. One potential consequence of these provisions is that governments may want to run larger surpluses during periods of strong economic activity to avoid destabilising pro-cyclical fiscal policy.

Spending limit

81. If a spending limit is implemented, the sustainability of government services may receive increased focus. A numeric rule will result in government's expenditure as a share of the economy reducing over time as on average, economic growth tends to outstrip the sum of inflation and population growth. Real per capita expenses remain constant, but it is unlikely that an equivalent basket of goods and services could be sustained - given that long-run wage pressures tend to exceed inflation and an ageing population is likely to increase demand for some services (e.g. health care, superannuation).
82. As the spending cap allows for population growth but not changes in the composition of population, it will require hard policy choices to be made over the next 10 years about how to deal with the cost pressures associated with an ageing population. This may create the impression that recurring ex-post breaches of the spending limit are inevitable over the long run without a substantial curtailment of government activity. Ongoing breaches could undermine the status and credibility of the fiscal responsibility provisions in general, and may simply create an expectation that the Public Finance Act will be amended again. The six-yearly review mechanism was designed in part to allow flexibility for a government to respond to these pressures, but it is difficult to predict whether it will be successful in doing so.
83. In the short term, there is a risk of the spending limit being seen as a safe or appropriate level of spending, with pressures to increase expenses up to that limit.

4.5.3 Economic impact

Treasury's recommended changes

84. The Treasury's recommended changes are largely about encouraging governments to think through and publicly communicate their fiscal strategy in a more systematic and comprehensive manner than is currently required. At a minimum, this would increase the transparency, and therefore bring more certainty, about the government's intended course of action over the short and medium term, and what those choices mean for the longer term. Any associated increase in public certainty and confidence about the direction of fiscal policy is likely to be beneficial for economic growth.
85. The changes will also be beneficial for economic growth to the extent that they support fiscal sustainability and macroeconomic stability. In particular, the addition of an economic stability dimension should help to reduce the risk of fiscal policy exacerbating the economic cycle. At best, a macroeconomic stability dimension could mean that any such windfalls would be used to pay down debt further rather than boost discretionary stimulus at a time when the economy is already operating above capacity. In an economic upturn, all things equal, this would reduce the risk of pro-cyclical fiscal policy, and consequently put less pressure on interest/exchange rates and the tradable sector than would otherwise be the case.
86. The size and composition of government matters a great deal for growth. The requirements for the government to state its medium-term priorities for public resources will enhance transparency but the economic impact would be dependent on the underlying policy direction being pursued by a government.

Spending limit

87. This spending limit may help to drive productivity gains within the state sector and the ongoing reprioritisation of ineffective spending. However, there is a chance that a spending limit may conflict with the macroeconomic stability dimension in a downturn. In certain circumstances, it may be desirable for macroeconomic stability to increase government spending temporarily, an action that could lead to a breach of the spending cap.

4.5.4 Administrative complexity

88. The Treasury has considered whether the range of options analysed in this RIS would increase the complexity and make it harder - for officials, Ministers and the public - to interpret what is required, which provisions take precedence (if at all) and if the provisions are being fulfilled.

Treasury's recommended changes

89. The Treasury's recommended changes would increase the length of the fiscal responsibility provisions, requiring reporting on more aspects of fiscal policy than the status quo. More complex fiscal responsibility provisions could potentially increase the administrative complexity of producing budget documentation, but whether this is true in every case will vary.

Spending limit

90. If a spending limit is introduced as a principle of responsible fiscal management, there may be some circumstances in which some of the principles will be in conflict. For example, in a downturn a spending cap may conflict with a government's desire to increase spending as a counter-cyclical measure or in an upturn a government may need to delay a tax cut that would reduce a high operating surplus if the economy is above potential. Such an outcome would require the government to explain the tradeoffs it is making in choosing a particular fiscal strategy.
91. A spending limit will be a prescriptive element and would give the government less flexibility, depending on the fiscal and economic context. Nevertheless, as is currently the case, a government would continue to be able to depart temporarily from the principles of responsible fiscal management if it can explain why and give a timeframe for returning to the principles.