A New Zealand approach
Improving public information on TEs has been cited as a potentially useful addition to the New Zealand accountability documents. While, New Zealand has comparably few TEs and many are relatively small in size, additional transparency would provide the information necessary to assess the ongoing effectiveness of TEs that accumulate over time.
Our instinct is that transparency is desirable and so any debate is likely to be beneficial. TEs have generated academic debate abroad and this debate has ultimately placed TEs transparently in the spotlight. TE reporting has not always led to widespread tax reform or spending cuts in overseas jurisdictions (Shaviro, 2004), but the reporting has contributed to a continued re-examination and debate about the efficacy of tax-based spending.
Descriptive financial reporting should support debate, but needs to be, as far is possible, impartial. The challenge for New Zealand will be to create a statement that clearly reports the cost of spending, while avoids any policy judgements. Debate about effectiveness should be separated from reporting.
Descriptive reporting will require a definition that is:
- easy to use;
- able to be understood; and
- avoids pejorative or normative statements.
A direct definition, rather than a benchmark, is considered more likely to achieve these three requirements. A normative benchmark would require a range of judgements that, given complexity, are difficult to communicate.
A wide range of options exist, but, based on international practice, the New Zealand statement should, where possible, separate fiscal reporting from advice on structural tax change. This suggests two separate reports.
1) Fiscal reporting — annual tax based spending data
Annual tax expenditure data would support existing financial information. Tax-based spending data would be based upon a TE definition and would, where possible, seek to measure TEs against the tax that would otherwise be collected.
This information could be provided on the web, as a standalone report, or as a very basic note to the financial statements.
2) Policy perspectives — a tax policy report
Information on TEs that are significant, cross-cutting, and are not picked up in other fiscal reporting could be released in a structural tax policy report built on a tax benchmark. However, the benefits of the report would need to be assessed in light of demand and existing reporting.
This work would involve a range of policy judgements and would be released as the Treasury's view ie, either as a Treasury policy perspectives paper or as a working paper.
Releasing data in the first report would be a basic minimum first step. Further information could be released if interest exists.
The production of any TE data is expected to require a reasonable amount of initial set up work. For this reason, reporting may be rolled out over a number of years. Initial reports would release a qualitative list of TEs, but may only quantify a few significant TEs. Due to data limitations many TEs may never be able to be quantified.
TE reporting is not covered by generally accepted accounting practice (GAAP). However, every attempt would be made to render TEs directly comparable to other fiscal data.
