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2.5  Challenges that remain

The fiscal provisions framework is proving a useful tool for fiscal policy. However, as with any tool, it evolves as experience develops. Some future challenges are briefly scoped below:

Rolling out provisions beyond the parliamentary term

The fiscal provisions framework is established for the parliamentary term. However the fiscal forecasts do extend beyond the term, more so as the term progresses. As noted in section 2.1 “technical provisions” are included to ensure a realistic “spending” profile is maintained.

A problem occurs when a government makes decisions that impact beyond the horizon of its fiscal provisions. Such spending increases beyond the period of the provisions are not captured by the provisions framework. The technical provisions for future spending beyond the current term of government are not automatically reduced in this case, as no government commitment has been made to maintain those forecast expenditure levels. This is termed the “bow wave” effect (to describe expenditure creep beyond the current budget period). Mechanisms may be required to limit the extent of this problem.

Incorporating capital into the framework

At the moment, a capital provision, which links to the Government’s debt objectives, exists alongside the operating provisions. However, the setting of a capital target has not proved to be a totally convincing framework for assessing or controlling capital spending[17].

Work is currently underway that seeks to improve the capital allocation process.

Institutionalising the fiscal provisions framework

Although the fiscal provisions framework is prominent in the government’s budget and fiscal reporting, it remains an informal control mechanism. Further institutionalisation[18] could help ensure the continuation of the strengthening of the linkage to the longer-term objectives.

For example, in 1999 it was uncertain whether the incoming Labour/Alliance Coalition Government would agree to continue to use the fiscal provisions framework. In the event they found it a useful tool to signal fiscal intentions. However, it will be important to maintain continuity of the principles of operating the framework from one term of government to the next.

However, institutionalisation of informal mechanisms that may need (and likely will need) to change to reflect a changing operating environment could be inappropriate.

Operation of the provisions framework

Two particular issues include:

  • Determining whether something impacts on the provisions can sometimes be a complex exercise. In applying any principle based approach, issues at the margins will always arise – causing differences in interpretation and application of the fiscal provisions framework.
  • Despite the provisions framework being an informal control mechanism, the predetermined provision levels effectively become “locked in” and it is seen as difficult to alter the limits. There may be good reasons why the limit needs more mechanisms to enable review and alteration in response to changing circumstances.

Currently underway is a review to bring together the experience over the last five years with the aim of improving (and simplifying) the decision making processes, addressing some of the anomalies that can occur at the margins of the framework, as well as a more general review of the provisions framework itself.

Education

Continued education on the link to long-term objectives, and the fact it is only one element of the operating balance, is important. Ongoing GAAP developments are likely to see the introduction of greater potential for fluctuations resulting from fair value assessments of assets and liabilities altering through time.

Notes

  • [17]Capital charge is at present excluded from the operating provisions framework (as it has no net impact on the operating balance). A possible alternative would be to “count” capital charge costs associated with increases in operating spending against the operating provision. This would act as a proxy for the resulting increase in Crown finance costs, although it would reduce the linkage between the provision and the operating balance.
  • [18]One suggestion that could be considered is whether external auditors should review the impact of policy decisions on the provisions target – enhancing the framework by introducing an external monitoring mechanism.
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