Over the past 15 years New Zealand has been paying considerable attention to the “rules of the game” for monetary, fiscal and regulatory policies. This new focus has been an integral part of New Zealand’s economic reforms that have been well documented elsewhere and which have received considerable international attention.
Prior to 1985, New Zealand labour and product markets were extensively regulated, effective tax rates were high and variable, and production of a narrow range of traded products left the economy vulnerable to shifts in world demand and shocks to commodity prices. A sustained period of fiscal deficits had seen a build-up in public debt, the current account deficit was close to 9% of Gross Domestic Product (GDP) in 1986, and inflation and inflationary expectations were high.
Institutional changes have separated and clarified the roles and responsibilities for monetary and fiscal policy. The Reserve Bank of New Zealand Act 1989 stipulates that the Bank is to formulate and implement monetary policy directed to the objective of achieving and maintaining stability in the general level of prices. The Fiscal Responsibility Act 1994 aims to improve fiscal performance and management and to bring a long-term focus to budgeting.
This paper discusses New Zealand’s fiscal policy framework, experience and evolution. The paper is set out as follows:
- Section 2 provides a brief fiscal history and describes the various factors influencing the development of the fiscal policy framework. These factors include lessons from New Zealand’s fiscal history and broader public sector reform.
- Section 3 outlines the key institutional change, namely the Fiscal Responsibility Act 1994.
- Section 4 compares the “fiscal rules” implied within New Zealand’s framework with those used internationally.
- Section 5 sets out the experience with the framework. It includes a comparison of fiscal outcomes with fiscal objectives and sets out three key policy themes.
- Section 6 describes the evolution of fiscal forecasting and refinements to the Budget process.
- Section 7 summarises some of the challenges facing New Zealand’s fiscal policy framework and Section 8 concludes.
- For example, see Bollard and Buckle (1987), Evans, Grimes and Wilkinson with Teece (1996), Silverstone, Bollard and Lattimore (1996). The latest IMF Article IV Staff Report and OECD Economic Survey provide further assessments, including recent policy developments.