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New Zealand's Fiscal Policy Framework: Experience and Evolution - WP 01/25

3.  The Fiscal Responsibility Act 1994

The FRA aims to improve fiscal policy by specifying principles of responsible fiscal management and strengthening reporting requirements.[9]

3.1  Principles of responsible fiscal management

  1. Governments are required to follow a legislated set of principles and publicly assess their fiscal policies against these principles. Governments may depart temporarily from the principles but must do so publicly, explain why they have departed, and indicate how and when they intend to conform to the principles. The five principles of responsible fiscal management are: Reducing total Crown debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total Crown debt in the future, by ensuring that, until such levels have been achieved, the total operating expenses of the Crown in each financial year are less than its total operating revenues in the same financial year.
  2. Once prudent levels of total Crown debt have been achieved, maintaining these levels by ensuring that, on average, over a reasonable period of time, the total operating expenses of the Crown do not exceed its total operating revenues.
  3. Achieving and maintaining levels of Crown net worth that provide a buffer against factors that may impact adversely on the Crown’s net worth in the future.
  4. Managing prudently the fiscal risks facing the Crown.
  5. Pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.

Definitions such as “prudent” level of debt, or “reasonable” degree of predictability are not specified in the Act. It is left to the Government of the day to interpret the relevant fiscal terms.

Importantly, although a Government can depart from the principles, the FRA requires any such departure to be temporary and that the Minister of Finance specify the reasons for departure, the approach to be taken to return to the principles and the period of time this is expected to take.

3.2  Reporting requirements

Governments must publish a Budget Policy Statement (BPS) before the annual Budget and a Fiscal Strategy Report (FSR) at the time of the Budget (see Box 1). These publications must demonstrate the consistency of the Government’s short-term fiscal intentions and long-term fiscal objectives with the principles of responsible fiscal management (Table 1 provides more detail). The Act requires the FSR to include fiscal projections (the “Progress Outlooks”) covering a minimum of 10 years for the variables specified as long-term fiscal objectives.[10]

The Treasury is required to prepare regular economic and fiscal forecasts (see Box 1). Having the timing and broad nature of the overall forecasts specified in legislation raises their credibility.

Under the FRA, all financial statements included in reports required by the Act are prepared under Generally Accepted Accounting Practice (GAAP). Fiscal reporting follows a set of consistent accounting rules established independently by the Accounting Standards Review Board (which sets accounting standards that are mandatory for both the public and private sector). The use of accrual accounts means that the full cost of policy must be disclosed, including non-cash items like depreciation and changes to government employee pension rights.[11] The predecessor of GAAP was “Table 2” which was prepared on a cash basis.

GAAP provides externally set and audited standards and helps avoid some of the boundary problems that affected previous fiscal forecasts (e.g., the treatment of forestry cutting rights in the early 1990s).

The economic and fiscal forecasts are based on the Treasury’s best professional judgement about the impact of policy, rather than relying on the judgement of the Government. The FRA requires the Minister of Finance to communicate all of the Government’s policy decisions to the Treasury. The fiscal forecasts are also required to disclose contingent liabilities and other specific fiscal risks.

Finally, all reports required under the Act are referred to a parliamentary select committee that comprises representatives from the Government and opposition parties.

Table 1 - Short-term fiscal intentions, long-term fiscal objectives, and principles of responsible fiscal management
  Short-term fiscal intentions Expenses, revenues, operating balance, debt, net worth Long-term fiscal objectives Expenses, revenues,operating balance, debt, net worthPrinciples of responsible fiscal management (a) to (e) in text
Set by:Current Government Current GovernmentSpecified in Act, Section 4(2)
Time horizon: Three-yearsNot specifiedNot specified*
Required reporting:Fiscal forecastsProgress Outlooks (10-year minimum fiscal projections) Specified in Act
Other reporting: Cyclically-adjusted operating balance“What if?” long-term fiscal scenarios (typically 50-years)  
Operational target: Fiscal provisions (see Section 6 in text)  

* As a set, the principles endure with the Act. However, individual principles do not contain explicit time horizons.

Notes

  • [9]See “Fiscal Responsibility Act 1994 – An Explanation” (September, 1995) available at www.treasury.govt.nz.
  • [10]The BPS and FSR are Government documents. The Progress Outlooks contained in the FSR use economic assumptions determined by the Treasury and fiscal assumptions agreed by the Government. The first years of the Progress Outlooks are the short-term fiscal forecasts. Beyond the forecast horizon, the Outlooks ignore cyclical effects and so the projected fiscal position is structural.
  • [11]In addition to a range of other financial statements, the Crown produces a statement of financial performance (operating statement), a statement of financial position (balance sheet), a statement of cash flows and a statement of borrowing. GAAP provides a comprehensive set of accounts that reconcile operating, cash and balance sheet statements.
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