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Objectives, Targets and Instruments for Crown Financial Policy - WP 03/21

Publication Details

  • Objectives, Targets and Instruments for Crown Financial Policy
  • Published: Sep 2003
  • Status: Current
  • Author: Hansen, Eric
  • JEL Classification: H11; H63
  • Hard copy: Available in HTML and PDF formats only.

Objectives, Targets and Instruments for Crown Financial Policy

New Zealand Treasury Working Paper 03/21

Published September 2003

Author: Eric Hansen


Crown financial policy is concerned with how the government manages the Crown’s assets and liabilities. The recently established New Zealand Superannuation Fund, which is projected to grow to around 45% of GDP over the next few decades, highlights that Crown financial policy is likely to become an important economic policy tool with potential to have a significant impact on New Zealand economic welfare.

The policy framework of objectives, targets and instruments is adopted as a basis for organising the theory literature relating to Crown financial policy. Applying this framework, seven distinct policy objectives are identified as potentially relevant to the future development of policy. Applying qualitative assessment criteria, it is concluded that four of the seven objectives should be the main factors that inform the design of alternative policy options. The four objectives relate to minimising distortionary taxation, time-consistency of policy, agency costs of government, and downside efficiency risks. The three objectives considered less relevant relate to policy neutrality, missing markets and risk management services.

The four main objectives imply a range of targets could be adopted for the Crown balance sheet, some of which would be conflicting. The objectives of minimising distortionary taxation suggests targeting the minimum risk portfolio by building up financial assets and net worth whereas the objective of minimising the agency cost of government suggests placing an upper bound on government operating surpluses and limiting the build up of financial assets. Time-consistency and agency cost objectives tend to conflict because the former suggests the level of debt should be kept low whereas the latter suggests high debt levels.


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Table of Contents

List of Tables

List of Figures

1 Introduction

2 Overview of potential objectives

3 Policy neutrality

4 Distortionary taxation

5 Time-consistency of policy

6 Agency costs of government

7 Provision of market maker services

8 Provision of risk management services

9 Downside efficiency risks

10 Summary of objectives and targets

11 Selection of objectives for policy design

12 Conclusions


Appendix: The trade-off between the level and variability of the tax rate


twp03-21.pdf (371 KB) pp. 1–41

List of Tables

List of Figures


I wish to thank John Carran, Aaron Gill, Arthur Grimes, Greg Horman, John Janssen, Struan Little, Brian McCulloch, Tim Ng and Grant Scobie for their comments on an earlier version of this paper. All errors remain my responsibility.


This paper was written while the author was on the staff of the New Zealand Treasury. The views expressed in this Working Paper are those of the author and do not necessarily reflect the views of the New Zealand Treasury. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

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