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Focus on three main objectives

In the remainder of this paper the focus is on distortionary taxation, time-consistency and agency cost as the three main objectives. The fourth objective - downside efficiency risk - would be unlikely to prevent the other objectives being achieved.

The two policy targets are the upper bound on the Crown’s ownership share of assets and the lower bound on quantities of benchmark bonds. As discussed further in Section 5.1, these policy targets will form part of the “baseline” common to all candidate policies.

The third policy target relates to smoothing of tax rates to ensure the Crown portfolio does not contribute volatility when citizens lack the information, incentive or capability to manage their wealth portfolios. Rather than deal with this as a separate issue, it is put aside and dealt with implicitly along with the distortionary taxation objective.

Table 1 - Policy targets under status quo and four objectives
Targets

Status quo [12](1)

Distortionary taxation(2)

Time-consistency(3)

Agency costs(4)

Downside risk(5)
Risk/return properties:          
Tax-smoothing over cycle Full Full - - Full
Deterministic smoothing Partial Full - - Full
Diversifiable risk - Minimise - - Minimise

Systematic risk

-

Minimise[13]

-

-

Minimise
Net worth:          
Bound on cyclically-adjusted OB - - - Upper -

Net worth buffer

-

Positive[14]

-

-

Positive
Financial asset structure:          
Bound on fungible assets - - - Upper -

Bound on share of asset held

Upper

-

-

-

Upper
Debt structure:          
Bound on total debt (%of GDP) ≤ 30% Upper[15] Upper Lower -
Bound on debt maturing < $3.5bpa - Upper - -
Bound on benchmark quantities ≥ $3b - - - Lower
Bound on average maturity - - Lower[16] - -
Bound on inflation-indexed debt - - Lower - -
Bound on net foreign-currency debt Zero - Lower - -

Bound on floating rate instruments

20-30%

-

-

-

-

Note: The table is read from right-to-left. For example, “Full” in the first row of status quo column is read as “full tax-smoothing over the economic cycle. “Upper” means “upper bound on ….”, implying that the target is expressed as an upper bound on the relevant variable. Similarly for “Lower”.

Notes

  • [12]Under the status quo the policy targets relating to the $3.5 billion upper bound on debt maturing, $3 billion lower bound on benchmark debt and 20-30% target for floating rate instruments are specified for NZ dollar denominated debt. The upper bound on debt maturing excludes Treasury Bills. The target of zero net foreign-currency debt applies where the definition of net foreign-currency debt is gross foreign-currency debt net of foreign exchange reserves and NZDMO-managed foreign-currency assets.
  • [13]The target would be for greater than minimum variance in case where citizens are non-responsive and the government objective is to minimise expected deadweight losses.
  • [14]Positive balance applies if and only if negative correlation between tax and consumption, otherwise zero balance.
  • [15]Upper bound applies if economy subject to unjustified risk premia.
  • [16]Lower bound is contingent on breach of threshold on upper bound for total debt. Same for lower bounds on inflation-indexed and foreign-currency debt.
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