3.3  What approaches has New Zealand applied?

Mechanisms in New Zealand to support an efficient allocation of public resources are focused on transparency and institutional design. In many areas efficiency is best achieved by introducing market mechanisms and allowing consumer choice. This motivated several privatisations of state assets during the 1980s. However, in cases where state provision is still considered best, an efficient allocation of resources is encouraged by providing discipline on government expenditure and a clear specification of responsibilities.

At the highest level, the Parliamentary Executive is held accountable for the allocation of resources and taxation decisions through the requirement that all government taxation and spending decisions be approved by Parliament. Parliament scrutinises spending decisions through debate and through select committee examination. All new spending proposals must be sanctioned by Parliament through an appropriation. As departments may only incur expenses in accordance with an appropriation, this process gives Ministers control over the allocation of resources (The Treasury, 2005b). Spending and taxation decisions are made transparent by the publication of the annual Budget and government accounts.

From the mid-1980s, New Zealand undertook a series of public sector management reforms in order to support a more efficient allocation of resources. Reforms were motivated by insights from management theory and institutional economics. Management reform was grounded in the principle that resources would be allocated most efficiently when public sector managers were given the freedom to make resource decisions and are held accountable for these decisions. As managers will not necessarily have the same objectives as the Executive, this model requires clear specification of expectations ex-ante and the undertaking of an ex-post review.[27]

The implication of these insights was that the best way to promote public sector performance is through delegating responsibilities to managers within a framework where objectives are clearly specified and lines of responsibility are clear, hence allowing greater responsibility to manage. This is coupled with a corresponding expectation of accountability for results through Central Agency monitoring of the performance of government entities (The Treasury, 2005b).

These principles apply to the management of departments and underlie the Public Finance Act, State Owned Enterprises Act (SOE) 1986, and the Crown Entities Act 2004 (CEs). The State Owned Enterprises Act 1986 is also aimed at improving resource allocation by requiring that SOEs be run along commercial lines (Janssen, 2001). SOEs and CEs represent a significant portion of the government balance sheet, being around 40% of total government assets in 2006/07.

3.4  Fiscal structure outcomes

The New Zealand public sector management reforms were intended to improve the efficiency of resource allocation. However, significant challenges still remain. Strong revenue growth over recent years has allowed government expenditure to increase in nominal terms and as a percentage of GDP without increasing the debt ratio. Most of the increase in expenditure has been in the areas of health and education (see Figure 4).

One criticism levelled at the New Zealand approach is “[I]ts failure to do more to impose value-for-money disciplines on new and existing government spending.” (Wilkinson, 2004). Wilkinson argues that greater use of top-down measures, such as a revenue or expenditure objective, could provide greater discipline. Although the specification of a debt objective forces government to prioritise expenditure, Wilkinson notes that it provides no top-down constraint on the level of expenditure or taxes, provides limited fiscal discipline in a growing economy and is not specifically focused on delivering value for money. Rae (2002) also criticises the system for not providing any formal requirements to assess baseline expenditure. In practice, reassessment of baseline expenditure has been difficult.

Although New Zealand’s tax system remains one of the most broadly based and comprehensive in the OECD (Dalsgaard, 2001, page 4), government has shown a willingness to use the tax system to address distribution goals and advance other areas of economic policy. This is articulated in the Government’s revenue strategy which includes the following statements: “The government’s wider policy objectives for the next three years include encouraging productivity, growth and savings. The quality and design of tax policy has an important role to play in support of these objectives”, and “The government will consider the use of tax exemptions and concessions only in the context of the full range of policy options and only if the benefits can be shown to outweigh the costs for New Zealand.” (Fiscal Strategy Report, Budget 2007, page 57).

Changes to the tax system over recent years include making the system more progressive with the increase in the top personal tax rate from 33% to 39% in 1999. The proportion of persons paying personal income taxation subject to the 39% rate has increased from about 6% in 1999 to about 12% in 2007. This change has lifted the marginal tax wedge on labour (as measured by the marginal income tax rate at 100% of average worker earnings), and lifted the marginal tax wedge above that for Australia (OECD, 2007, Figure 7). Nevertheless, the degree of progression of the New Zealand income tax structure appears to remain relatively low compared to the income taxation structures in many other OECD economies (OECD, 2007, Figure 8) and the implicit tax on continued work in early retirement remains relatively low.

Other changes include the introduction of R&D tax credits to address concerns about relatively low rates of private business investment and measured R&D spending, and changes to investment taxation through the introduction of the Portfolio Investment Entity regime. A reduction in the corporate taxation rate from 33% to 30% took effect on 1^st April 2008. During the past decade, average corporate tax rates in developed economies gradually declined to the extent that, whereas a decade ago New Zealand’s corporate tax rate was well below the OECD average, it gradually rose above the OECD average and in 2006 was the 9^th highest rate in the OECD. The April 2008 reduction brings the New Zealand corporate rate closer to, but still slightly above, the OECD average corporate rate.