4.4 What approaches has New Zealand applied?
4.4.1 Fiscal framework
The principles of responsible fiscal management in the Public Finance Act 1989 (PFA) do not explicitly require that government should take stability concerns into account. However, they allowthe government of the day to operate a fiscal policy which takes stability into account, for example, by allowing government to run a balanced operating budget on average once a prudent level of debt has been reached and allowing temporary departures from the principles. This does not necessarily ensure, however, that capital expenditure decisions that are consistent with the debt objective will necessarily take short-run stability conditions into account.
One of the reasons for not setting mandatory targets in the PFA was to allow fiscal policy flexibility to respond to short run circumstances (Janssen, 2001). The PFA also supports macroeconomic stability in that sustainable public finances are a pre-requisite for maintaining low inflation and achieving macroeconomic stability.
4.4.2 Fiscal policy and management
Consistent with the PFA, the current Government’s long-term objectives allow stability to be taken into account through the automatic stabilisers by specifying the operating balance objective to apply over the cycle. Although the Government does not have a rule or stated intention to run an active counter-cyclical fiscal policy, stability issues are considered as part of the annual Budget-setting process and in particular in the setting of the allowances for new initiatives. The setting and publication of these allowances also supports macroeconomic stability by providing the private sector and the Reserve Bank with greater certainty as to government’s plans (Vandermolen, 2002, page 5).
In response to concerns about macroeconomic “imbalances”, the Government has recently shown an increasing willingness to adjust new operating and capital expenditure plans in response to macroeconomic conditions. For example, some initiatives in Budget 2007 were deliberately designed with short-term stability concerns in mind, in conjunction with medium term considerations. The introduction to the 2007 FSR stated that “in designing Budget 2007 we have had both the short-term and the long-term in mind. The overarching theme of saving and investing is intended to minimise the impact of government on some of the imbalances which have built up in the economy” (Minister of Finance, 2007, page 38 in the Budget 2007 Fiscal Strategy Report).
There are no formal requirements for the government to present a measure of the impact of fiscal policy on the macro-economy. However, significant impacts of fiscal policy decisions on inflation may be made transparent in the Reserve Bank’s monetary policy statements and in fiscal information reported by the Treasury. The fiscal impulse indicator, discussed below, is published on the Treasury website and at times used in the Fiscal Strategy Report. There is also frequent communication between the Treasury and the Reserve Bank about the economic outlook, including fiscal policy intentions.
