1 Introduction
New Zealand's current fiscal policy framework has been in place for nearly 20 years. At its core is a set of principles around maintaining prudent levels of public debt and running, on average over time, fiscal surpluses. This framework, combined with an extended period of economic growth, contributed to New Zealand entering the an economic recession of 2008-2009 with historically and internationally low levels of public debt.
While the current fiscal policy framework has helped achieve and maintain defined, prudent levels of public debt, it is does not require the government to define a target level for government spending. Over recent years, government spending has increased as a share of GDP. Most of this reflects increased spending during the extended economic upturn through the middle of last decade. The recent economic recession also played a small role in increasing spending, largely through the automatic stabilisers as New Zealand did not implement a substantive expenditure-based stimulus package. The Government therefore committed to investigating whether a spending cap would be an appropriate addition to the existing fiscal policy framework.
Section 2 of this paper considers the literature on fiscal rules, how they have been used internationally, and how they have performed over the past few years. One thing that is apparent is that the appropriate design for a spending rule is dependent on the existing institutional arrangements. Therefore, section 3 outlines New Zealand's current fiscal institutions and section 4 describes the evolution of Budget management processes. Section 5 provides some more context by outlining New Zealand's economic and fiscal performance over the past decade. Section 6 outlines some of the key design choices that would be relevant if a spending cap was to be introduced in New Zealand. Section 7 then discusses some the Government's reasoning for not going ahead with a cap on total spending at this point in time.
