3  New Zealand's legislative framework

Reflecting a combination of external factors and policy choices, New Zealand's fiscal position deteriorated considerably from the mid 1970s until the early 1990s, with net public debt rising from around 5% of GDP in 1974 to above 50% of GDP in 1992.[3] In response, the Government adopted a number of practices that aimed to improve fiscal management, with a large emphasis on transparency. The Fiscal Responsibility Act of 1994 codified the initial practices, including the shift to accrual accounting, the publication of short-term fiscal forecasts, and the publication of a pre-election economic and fiscal update.

The Fiscal Responsibility Act aimed to address poor fiscal performance by:

• strengthening the incentives on Ministers to set Budget priorities and to follow an agreed fiscal strategy; and
• providing more regular information to the public on the medium-term fiscal outlook and the decisions that underpinned that outlook.

In 2005, the Fiscal Responsibility Act was incorporated into the Public Finance Act 1989 (PFA). The intention of the merger was to consolidate legislation regarding public finance. The principles of responsible fiscal management contained in the 1994 Act were retained (see below), but amendments were made to the other fiscal responsibility provisions.

The amendments were introduced to align New Zealand's fiscal reporting with best international practice after assessing legislation in the United Kingdom and Australia, reviewing the best practice guidelines issued by the IMF and OECD, and drawing on experience with the legislation since its introduction. The key addition was a legislated requirement for the Treasury to produce a regular statement on the long-term fiscal position covering at least 40 years (New Zealand Treasury, 2009).

The PFA sets out five principles of responsible fiscal management. The two that are most relevant for this paper are those associated with debt and fiscal balance:[4]

• Reducing total debt to prudent levels, so as to provide a buffer against factors that may impact adversely on the level of total debt in the future. Until prudent levels of debt have been achieved, the Government must ensure that total operating expenses in each financial year are less than total operating revenues in the same financial year.
• Once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues.

Definitions such as “prudent” level of debt or “reasonable period of time” are not specified in the PFA. It is left to the Government of the day to interpret these terms. Importantly, although a Government can depart from the principles, the PFA requires any such departure to be temporary and that the Minister of Finance specify the reasons for departure, the approach to be taken to return to the principles and the period of time that this is expected to take.

In addition, the PFA requires the Government to annually state long-term (ten or more years) fiscal objectives and short-term (three year) fiscal intentions for the following variables:[5]

• total operating expenses;
• total operating revenues;
• the balance between total operating expenses and total operating revenues;
• the level of total debt; and
• the level of total net worth.

With the exception of the principles of responsible fiscal management that relate to debt and the operating balance, the PFA is not prescriptive about what the fiscal objectives and fiscal intentions should be. Rather, it requires the Government to state its objectives and intentions, whether they have changed, and how they accord with responsible fiscal management. This means that a trend increase in government expenses as a share of GDP is permissible under the PFA provided that the principles relating to debt, the operating balance, and revenue are adhered to.