8 Conclusion
New Zealand's existing fiscal framework - centred on the principles embedded in the Public Finance Act - contributed to New Zealand entering the economic recession of 2008-2009 with historically and internationally low levels of public debt. However, the focus on debt did not prevent Government spending increasing as a percent of GDP. This paper considered whether a spending cap would be a useful addition to the fiscal tool kit.
To be effective, a spending cap would need to have fitted into the existing Fiscal Management Approach. The proposal considered in this paper entailed a rolling three-year nominal target for core Crown expenses, as set by the government. It was designed to have a range of exclusions, such as unemployment benefit expense - due to their cyclical nature. In addition, there would have been a margin to accommodate unexpected changes in forecast expenses.
The benefits of the proposed spending cap are that it would have reinforced the commitment to the existing limit on new initiatives under the Operating Allowance and placed an indicative limit on changes to forecast expenses that go through the Baseline Update process. However, the complexity of the proposal would have led to significant communication challenges, potentially with some confusion about how it would operate alongside the existing system.
The review of the Fiscal Management Approach, signalled in Budget 2010, could assess whether more of the changes to forecast expenses should be “counted” against the Operating Allowance. Ideally, future arrangements will also allow the fiscal pressures associated with the rising profile of some categories of demand-driven expenses (e.g. New Zealand Superannuation, some categories of welfare benefits) to be more clearly identified and compared at the same time as decisions are being made around new spending initiatives. A simple and transparent approach will ensure that the underlying trade-offs around current policy settings, and their long-term fiscal effects, are visible. This will contribute to New Zealand having a sustainable fiscal position and being well-placed to respond to long-term fiscal challenges.
