5  New Zealand’s fiscal policy over history

5.1  A consistent data series

As well as informing policy judgements in real time, the techniques discussed in this paper can shed light on the evolution of fiscal policy in the past and put the more recent fiscal developments in historical context. Results in this paper have been presented using data only dating back to 1994 since this was when the New Zealand government moved from cash to accrual accounting. To gain a comparable picture of the fiscal balance from the 1970s to the present, a measure of the cash balance can be used.

The pre-1994 adjusted financial balance is spliced with the post-1994 core Crown residual cash balance.[3] Both are cash balances with a broadly similar reporting entity. This new series is plotted in Figure 14, decomposed into its primary and financing components. Of note is the sustained period of primary surpluses from 1986 to 2008. These primary surpluses eventually led to the elimination of net financing costs. Secondly, the magnitude of the 2009 and 2010 deficits stand out, particularly so given that net financing costs are almost nil.

Figure 14 – Primary and financing cash balance

Source:  The Treasury

5.2  Cyclical adjustment

A very simple cyclical adjustment can be applied to the primary cash balance – by adjusting tax receipts in proportion to the output gap. This method is only very approximate because it does not take into account changing tax regimes, nor the cyclicality of expenses. Nevertheless, it should produce results which have the right order of magnitude given the relative insensitivity of results to the elasticity parameters. Results are plotted in Figure 15.

It is interesting to note that fiscal policy in the mid 1980s achieved a very significant consolidation with a structural improvement in the budget balance of around 7% of GDP, slightly larger than the consolidation following the 1991 Budget. A second interesting part of the story is that the weak cyclical state of the economy in the early 1990s meant that the underlying budget position was probably much stronger than the headline deficits indicated. However, there is an endogeneity issue lurking in the background: the fiscal consolidation was part of a set of policy reforms which likely contributed to stronger potential growth in subsequent years.

Figure 15 – Cyclically-adjusted primary cash balance

Source:  The Treasury, author's estimates

The pattern of consolidation reversed in the late 1990s, mainly driven by significant tax cuts. The 2000s saw the structural primary balance initially stabilise at a modest or zero level (depending on the view taken about the cyclicality of growth over this period). Policy easing in the 2008 Budget led to a rapid and significant deterioration in the structural fiscal position, resulting in the largest structural deficit and largest deterioration in any one year over this time period.

A terms-of-trade perspective can also be applied. A terms-of-trade adjustment is made using the method discussed earlier in this paper, shown in Figure 16. It suggests that, relative to the unadjusted indicator, the underlying fiscal position was stronger in the 1980s, but weaker in the 2000s.

Figure 16 – Cyclical and terms-of-trade adjusted primary cash balance

Source:  The Treasury, author's estimates