Fiscal policy is one tool a government has to achieve its economic and social objectives. The operation of fiscal policy is governed by the Public Finance Act 1989 (PFA).
Fiscal Strategy of the Government
The Government's fiscal priorities are set out in the Fiscal Strategy section of the Budget Policy Statement 2023.
The Government announced two new fiscal rules ahead of Budget 2022:
- returning the operating balance before gains and losses (OBEGAL) to a surplus and aiming for small surpluses thereafter, as the primary fiscal rule, and
- a net debt ceiling that complements the OBEGAL target while allowing more fiscal space to fund high-quality capital investments that will improve productivity and living standards. Maintaining net debt below this ceiling will also ensure a sufficient fiscal buffer to address economic shocks or natural disasters.
The Treasury’s advice on these fiscal rules is outlined in a summary paper The Treasury’s analysis and recommendations for fiscal rules.
The Government’s short-term intentions for fiscal policy for the next three years and long-term fiscal objectives for the next ten years reflect the fiscal rules adopted at Budget 2022. These rules remain unchanged in the Budget Policy Statement 2023. These are:
|Short-term intention||Long-term objective|
|Debt||Maintain total debt at prudent levels. Maintain net debt at below 30 percent of GDP based on the new net debt measure including the NZSF, subject to significant shocks.
Gross debt is forecast to be 39.9 percent of GDP at the end of the forecast period.
Net debt is forecast to peak at 21.4 percent of GDP in 2023/24 and reduce over the forecast period to 14.1 percent of GDP in 2026/27.
|Maintain total debt at prudent levels. Maintain net debt at below 30 percent of GDP based on the new net debt measure including the NZSF, subject to significant shocks.|
|Operating balance||Our intention is to return to an operating surplus (before gains and losses) by 2024/25, subject to economic and fiscal conditions.
The operating balance (before gains and losses) is forecast to be 0.4 percent in 2024/25.
The operating balance is forecast to be 3.3 percent of GDP in 2026/27.
|Once the operating balance (before gains and losses) has returned to a surplus, our long-term objective is to maintain an average surplus in the range of 0 percent to 2 percent of GDP, subject to economic and fiscal conditions.
This will ensure that, on average, over a reasonable period of time total operating expenses do not exceed total operating revenue.
|Expenses||Our intention is to ensure expenses are consistent with the operating balance objective.
Core Crown expenses are forecast to be 30.9 percent of GDP in 2026/27. Total Crown expenses are forecast to be 39.4 percent of GDP in 2026/27.
|The Government will ensure operating expenses support a responsible and proportionate role for the Government in maintaining a productive, sustainable and inclusive economy, consistent with the debt and operating balance objectives.|
|Revenue||Our intention is to ensure revenue is consistent with the operating balance objective.
Total Crown revenue is forecast to be 41.4 percent of GDP in 2026/27.
Core Crown revenue is forecast to be 33.4 percent of GDP in 2026/27.
Core Crown tax revenue is forecast to be 30.8 percent of GDP in 2026/27.
|The Government will ensure a progressive taxation system that is fair, balanced and promotes the long-term sustainability and productivity of the economy, consistent with the debt and operating balance objectives.|
|Net worth||Our intention is to maintain net worth consistent with the operating balance objective.
Total net worth attributable to the Crown is forecast to be 42.9 percent of GDP in 2026/27.
Total Crown net worth is forecast to be 44.4 percent of GDP in 2026/27.
|The Government will use the Crown's net worth to maintain a productive, sustainable and inclusive economy, consistent with the debt and operating balance objectives.|
The Public Finance Act and Responsible Fiscal Management
The PFA prescribes that the Government must pursue its policy objectives in accordance with the following principles:
- 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 by ensuring that, until those levels have been achieved, 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
- achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future
- managing prudently the fiscal risks facing the Government
- when formulating revenue strategy, having regard to efficiency and fairness, including the predictability and stability of tax rates
- when formulating fiscal strategy, having regard to the interaction between fiscal policy and monetary policy
- when formulating fiscal strategy, having regard to its likely impact on present and future generations
- ensuring that the Crown's resources are managed effectively and efficiently.
The PFA also requires the Government to present, in each financial year, reports outlining its fiscal policy: The Budget Policy Statement and a report on the Government’s fiscal strategy.
The Budget Policy Statement has a short-run focus setting out policy goals that will guide the Government's upcoming Budget decisions and priorities. The Fiscal Strategy Report is presented with the Budget and must state the Government's long-term objectives for fiscal policy over a period of at least ten years and the Government's short-term intentions for fiscal policy over a period of three years.
The Fiscal Strategy Report must also provide projections of fiscal variables to show progress towards meeting the Government’s long-term objectives for fiscal policy.
In addition, the Treasury is required to publish, at least every four years, a Statement of the Long Term Fiscal Position. This has a horizon of at least 40 years and identifies how demographic and other changes may impact the fiscal position.