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 2021 document.
The Government’s short-term fiscal intentions include reducing deficits over the forecast period as economic conditions allow. As set out in the Budget Policy Statement, running operating deficits is needed in the short-term to fight COVID-19, cushion its impact and position New Zealand for recovery.
The Government’s long-term fiscal objectives are to:
- stabilise net core Crown debt as a percentage of GDP by the mid-2020s and then reduce it as conditions permit (subject to any significant shocks)
- run an operating balance consistent with meeting the long-term debt objective
- 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
- 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
- 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 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 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 report on the fiscal strategy must also provide projections of fiscal variables to show progress towards meeting the long-term objectives.
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.