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:
The Government’s short-term intentions for fiscal policy for the next four years and long-term fiscal objectives for the next 15 years are:
| Short-term intention | Long-term objective | |
|---|---|---|
| Debt | Maintain total debt at prudent levels. Put net core Crown debt as a percentage of GDP on a downward trajectory towards 40 per cent. | Maintain total debt at prudent levels. Once net core Crown debt is below 40 per cent of GDP, maintain it within a range of 20 per cent to 40 per cent of GDP, subject to economic shocks. |
| Operating balance | Return the operating balance (before gains and losses) to surplus by 2027/28. Ensure consistency with the short-term intention for debt. | Maintain operating surpluses sufficient to ensure consistency with the debt objective. This will ensure that, on average, over a reasonable period of time, operating expenses are funded from operating revenues and not from debt. |
| Expenses | Reduce core Crown expenses as a percentage of GDP. Ensure expenses are consistent with the operating balance intention. | Control growth in government spending so that, over time, core Crown expenses reduce towards 30 per cent of GDP. |
| Revenue | Ensure revenue is consistent with the operating balance intention. | Ensure the level of operating revenues is consistent with the operating balance objective and supports long-term productive economic growth. |
| Net worth | Maintain net worth at around 40 per cent of GDP. | Ensure net worth remains at a level sufficient to act as a buffer to economic shocks. |
Background
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 sets out policy goals that will guide the Government's upcoming Budget decisions and priorities. The 2024 statement sets out the Government’s fiscal strategy, including its long-term objectives for fiscal policy over a period of at least ten years and its short-term intentions for fiscal policy over a period of three years.
Alongside Budget 2024, the Government also presented its first Fiscal Strategy Report which details any updates to the Government’s fiscal strategy as set out in the Budget Policy Statement. 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 on 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.