Working paper

Draft working paper: Enhancing the role of fiscal policy in New Zealand’s macroeconomic stabilisation


This paper considers the role of fiscal policy in New Zealand’s macroeconomic stabilisation.

Over the last thirty years, monetary policy has been primarily responsible for cyclical stabilisation, while fiscal policy has been responsible for debt sustainability. Fiscal policy has supported macroeconomic stability in the background through the automatic stabilisers and broadly counter-cyclical discretionary stance.

There is a need to re-assess the role of fiscal policy in light of structural challenges, especially the low interest rate environment. Fiscal policy will likely need to play a significant role in macroeconomic stabilisation in the future if monetary policy is constrained by the effective lower bound on interest rates. This paper examines the high-level options, including strengthening the automatic stabilisers, counter-cyclical discretionary policies or developing ‘semi-automatic’ stabilisers. There is a need to consider fiscal institutions and administrative capacity to implement stabilisation policy effectively and maintain debt sustainability.