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New Zealand’s fiscal policy framework has been in place for nearly 20 years. At its core is a set of principles around maintaining prudent levels of public debt and running fiscal surpluses on average over time. This framework, combined with an extended period of economic growth, contributed to New Zealand entering the economic recession of 2008-2009 with historically and internationally low levels of public debt.
While the current fiscal policy framework has helped achieve and maintain defined, prudent levels of public debt, it does not require the government to define a target level for spending. Since 2004 government spending has increased as a share of GDP. Most of this reflects increased spending during the extended economic upturn through the middle of the last decade. The economic recession of 2008-2009 also played a small role in increasing spending, largely through the automatic stabilisers as New Zealand did not implement a substantive expenditure-based stimulus package. The Government therefore committed to investigating whether a spending cap would be an appropriate addition to the existing fiscal policy framework. This paper outlines the motivation for a spending cap and – drawing on international experience – presents a proposed design.
A benefit of the proposed cap is that it would have reinforced the existing limit on new discretionary spending initiatives through the annual Operating Allowance being fixed at $1.1 billion. It would also have placed a limit on other forecast expense increases that occur via the six-monthly Baseline Update process. However, the complexity of the proposal may have led to significant communication challenges, and some confusion about how it would operate alongside the existing system. Reflecting on this analysis, the Government decided not to introduce a formal cap on total spending at Budget 2010.
The authors would like to thank Renee Philip and Coco Lu from the New Zealand Treasury for their contributions to this paper. Jana Kremer provided useful insights as a discussant of the paper at the Banca di Italia conference in Perugia in March 2010. Mark Blackmore from the Reserve Bank provided valuable external review. Any remaining errors are the responsibility of the authors and not the reviewers.
The views, opinions, findings, and conclusions or recommendations expressed in this Policy Perspectives Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury. The Treasury takes no responsibility for any errors or omissions in, or for the correctness of, the information contained in these Policy Perspectives Papers. The paper is presented not as policy, but to inform and stimulate wider debate.
Table of Contents
- Data from Charts and Graphs in the Paper
- 1 Introduction
- 2 Fiscal rules - theory and international experience
- 3 New Zealand's legislative framework
- 4 New Zealand's Budget management process
- 5 New Zealand's economic and fiscal performance over the past decade
- The 2008/09 recession and the global financial crisis
- Overall assessment of the past decade
- 6 Designing a spending cap for New Zealand
- 6 Designing a spending cap for New Zealand (continued)
- 7 The Government's response
- 8 Conclusion