Government to strengthen fiscal responsibility

The Government intends to strengthen the Public Finance Act so there are more checks and balances on ministers’ spending decisions and their long-term effects, Finance Minister Bill English says.

“The fiscal responsibility provisions of the Public Finance Act, which include a high degree of public reporting and transparency, have served New Zealand well in terms of maintaining a focus on low debt since 1994,” Mr English says.

“However, the global recession and events in the years immediately preceding it point to the need for a broader focus.

“In times of surplus, governments come under pressure to increase spending, which can put extra pressure on the economy, leading to higher inflation, higher interest rates and a higher exchange rate. This is bad for exports and jobs.

“The Government is proposing introducing some additional principles into Part 2 of the Public Finance Act that ministers would have to take into account when setting fiscal policy.

“The proposed changes are designed to ensure greater transparency around how government decisions affect the wider economy and future generations.”

The proposed changes would require governments to:
• Consider the impact of their fiscal strategy on the broader economy, in particular interest rates and exchange rates.
• Set out their priorities for revenue, spending and the balance sheet, rather than focus narrowly on debt as is currently the case.
• Take into account the impact of fiscal policy decisions on future generations
• Report on the successes and failures of past fiscal policy.

“We are also proposing to add a spending limit based on the rate of growth in inflation and population as a new principle of responsible fiscal management, as set out in the National-ACT Confidence and Supply Agreement.”

It would exclude spending on natural disasters, finance charges, the unemployment benefit and asset impairments, as they are either outside the Government’s control or they help stabilise the economy in a downturn.

“Under the proposal, if a government decided to temporarily exceed the limit they would need to clearly explain the reasons and outline how they intended to ensure future expenses remained within the limit.”

The Government intends to consult other political parties on the proposed changes, which would be included in a Bill to be introduced around the middle of the year.

“Naturally we don’t expect agreement on everything, but the broader the political support for these changes the better,” Mr English says.