New Zealand’s fiscal framework has endured over nearly three decades. The main features of the fiscal framework are its emphasis on principles of fiscal responsibility, transparency, and independence in reporting, standards and audit.
The Fiscal Responsibility Act (FRA) was introduced in 1994 in order to safeguard improvements in the public finances and increase policy credibility. The FRA required New Zealand governments to set their own long-term fiscal objectives to be consistent with principles of responsible fiscal management. The principles include maintaining debt at “prudent” levels and balancing revenue and expenses over time.
Since 1994, New Zealand governments have used a debt anchor to guide fiscal policy. The debt anchor is a numerical target for public debt, expressed as a percentage of GDP. The form of the debt anchor has changed over time, reflecting changes in policy and economic circumstances. This includes changes to the definition (net debt, gross debt), form (range, ceiling, point targets) and the level of the debt anchor.
Determining a prudent level of debt requires an on-balance judgement, taking into account the buffer needed to manage shocks, wider macroeconomic vulnerabilities, structural changes that will influence long-term fiscal sustainability, intergenerational equity, public investment and debt dynamics. New Zealand is a small, open, commodity-exporting economy that is vulnerable to external shocks and natural disasters. Reflecting these features, New Zealand has targeted a level of public debt that is low compared to major advanced economies.
While the debt anchor plays a key role in the framework, this is supplemented by other short-term targets that provide operational guidance. A wide range of indicators is used to develop the fiscal strategy, including a full balance sheet. Reporting in Budget documents is also broadening to include a wider range of wellbeing indicators.
The debt anchor is closely aligned with the objective of fiscal sustainability. The framework has been successful in achieving considerable public debt reduction since the early 1990s (see Figure 1). Following recession in 2008–09, the debt anchor was adjusted to allow debt to increase in the short term while capping the rise in debt and setting a longer-term path to stabilise and then reduce public debt.
New Zealand’s Net Public Debt, 1992–2018
Source: New Zealand TreasuryNote: Each dot represents a year from 1997 to 2017. A positive (negative) fiscal impulse represents a decrease (increase) in the structural primary balance.New Zealand’s Net Public Debt, 1992–2018
Source: New Zealand TreasuryNote: Each dot represents a year from 1997 to 2017. A positive (negative) fiscal impulse represents a decrease (increase) in the structural primary balance.New Zealand’s Net Public Debt, 1992–2018
Source: New Zealand TreasuryNote: Each dot represents a year from 1997 to 2017. A positive (negative) fiscal impulse represents a decrease (increase) in the structural primary balance.Macroeconomic stability is supported by having sufficient flexibility to accommodate shocks. A low level of public debt provides fiscal space to allow the automatic stabilizers to operate. However, a debt anchor is not sufficient to avoid pro-cyclical discretionary fiscal behaviour, particularly as the debt outlook is sensitive to short-term forecast revisions. New Zealand’s discretionary fiscal stance has been broadly a-cyclical over the last twenty years (see Figure 2).
Discretionary Fiscal Impulse and Output Gap, 1997–2017
Source: New Zealand TreasuryDiscretionary Fiscal Impulse and Output Gap, 1997–2017
Source: New Zealand TreasuryDiscretionary Fiscal Impulse and Output Gap, 1997–2017
Source: New Zealand TreasuryCompared with other potential fiscal rules, a debt anchor is relatively simple. This simplicity helps to build understanding by policymakers and the public. There is wide public and cross-party commitment to keeping public debt at prudent levels. Targeting medium-term outcomes also avoids the need for setting fiscal targets in cyclically-adjusted terms, as the output gap is expected to be closed in the medium term. Cyclically-adjusted targets are more complex, and subject to estimation uncertainty, making them harder to communicate. There is a parallel with monetary policy targets: an inflation target is typically communicated in terms of future actual inflation, although measures of core inflation are used for analytical purposes.
A medium-term budgeting framework is important for ensuring the fiscal anchor provides operational guidance to the annual budget process. There are regular updates of fiscal forecasts and projections with a ten-year horizon. New Zealand’s fiscal management approach includes operating guidelines that ensure budget decisions are consistent with the fiscal strategy. These guidelines include fixed nominal baselines for most expenses and budget allowances for new measures. The budget allowances are adjusted, if necessary, to ensure levels of new spending align with the fiscal objectives.
The fiscal framework has been resilient to political and economic changes. Although there have been changes to the specification of the debt anchor over time, the changes have reflected successive governments setting their own fiscal strategy creating strong political commitment. Rather than relying on enforcement of legislated numerical fiscal rules, New Zealand’s framework relies on creating effective incentives for governments to conduct responsible fiscal policy. As governments must determine and announce their own fiscal anchors, there is high reputational cost of not achieving them.
Overall, New Zealand’s fiscal framework has been effective in supporting fiscal sustainability. The experience suggests that a debt anchor can be effective in supporting fiscal management and fiscal anchors that are determined by governments can create strong incentives for achievement. Nevertheless, outcomes also reflect New Zealand’s particular history, institutions and political culture, so lessons may not easily transfer to other country contexts.
