Fiscal Institutions in New Zealand and the Question of a Spending Cap

Abstract

New Zealand’s current 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 global financial crisis 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 is does not require the government to define a target level for government spending. Over recent years, government spending has increased as a share of GDP. Most of this reflects increased spending during the extended economic upturn through the middle of last decade. The recent recession has 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 such a spending cap, presents a proposed design, including some of the potential challenges, drawing heavily on international experience.Reflecting on this analysis, the Government decided not to introduce a formal cap on total spending in Budget 2010. The benefits of the proposed spending cap are that it would have reinforced the commitment to the existing limit on new initiatives (via the $1.1 billion Operating Allowance) and placed an indicative limit on other forecasted expenses increases that go through the 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.