General policy statement
The objective of this Bill is to limit the annual increase in core Crown expenses by linking it to the rate of inflation and the rate of population change. The Bill also provides for eligible voters to approve, by a majority of valid votes cast in a binding referendum, an increase in the spending cap.
At present, it is easier for governments to spend more, rather than to reprioritise and drive greater efficiency in existing spending. This Bill will provide more certainty in relation to the future growth in government spending, ensure a degree of spending restraint, and improve the transparency of spending decisions. The Bill will lead to government objectives being delivered via a State sector that comprises a smaller share of the economy than would otherwise be the case. This will allow for a lower tax burden on the economy over time, thereby supporting higher economic growth and higher living standards.
The Bill provides for a spending cap for specified expenses, which changes for each financial year in direct proportion to the rate of inflation and the rate of population change. This still allows core Crown expenses to grow, albeit more slowly than gross domestic product, which tends to also include gains from productivity improvements.
The spending cap allows fiscal policy to continue to play a stabilising role in response to the economic cycle and shocks. Unemployment benefit expenses are excluded from the cap so that they can continue to expand and contract through the economic cycle, without placing pressure on other expenses under the cap. The Bill also provides for national emergencies, such as a natural disaster, where it is appropriate to exclude from the spending cap those expenses incurred as a direct result of an emergency. Finance costs (borrowing expenses) are excluded from the cap. The provisions of the Public Finance Act 1989 have been shown to provide an effective limit to growth in finance costs. Impairment losses are excluded from the cap because asset impairments tend to be volatile and difficult to forecast, and are largely outside the immediate control of the Government. Examples where asset impairments can arise include tax receivables and the student loan portfolio.
Capital expenditure is also excluded from the spending cap, because it is limited by the Government debt target and the fact that any operating expenses associated with capital expenditure would need to be met from within the cap.
The Bill sets out the calculation of a spending cap for a financial year, which is based on the spending cap for the previous year, adjusted for the rate of inflation and the rate of population change. The spending cap may be increased if a proposal to increase the cap is supported by a majority of valid votes cast in a referendum.
The Minister of Finance (the Minister) must include the spending cap for the coming financial year in the budget policy statement presented to the House of Representatives. The Minister must also, when presenting the annual financial statements of the Government to the House of Representatives, report on whether the spending cap has been breached, and if so, why, and what measures will be taken to ensure compliance with future spending caps.
Spending cap referenda
The Bill also provides for eligible voters to approve, by a majority of valid votes cast in a referendum, an increase in the spending cap.
The Government may initiate a referendum on a proposal to increase the spending cap for a financial year. The referendum is carried out under the provisions of the Referenda (Postal Voting) Act 2000, except that the question to be put to electors in a spending cap referendum is set out in the Bill and the outcome is binding for the purposes of calculating the spending cap.
If a majority of valid votes favour the proposal to increase the spending cap for the financial year, then the proposal is carried. If the referendum proposal is carried, the spending cap for each subsequent financial year is calculated based on that higher level of expenses.
Clause by clause analysis
Clause 1 is the Title clause.
Clause 2 is the commencement clause. The Act comes into force on the day after the date on which it receives the Royal assent.
Clause 3 sets out the purpose of the Bill.
Clause 4 is an interpretation provision.
Clause 5 sets out the meaning of specified expenses, which are subject to a spending cap. Specified expenses are expenses incurred by the Crown, or by an Office of Parliament, other than the following:
unemployment benefits paid under the Social Security Act 1964:
borrowing expenses (which means any interest or other financing expenses in respect of any loan or under any public security):
capital expenditure (which means the costs of assets acquired or developed (including tangible, intangible, or financial assets and any ownership interest in entities, but excluding inventories)):
impairment losses (as understood in generally accepted accounting practice):
emergency-related expenses (which means expenses that are directly related to an emergency or situation described in section 25(1) of the Public Finance Act 1989).
Clause 6 provides that the Act binds the Crown.
Restrictions on growth in government expenses
Subpart 1—Spending cap
Subpart 1 deals with—
Clause 7 provides that nothing in subpart 1 applies to a financial year that commences earlier than 12 months after the day on which the Act comes into force.
Clause 8 sets out the formula for calculating a spending cap. The spending cap for a financial year is calculated by increasing or decreasing the spending cap for the previous financial year in proportion to the rate of inflation and the rate of population change. The spending cap may be further increased only in accordance with the result of a spending cap referendum (see subpart 2 of Part 2).
Clause 8(2) provides that the annual percentage changes in inflation and population used in calculating a spending cap must relate to the year ending on 30 September in the financial year prior to the financial year for which the spending cap is calculated. The information will be sourced from official statistics published by Statistics New Zealand.
The formula will not produce a valid result for the first financial year to which the Act applies because no value will exist for the spending cap for the previous financial year. Clause 9 provides for the first spending cap to be calculated by replacing the amount of the spending cap for the previous financial year with the total amount of specified expenses that the Treasury forecasts will be incurred in that previous financial year.
Clause 10 sets out the formula for calculating an indicative spending cap. An indicative spending cap is calculated in the same way as a spending cap, except that it is based on rates of inflation and population change that are forecast by the Treasury for the purpose of preparing economic and fiscal updates.
Clause 11 requires the Minister to include the spending cap for a financial year in the annual budget policy statement relating to that year. The Minister must also include in the budget policy statement indicative spending caps for at least the next 2 financial years.
Clause 12 requires the Minister, when presenting the annual financial statements for a financial year to the House of Representatives, to report to the House of Representatives on whether the spending cap for that year has been exceeded. If the spending cap has been exceeded, the report must state why this has happened and what measures will be taken to ensure compliance with future spending caps. The report will also include details of any emergency-related expenses incurred in the financial year and excluded from the operation of the spending cap (see clause 5(2)(e)).
Clause 13 makes the consequential amendments set out in the Schedule, which align the Public Finance Act 1989 and the Referenda (Postal Voting) Act 2000 with this Bill.
Subpart 2—Spending cap referenda
Subpart 2 enables the spending cap for a specified financial year to be increased by way of a binding referendum (a spending cap referendum).
A spending cap referendum—
may be initiated by the Government at any time (clause 14):
is conducted under the Referenda (Postal Voting) Act 2000 (clause 15):
is based on a proposal to increase the spending cap by a stated amount and percentage for a specified financial year (clause 16):
may be held prior to or during the financial year to which it applies.
A proposal to increase the spending cap for a specified financial year by a specified amount will be carried if the majority of valid votes cast favour the proposal (clause 17(a)). If the proposal is carried, the spending cap for the specified financial year is increased by the specified amount (clause 17(b)).