Recommendation

The Finance and Expenditure Committee has examined the Public Finance (Fiscal Responsibility) Amendment Bill, and recommends by majority that it be passed with the amendments shown.

Introduction

The bill seeks to amend the fiscal responsibility provisions of the Public Finance Act 1989 by adding new principles of responsible fiscal management and codifying some existing reporting practices as legislative requirements.

The new principles would require the Government to

• •formulate fiscal strategy with regard to its interaction with monetary policy

• •formulate fiscal strategy with regard to its likely impact on present and future generations

• •ensure that the Crown’s resources are managed effectively and efficiently.

One existing principle would be amended to require revenue strategy to have regard to efficiency and fairness, including the predictability and stability of tax rates.

The bill would amend reporting requirements in four main ways:

• •Introducing a requirement for fiscal strategy reports to include an assessment of the extent to which the Government’s fiscal performance is consistent with its fiscal strategy.

• •Requiring fiscal strategy reports to include details of the Government’s revenue strategy, including the Government’s objectives for the tax system and tax policy; although producing a revenue strategy has been established practice for some time, it is not currently required by legislation.

• •Requiring regular investment statements, prepared by the Treasury, to be presented to the House; while an investment statement was prepared in 2010, with a supplement in 2011, neither document was required by legislation.

• •Requiring fiscal strategy reports to be clear about what the Government is trying to achieve and how its management of the Crown’s resources contributes to those goals.

This commentary explains the amendments the majority of us recommend to the bill, which aim to clarify one of the principles and refine the reporting requirements to help the legislation operate more effectively.

Principles of responsible fiscal management

One of the new principles of responsible fiscal management to be inserted by clause 4 of the bill is “formulating fiscal strategy with regard to its interaction with monetary policy” (new section 26G(1)(f)). To avoid possible misinterpretation of its intent, we recommend, by majority, amending the provision to refer to “formulating fiscal strategy having regard to the interaction between fiscal policy and monetary policy”. (We are also proposing minor drafting improvements to this and the two preceding principles.)

The Act does not mention monetary policy. The majority of us understand that in doing so, the bill aims to ensure that governments take explicit note of the fact that fiscal policy and monetary policy are interdependent; and that different fiscal strategies can prompt different monetary policy responses.

The majority of us believe our recommended amendment would make clearer this interdependence between fiscal policy and monetary policy, without giving a mistaken impression that the relationship is one-way; that is, that fiscal policy should take monetary policy into account, but not the reverse.

Contents of fiscal strategy report

Clause 5, inserting new section 26KA, would implement the policy goal of requiring fiscal strategy reports to be clear about what the Government is trying to achieve, and how its management of the Crown’s resources contributes to doing so. As introduced, the bill would require the fiscal strategy report to state and explain the Government’s priorities for allocating the Crown’s resources. The majority of us consider that the use of the word “priorities” might encourage a focus on short-term spending plans, whereas the majority of us believe the intention of this reporting requirement is to have governments explain their focus for the medium term. For clarity, we therefore recommend by majority amending clause 5 so that it refers to the Government’s strategy for management of the Crown’s resources, and specifies that these resources consist of expenditure, assets, and liabilities. We also recommend, by majority, a consequential amendment to clause 7(2), inserting section 26M(3)(c).

Publication of notices in the Gazette

Clause 10 of the bill as introduced would amend section 26Y of the Public Finance Act to add investment statements to the list of reports which must be “gazetted” upon presentation to the House; that is, a notice must be published in the Gazette to publicise the fact that the reports are publicly available. The majority of us consider this requirement largely outdated, and believe public communication and transparency are better served by making such documents available on the Internet.

Accordingly, we recommend, by majority, amending clause 10 to replace the requirement under section 26Y to publish a notice in the Gazette upon presentation of specified reports to the House with a requirement that the specified documents be published on an Internet site maintained by or on behalf of the Treasury. The Secretary to the Treasury would be required to ensure that such documents remained accessible on the site for at least 5 years. In practice, they are likely to remain on the website for longer, and after removal would continue to be publicly available under normal archiving practices.

New Zealand Labour Party minority view

This amendment bill has its genesis in the confidence and supply agreement between the National and ACT parties. It expands and amends the list of criteria to be taken into account by the Government when managing the country’s finances.

The changes proposed would not make the management of the Crown’s finances any better, and in one case (interaction with monetary policy) has the potential to make imbalances in the economy worse.

New section 26G(1)(g) says the Government should be “formulating fiscal strategy with regard to its likely impact on present and future generations, and”. Of course prudent governments should already do this.

It is clear from advice from officials that the amendment will have no enforceable effect on National’s refusal to address the age of eligibility for superannuation, despite this being the most obvious example of budget settings that have effects between generations. Superannuation costs rose from $7.3 billion in 2008 to $10.2 billion in 2013. This is already more than the cost of all welfare benefits combined. Within two years superannuation exceeds the amount spent by Government on all education (preschool, primary, intermediate, secondary, and tertiary combined). The proposed amendment has no effect on this.

A more significant change is proposed to section 26G(1)(f) which proposes “formulating fiscal strategy with regard to its interaction with monetary policy”.

Assuming that this phrase is not meaningless, its effect must be to elevate the status of monetary policy in regard to fiscal strategy compared with the status quo. We suggested the wording should require the interaction between fiscal and monetary policy to be considered, but not elevate monetary policy in this way.

The Treasury and Government reading of “monetary policy” in paragraph (f) is too narrow. We believe the wording in (f) should be “formulating fiscal and monetary policy with regard to the interactions between them”. This proposed change was rejected by the Government, who have said fiscal responsibility legislation should not influence monetary policy. If that logic were applied consistently, then fiscal responsibility legislation should not refer to effects on economic efficiency either, which this bill does.

In any event, Labour members do not accept the officials’ advice that all monetary policy is delegated to the Reserve Bank. It is true that that which is delegated to the Reserve Bank through the Reserve Bank Act is delegated, but other monetary policy (including advice functions and other relevant considerations for the Government) remain with the Treasury and the Government.

A comparison with the equivalent legislation in Australia is also relevant. The Australian equivalent makes express reference to achieving adequate national savings. When we asked officials about this, they emphasised Government savings, which is only a subset of national savings. Given the entrenched problem that New Zealand has as a consequence of a current account deficit spanning decades, which is currently the worst in the developed world, we think that the reference to national savings is at least as important as reference to monetary policy. This proposed amendment was also rejected by Government members.

Overall this legislation is poorly drafted and will do nothing to improve fiscal responsibility. It is a waste of Parliament’s time and is accordingly opposed by the Labour Party members.