6 LEGISLATING FOR STABILITY - THE FISCAL RESPONSIBILITY ACT 1994

Introduction

The Fiscal Responsibility Act legislates reporting requirements by the Minister of Finance to Parliament in respect of fiscal management. The long title of the Act refers to improving "the conduct of fiscal policy by specifying principles of responsible fiscal management and by strengthening the reporting requirements of the Crown".

The Act is the last piece in a suite of legislation - the State Owned Enterprises Act, the State Sector Act, the Public Finance Act, and the Reserve Bank Act are antecedents - designed to re-define the role and responsibilities of the State, and establish an environment facilitating responsible and business-like longer-term public management.

The Principles of Responsible Fiscal Management

Five principles guide the Government:

• Reduction of total Crown debt to prudent levels - to provide a buffer against factors that may impact on the level of debt in the future. To achieve this, Government must keep total operating expenses of the Crown in each financial year less than its total operating revenue until these are achieved.
• Maintaining prudent levels of debt once these have been achieved - by ensuring that total operating expenses do not exceed total operating revenue. There is some leeway allowed for here, as the levels are expected to be maintained on average through time.
• Achieving and maintaining levels of Crown net worth - so as to provide a buffer against factors that may impact adversely on the Crown's net worth in the future.
• Managing prudently the fiscal risks facing the Crown.
• Pursuing consistent policies - with a reasonable degree of predictability about the level and stability of tax rates for future years.

These arrangements developed from the background of New Zealand's recent economic history, when debt levels rose significantly as the Government fought to maintain income and employment levels and to broaden the base of the economy in the aftermath of Britain's entry to the European Community, and the shocks of the international oil crises. The fairly frequent adjustments and switches in policy settings that characterised that phase contributed to what became a somewhat unpredictable and unstable operating environment - both for the State sector and the business sector. The central purpose of the Fiscal Responsibility Act is to establish a stable operating environment.

The key elements in this are predictability and transparency. Departures from the principles are allowed for but the Minister of Finance must, in accordance with the Act, specify why the Government is departing from them, how the Government will return to the principles and the likely period of time that the principles will be departed from.

With the best of intentions

Having outlined what it is the Government is expected to base its fiscal management upon, the Act details the increased reporting requirements that are the responsibility of the Government. Several statements and reports are tabled in Parliament or published on a regular basis. Two of these - the Budget Policy Statement and the Fiscal Strategy Report - relate to the long term intentions of Government, while the remainder are designed generally to disclose and verify as much information as possible about the state of the economy and the progress of the Government's strategies. The other documents are various economic and fiscal updates.

The Budget Policy Statement

The Minister of Finance must, at least three months before the start of each financial year, publish a Budget Policy Statement. The Policy Statement contains the Government's long-term objectives for fiscal policy and focuses on the Crown's total operating expenses and revenue, the balance between the two, and levels of the Crown's total debt and net worth. The Statement must show how these long-term objectives accord with the principles of responsible fiscal management. The Statement should outline, both for the upcoming financial year and the following two years, the broad strategic priorities the Government will follow in preparing its Budget. The Policy Statement should also explain the Government's intentions regarding operating expenses, net worth and so on, and indicate whether these meet the principles of responsible fiscal management. Again, there is room for departing from the principles, but any such departures must be fully explained and plans for return to the principles must be included in the statement.

The Fiscal Strategy Report

Published at the same time as the Budget, the Fiscal Strategy Report is designed to ensure that the Budget is consistent with the Budget Policy Statement. Any departures must be explained and the Policy Statement amended.

The report also contains progress outlooks that include projections of trends in Crown revenue, expenses, the balance between them, net debt and net worth. Progress towards the longer-term fiscal strategy and objectives set out in the Budget Policy Statement is also set out in the report.

These two documents establish a long term perspective in the Crown's financial management and planning together with a high degree of transparency - they are by design public documents.

Economic and Fiscal Updates

Several updates are required, including -

• An Economic and Fiscal Update for the next three years - to be prepared by the Treasury and published in December each year.
• An Economic and Fiscal Update for the next three years - to be prepared by the Treasury and published three months before a general election.
• An annual Fiscal Update - for that year, including forecast estimated actual financial statements for the Crown, to be prepared by the Treasury and tabled in Parliament towards the end of each year.

All Government decisions that may have a material effect on the fiscal and economic situation must be incorporated into economic and fiscal updates. If any decision cannot be quantified the reasons are disclosed in the statement of specific fiscal risks of the Crown. If the Minister of Finance determines that including a specific decision in an economic and fiscal update would prejudice the country's economic interests or its security, or compromise the Crown in any negotiations, litigation or commercial activity, or result in material loss of value to the Crown, then the information does not have to be published. An example of grounds for such non-disclosure might be the intention to sell a Crown asset - listing expected revenue from the sale in the forecasts might prejudice the best possible price.

As the economic and fiscal updates are prepared by the Treasury on behalf of the Minister of Finance, a statement of responsibility signed by both the Minister and the Secretary to the Treasury comes with every update. The Minister is obliged to pass all policy decisions with material economic or fiscal implications to the Secretary. The Secretary must state that the Treasury has used its best professional judgment on the basis of the economic and fiscal information available, and from that judgment has supplied an economic and fiscal update incorporating the fiscal and economic implications of the policies of the Government.

Other updates required are a half year update and a current year fiscal update.

Timing of Statements

December - Half year economic and fiscal update published

The half year economic and fiscal update is published in December of each financial year unless a pre-election update has been published. The current year fiscal update contains forecast estimated Crown financial statements and a statement of all underlying significant assumptions and therefore is not as comprehensive as other reports.

Summary

The suite of reports and statements that is now examined and debated in Parliament and is open to public scrutiny provides an unprecedented level of information about the Government's fiscal performance and plans.

Even though the Fiscal Responsibility Act has been in operation for only a short time it is already contributing to a more predictable and stable operating environment than existed through the 1970s and much of the 1980s. Its value will be fully tested as New Zealand moves into government under proportional representation.