Roles of Fiscal Policy in New Zealand

1
Roles of Fiscal Policy in New Zealand

• Felicity Barker
• Robert Buckle
• Robert St Clair
• Prepared for Conference on Fiscal Policy
  Frameworks, Monetary Policy Implications, and
  Intergenerational Financial Funds
• Sydney, 23 and 24 August

2
Purposes

• Propose lenses of sustainability, structure and
  stability through which fiscal policy impacts on
  growth
• Discuss New Zealands fiscal framework in the
  context of these lenses
• Discuss contemporary issues in New Zealand to
  highlight areas to investigate

3
Sustainability

• Ability of government to fund a given expenditure
  program at given tax rates
• Importance to growth
• Tax smoothing
• Crowding out via high debt
• Certainty
• Macro and financial stability

4
Deficit bias arises from

• Political economy issues
• Short sighted behaviour of politicians
• Expenditure of cyclical revenues
• Weak fiscal institutions
• Information requirements
• Effective monitoring
• Contingent liabilities

5
NZ Responses

• Principles of responsible fiscal management
• Balanced budget over cycle
• Prudent level of debt and net worth
• Transparency
• Reporting of financial information and risks
• Long-term objectives and projections (FSR)
• Short term intentions
• Statement of Long Term Fiscal Position
• Independence preparation, standards, audit

6
Outcomes
7
Outcomes
8
Structure

• Structure of expenditure and taxation and size of
  government
• How structure impacts on growth
• Endogenous growth literature suggests role for
  government expenditure
• Taxation effects growth through distorting
  behaviour
• Impact of size at what point does the Baumol
  effect arise?

9
Challenges

• Information requirements can lead to government
  failure
• Identifying externalities
• Identifying role of government and relative
  effectiveness of comparative institutions
• Limits on cost benefit analysis
• Political economy
• Politicians motivated by vote buying

10
NZ Responses

• Institutional design
• Delegation of responsibilities and accountability
• Introduction of market mechanisms
• Transparency and accountability
• Parliamentary scrutiny
• Ministerial responsibility

11
Outcomes

• Difficult area to assess as information is
  dispersed
• On going debates as to how to impose
  value-for-money disciplines on government,
  particularly for existing expenditure

12
Stabilisation

• Independent central Bank delegated role of price
  stability due to
• Argument fiscal policy cannot impact on demand
• Institutional issues
• time inconsistency implies independence
• lags, multiple objectives of fiscal policy
• Recent research shows fiscal policy can impact on
  demand
• Institutional issues remain

13
Fiscal policy and Stability

• Views at both ends of the spectrum
• Buiter (2005) no role for discretionary fiscal
  policy
• Allsopp and Vines (2005) government should take
  account of impact on the macro-economy eg
  through impact of interest and exchange rates
• Fiscal policy may have a role when monetary
  policy ineffective
• However institutional issues remain

14
NZ Responses

• Automatic stabilisers PFA and government
  objective to balance operating budget over the
  cycle
• Setting of tri-annual short-term intentions
• Assessment of macro-economic outlook including
  provision of fiscal impulse
• Understanding impact of fiscal policy on the
  cycle is an on-going area of assessment

15
Outcomes

• Recent business cycle in combination with low
  international interest rates poses challenges for
  monetary policy
• Increased emphasis on short term interest rates
  and exchange rate
• Has raised debate about robustness of framework
  and the role of fiscal policy

16
Outcomes
17
Outcomes
18
Contemporary Issues

• Understanding the links between the lenses
• Key issues for NZ
• Can the fiscal framework be used to improve
  fiscal structure
• What would be the benefit of fiscal rules focused
  on stability
• What are the links between structure and stability

19
Sustainability and Structure

• Debt constraint provides weak discipline on the
  quality of expenditure in a growing economy
• Revenue or expenditure limits
• Budget rules to provide incentives for
  departments to re-prioritise

20
Fiscal rules and stability

• Policy rules relating to structural balance and
  dedicated funds
• Fixed expenditure rules
• Ex-ante rules relating to revenue surprises
• Independent fiscal authority

21
Structure and Stability

• Taking account of stability in structural
  policies may conflict with micro efficiency
  objectives, suffer from lags or may be
  politically undesirable
• Freeing up for land for residential investment vs
  urban sprawl goals
• Denying deductibility of rental losses vs taxing
  comprehensive income.

22
Conclusions

• New Zealand has a strong sustainability framework
• Challenges remain in achieving value-for- money
  and questions remain as to the role of the fiscal
  framework here
• Debate reignited as to whether fiscal
  institutions can be designed to take greater
  account of stability

23
How far have we come?

• Madison, 1788
• In framing a government which is to be
  administered by men over men, the great
  difficulty lies in this you must first enable
  the government to control the governed and in
  the next place oblige it to control itself