The Fiscal Responsibility Act 1994: The astonishing success of a weak non-binding policy

December 3, 2018

The Fiscal Responsibility Act 1994 (FRA) shouldn’t have worked to cement fiscal discipline into the New Zealand budgeting practices, the wider political discourse and become part of New Zealand’s constitution.

“All” it requires governments to do is explain their fiscal actions and fiscal intentions, with the Treasury keeping score. The FRA leaves it to the government of the day to define fiscal success. The result, however, has been a series of governments of all political hues striving for fiscal balance and low debt.

Like a bumblebee that can in fact fly, this new paper explains how the FRA has become a pollical force even though it wasn’t legally enforceable. It brings out that the conditions for the policies to succeed were quite subtle.

While some of the FRA principles have been highly effective, other elements, such as the 40-year fiscal and economic outlook have achieved almost no traction. Parliamentary scrutiny has been missing in action, while monitoring by economic commentators and financial markets has proven effective.

One crucial condition for success has been the role of the Treasury’s statutory independence when it undertakes its economic and financial forecasting and reporting roles.

As well as looking at past success, the paper raises interesting questions about the current fashion for independent fiscal institutions (IFI). The New Zealand government is currently consulting on whether New Zealand should follow this fashion.

If New Zealand already has independent fiscal functions undertaken by the Treasury and the Office of Auditor General, do we really need an IFI that the Government’s document implicitly assumes is required?

Over 20 years’ experience with the FRA and government performance information generally has shown that supply of fiscal information does not create demand. The experience of the FRA raises real questions about whether there is any sustained demand for the sort of economic fiscal and fiscal analysis that the IFI consultation paper assumes is required. One can leave aside the need for financial costings of political party’s policies, which could be sourced using current government capabilities.

Countries that don’t learn from their policy successes and failures are doomed to repeat the failures of the past. This paper can help inform New Zealanders, so we can do better than that.

ANU Press has published our volume (NZIER working paper 2018/1) in, Successful Public Policy: Lessons from Australia and New Zealand. It is available here.

This chapter and others in the book can help inform New Zealanders, so we can do better than that.

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