Why doesn’t NZ need a fiscal rule?

I’ve been pointed to a very useful review of NZ’s fiscal policy that explains how the country manages so well with neither a fiscal rule nor a fiscal council. The NZ government is required by law to maintain ‘prudent levels’ of public debt but, beyond that, it is left to individual governments to decide what that means. Accountability and scrutiny is achieved largely through transparency and “broad social consensus on fiscal responsibility” and, so far, that has largely worked. The weakness identified by the review is that the government pursues time-inconsistent policy and saves too little in booms to offset the expenditure in recessions. The UK, despite a series of fiscal rules, suffers from similar problems.

The review considers whether a numerical fiscal rule might help and makes the point that

..it might weaken the Government’s ‘ownership’ of the debt target, and its preparedness to save revenue windfalls…  It might create incentives for governments to comply with the rule through policies that would weaken other parts of the balance sheet.

In other words, once there is a rule then the game is compliance with the letter, not the spirit, and that can actually weaken fiscal governance.

The review is also lukewarm on the idea of a NZ fiscal council, pointing to

…the operational independence of the Treasury in the preparation of the forecasts and other documents of its responsibility, its well-established non-partisan reputation, its increased openness to outside inputs, and its strong record of relatively (compared to other national forecasters) accurate and unbiased macroeconomic and fiscal forecasts.

How does HM Treasury stack up against that assessment and should we be thinking about its role in fiscal sustainability rather than allocating the entire burden to the OBR?

3 replies
  1. Eric Crampton
    Eric Crampton says:

    Main problem is there’s no clearinghouse that might undertake both cost-benefit assessment of substantial spending and regulatory measures, and rolling review of the stock of existing programmes. A fiscal council could serve that function. As it stands, we get spendups during good times with little consideration of long term fiscal effects.

    • jamesz
      jamesz says:

      Do many fiscal councils have the CBA role? As I understand it, most don’t have the resources and really just certify the assumptions used in departmental modelling work. I like the idea but it’s a bit like beefed-up RIA and there’s not a lot of evidence that has improved the quality of policy. I wish there was because it seems like such a good idea!

      Asymmetric responses to pos/neg output gaps are definitely a problem in the UK, too. The question for me is how you force a government to confront the long-run fiscal effects when it makes policy. Should the BEFU and HYEFU include elements of the LTFO, for instance?

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