New Zealand’s Budget Principles
New Zealand, since 1994, has followed a legally enshrined set of budget principles, and the Government is legally required to assess its fiscal policies against these. The principles include: reducing public debt to prudent levels; once these have been achieved, maintaining them by ensuring that, over a reasonable period of time, operating expenses do not exceed operating revenues; sustaining a net worth that provides a buffer against adverse events; managing fiscal risks prudently; and pursuing policies that contribute to stable, predictable future tax rates. It is left to the government to interpret terms in the law such as “prudent” and “reasonable.” A government may depart from the principles if it specifies its reasons and a plan to return to the principles in a specified period of time. Every 4 years the government presents a statement of New Zealand’s “long-term fiscal position,” including a 40-year budget projection and accompanied by a “statement of responsibility, signed by the Secretary of the Treasury, attesting that his Department used its best professional judgments about the risks and outlook (Anderson and Sheppard, 2010).
mechanism for significantly improving the long-term outlook. Subsequently, the abandonment of overarching fiscal policy goals and targets has left Congress and the President without a framework to assess the long-term consequences of current policy or new proposals. Nor does it reward them for doing so.
The setting of long-term fiscal targets could be adapted to the current budget process. As explained in Chapter 3, the committee judges that a 60 percent upper limit on the ratio of debt to the size of the economy (as measured by the gross domestic product, GDP) would be an appropriate fiscal goal for leaders to put in place over the next two decades. Formal adoption of such a goal now can help leaders develop fiscal policies to constrain the exponentially growing levels of debt implied by the nation’s current fiscal path.
A practical question is how to integrate such long-term fiscal goals into a budget process that is predominately focused on the near term. The long-term outlook is the starting point for formulating alternative fiscal policy targets that would create a more sustainable fiscal future. However, no one would suggest that the federal government should prepare a detailed budget for the next 50 or 75 years. Rather, since the federal budget is prepared annually, long-term goals should serve as a guide for the formulation of policies that would lead to a sustainable debt level over the next 10 or 20 years. In the United States, any such fiscal target would have to be renewed with each administration and each Congress.