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The Story Behind the New Zealand Budget Process

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Yesterday was New Zealand’s Budget Day – the day that the Minister of Finance tables various documents and makes a statement in Parliament relating to the Government’s economic policies and spending proposals for the next fiscal year, which starts on July 1.  While the proposals in the Budget are interesting and have a large impact domestically, what I thought I’d write about are the laws that govern New Zealand’s Budget process .  Each country has their own way of doing things in this area and the large scale reforms that led to the existing laws in New Zealand have been quite widely discussed and analyzed around the world.

Up until the 1980s, New Zealand’s economy was possibly one of the most highly regulated in the world and the public sector had grown substantially.  During the 1970s, the government had sought to respond to various crises (e.g., high inflation, the oil price crisis, high unemployment, reduction in overseas trade) with a range of policies that were funded by high taxation and substantial overseas borrowing.  By 1984, the country was considered to be on the verge of bankruptcy.  The Government therefore decided to make some fairly radical changes to the way that the economy and government were run.

Following reforms aimed at achieving significant liberalization of the economy (e.g., floating the currency, abolishing certain subsidies), the focus turned to the public sector.  The reforms in this area involved the corporatization, deregulation, and privatization of major government-owned businesses (“state-owned enterprises”), the widespread reorganization and refocusing of public sector agencies, including changes to accountability arrangements and the introduction of a strategic management system, and revolutionizing the government’s financial management system.  For example, there was a shift to focusing on “outputs” of government departments that would be linked to meeting the elected Government’s desired “outcomes” – the Government was essentially a purchaser of services, and the departments were the suppliers.  Departments were required to fully report on the costs of delivering the services, and there was a significant increase in the level of parliamentary scrutiny of those costs and of how departments conducted their business.

In addition, the Fiscal Responsibility Act 1994 was enacted that set out the principles of responsible fiscal management and imposed much greater reporting requirements on the Government itself.  These provisions have since been incorporated into the Public Finance Act 1989.  It is these provisions that require the Government to produce documents such as a Budget Policy Statement (which sets out long-term objectives), a Fiscal Strategy Report, and Economic and Fiscal Updates.  All of these reports, as well as those that departments are required to produce, are public and are closely examined by Parliament.  Furthermore, similar to other democracies, under the Constitution Act 1986 it is not lawful for the Crown (i.e., the elected Government) to levy a tax, borrow money, or spend public money except by or under an Act of Parliament.

Of course, this is only a very brief and broad overview of the system, and there have been various other changes added over the years.  There are now several core pieces of legislation that fit together to ensure that the fiscal management system is transparent and that there are clear obligations and lines of accountability in different parts of the public sector.  I was interested to see that the results of a couple of recent international surveys place New Zealand at or near the top of the rankings in relation to fiscal transparency and responsibility, as well as being perceived as having the lowest level of public corruption.

There is no doubt that the economic and public sector reforms have had a huge impact on the country, and the positive and negative aspects of these impacts have been widely debated.  The Library of Congress has a number of resources on these issues and on reforms and processes in other countries as well, plus there is a great deal of information available online.  It’s a complicated area, for sure, but thankfully you don’t have to be an expert to learn more!

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