The Budget Policy Statement

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The Budget Policy Statement The Budget Policy Statement December 2019 Summary From a parliamentary perspective, the Budget Policy Statement (the Statement) commences the Budget cycle. The requirement for a Statement was first legislated in the Fiscal Responsibility Act 1994, and is now included within the Public Finance Act 1989. The Government must pursue its policy objectives in accordance with eight principles of responsible fiscal management set out in the Public Finance Act 1989. The Statement must provide details of the broad strategic priorities guiding the Government in the preparation of the Budget for the upcoming financial year (which commences 1 July). The Statement is required to provide details around how the upcoming Budget aligns with the short-term intentions published in the latest Fiscal Strategy Report (or any amended short-term intentions). The Statement is referred to the Finance and Expenditure Committee, which then reports back to the House of Representatives within 40 working days. The next general debate after the presentation of the Committee’s report to the House of Representatives is replaced by a two hour debate on the Statement and the Finance and Expenditure Committee’s report on the Statement. The Budget Policy Statement commences the Budget cycle From a parliamentary perspective, the annual financial cycle commences with the publication of the Budget Policy Statement (the Statement). The Public Finance Act 1989 requires the Statement to be published and presented to the House of Representatives by 31 March (i.e. three months prior to the commencement of a new financial year on 1 July).1 For the upcoming financial year, the Statement must “…state the broad strategic priorities by which the Government will be guided in preparing the Budget…” The Statement must include: the overarching policy goals that will guide the Government’s Budget decisions; the policy areas that the Government will focus on in the upcoming financial year; and how the Budget for the upcoming financial year accords with the short-term intentions referred to in the most recent Fiscal Strategy Report (or any amended short-term intentions).2 1 Public Finance Act 1989, s 26M. 2 The Fiscal Strategy Report is normally published as part of the Budget documentation on Budget Day. Therefore the Fiscal Strategy Report referred to, is that published as part of the previous Budget. Parliamentary Library Research and Information research paper 2019/06 1 The 2020 Statement included the following five priorities: 2020 Budget Policy Statement priorities Just Transition – Supporting New Zealanders in the transition to a climate-resilient, sustainable and low-emissions economy. Future of Work – Enabling all New Zealanders to benefit from new technologies and lift productivity through innovation. Māori and Pacific – Lifting Māori and Pacific incomes, skills and opportunities. Child Wellbeing - Reducing child poverty and improving child wellbeing. Physical and Mental Wellbeing – Supporting improved health outcomes for all New Zealanders. Source: Hon Grant Robertson, Minister of Finance, Budget Policy Statement. Budget 2020 (11 December 2019). Usual practice is for the Statement to be published at the same time as the Half Year Economic and Fiscal Update (HYEFU).3 However, this is not always the case (see Appendix 1). Specifically in election years, if the Pre-election Economic and Fiscal Update is published between 1 October and 31 December, a HYEFU is not required to be published.4 This occurred in 1999 and 2011. In December 2008, due to the impact of the Global Financial Crisis on the New Zealand economy, the Government requested that the Treasury publish updated Economic and Fiscal Forecasts, despite a Pre-election Economic and Fiscal Update being published on 6 October 2008. The Statement was published on the same day as these Forecasts. Appendix 2 provides details of the Budget Policy Statement cycle. The role of the Fiscal Responsibility Act 1994 The Statement was a creation of the Fiscal Responsibility Act 1994. This legislation was enacted to “improve the conduct of fiscal policy by specifying principles of responsible fiscal management and by strengthening the reporting requirements of the Crown”.5 These reporting requirements included the publication of a Budget Policy Statement. Content of the Statement had to include the Government’s long-term objectives for fiscal policy, its broad strategic priorities for the upcoming Budget, and its fiscal intentions for the upcoming financial year and following two years.6 The first Statement was published on 23 February 1995 by the Minister of Finance, Rt Hon Bill Birch. In the Statement’s Introduction, the Minister said that “These strategic documents are 3 The Half Year Economic and Fiscal Update publication was previously known as the December Economic and Fiscal Update. Its name was changed in 2005 due to an amended Public Finance Act 1989 enabling the Update to be published in either November or December. 4 Fiscal Responsibility Act 1994, s 13(3) and Public Finance Act 1989, s 26S(4). 5 Fiscal Responsibility Act 1994, Long title. 6 Ibid. Parliamentary Library Research and Information research paper 2019/06 2 designed to provide confidence and certainty about the Government’s direction and to create an opportunity for debate about the choices that face the community”.7 The Statement was referred to the Finance and Expenditure Committee, which then undertook public hearings and had the Minister of Finance appear in front of it.8 The Committee’s report was presented to the House of Representatives on 30 March 1995, and the first ever debate on a Budget Policy Statement took place on 5 April 1995.9 In 2004, the Fiscal Responsibility Act 1994 was repealed, with sections incorporated into the Public Finance Act 1989.10 According to the explanatory note of the amending bill, the intention was to consolidate the principal legislation regarding public finances, while retaining the principles of the Fiscal Responsibility Act 1994.11 Some changes were introduced at this point, including: a refocusing of the Statement towards the Government’s budget strategy for the upcoming Budget, and reducing the emphasis on the long-term fiscal policy objectives; and allowing the Statement to be published earlier than 1 December. Principles of responsible fiscal management The Public Finance Act 1989 specifies that the Government must pursue its policy objectives in accordance with principles of responsible fiscal management. The Government can only depart from these principles temporarily. When it does so, the Minister is required to state the reason for the departure, the approach the Government intends to take to return to the principles, and the period of time it is expected to take.12 The Public Finance (Fiscal Responsibility) Amendment Act 2013 increased the number of principles from five to eight (while also amending the fifth principle).13 The Treasury’s An Introduction to New Zealand’s Fiscal Policy Framework noted that these additional principles broadened the definition of good fiscal policy (which was based around sustainability) to also include economic stability and fiscal structure.14 The eight principles of responsible fiscal management are:15 7 Rt Hon Bill Birch, Minister of Finance Budget Policy Statement 1995 (23 February 1995) at 5. 8 (5 April 1995) 547 NZPD 6707. 9 (30 March 1995) 547 NZPD 6573. (5 April 1995) 547 NZPD 6706. 10 The Treasury A Guide to the Public Finance Act (August 2005) at 42. 11 Public Finance (State Sector Management) Bill, Explanatory note. 12 Public Finance Act 1989, s 26G. 13 The fifth principle was previously defined as “Pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years”. 14 The Treasury An Introduction to New Zealand’s Fiscal Policy Framework (March 2015) at 8. 15 Public Finance Act 1989, s 26G. Parliamentary Library Research and Information research paper 2019/06 3 1. Reducing total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future by ensuring that, until those levels have been achieved, total operating expenses in each financial year are less than total operating revenues in the same financial year. 2. Once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues. 3. Achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future. 4. Managing prudently the fiscal risks facing the Government. 5. When formulating revenue strategy, having regard to efficiency and fairness, including the predictability and stability of tax rates. 6. When formulating fiscal strategy, having regard to the interaction between fiscal policy and monetary policy. 7. When formulating fiscal strategy, having regard to its likely impact on present and future generations. 8. Ensuring that the Crown’s resources are managed effectively and efficiently. “Prudent” debt levels are not defined in the Act, allowing for each Government to decide what level of debt it considers to be prudent. Similarly, a “reasonable period of time” is also undefined in the legislation. The Treasury’s An Introduction to New Zealand’s Fiscal Policy Framework noted that “By setting their own targets, governments are more likely to commit to meeting them”.16 Budget Policy Statement requirements For the upcoming financial year, the Statement is required to provide the details of the broad strategic priorities guiding the Government in the preparation of the Budget. According to the Public Finance Act 1989, these have to include:17 The overarching policy goals that will guide the Government’s Budget decisions; The policy areas that the Government will focus on in the upcoming financial year; and How the Budget for that year accords with the short-term intentions referred to in the most recent Fiscal Strategy Report (normally published as part of the Budget documentation on Budget day), or any amended short-term intentions.
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