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Steps Needed to Promote Fiscal Responsibility

Tuesday, 23 November 2004

More Steps Needed to Promote Fiscal Responsibility and Economic Growth

Ten years after the passage of the Fiscal Responsibility Act, the New Zealand Business Roundtable today released a report arguing the legislation should be strengthened.

Restraining Leviathan: A Review of the Fiscal Responsibility Act 1994 by Wellington economist and director of Capital Economics, Dr Bryce Wilkinson:

- reviews fiscal policy and its outcomes over the past decade and in a longer-term perspective;

- discusses the relationship between the size and quality of government spending and economic growth;

- makes the case for introducing explicit tax and spending limitations into the FRA; and

- explores other options for constraining government spending.

Business Roundtable executive director Roger Kerr said that 10 years was a suitable period to take stock of the effectiveness of the legislation. “The FRA has contributed to the achievement of sustained operating surpluses, improvements in Crown net worth and, most recently, an AAA credit rating for Crown foreign currency debt by one rating agency.

“However, the legislation has not been successful in constraining government spending and taxation, or in imposing meaningful discipline on the quality of expenditure decisions. Both an excessive level of government spending and wasteful or poorly targeted spending programmes constrain economic growth and work against the government's “top priority” goal of restoring New Zealand to the top half of the OECD income rankings.

“As Dr Wilkinson outlines, more explicit disciplines could be introduced. These could include tax and expenditure limits that give politicians extra protection against vested interest groups and may encourage decisions more closely aligned with the public interest.

“Many countries have successfully implemented spending caps. Limitations can be self-imposed by a government, or decided or ratified through referenda. There is also a case for a super-majority requirement for tax increases, because of the risk that a simple political majority may act in a predatory fashion.

“Such changes could be supplemented by a rigorous review of the quality of base spending.

“The FRA has served New Zealanders well but in the time it has been in operation other governments have implemented similar measures and some have gone further. The Business Roundtable believes it is time for a debate on whether New Zealand should follow suit and adopt stronger tax and expenditure limitations in the interests of better government and faster economic growth”, Mr Kerr said.

ENDS

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