NZ fiscal watchdog needed to guard the public purse

• Ageing population will increase fiscal pressures
• Independent oversight needed to guard spending quality
• Proactive changes now preferable to rapid change later

Wellington, 20 November 2014 - New Zealand needs tighter fiscal rules and an independent watchdog to improve the quality of government spending and reduce the risk of a return to deficit spending as the country’s population ages, if not before.

This is a key recommendation from Guarding the Public Purse: Faster Growth, Greater Fiscal Discipline, the latest report published by The New Zealand Initiative, a public policy think tank.

Using Treasury’s fiscal projections as a foundation, the report explores some of the spending pressures future governments are likely to face as the babyboomer generation retires, and considers options to avert a crisis.

Demographic projections show that the number of dependents (people under the age of 15 and over the age of 65) per 100 workers is expected to reach 72 by 2060, up from 50 in 2010 – an increase of 44 percent. Government spending on pensions and health is set to rise sharply as things stand.

“This isn’t abstract government finance, this has real implications for ordinary New Zealanders,” said Dr Bryce Wilkinson, principal author of the report. “We could all face sharp tax hikes to pay for increased retirement spending as a greater number of people become dependent on a shrinking base of economically active workers.”

The report also found that the big fluctuations in government spending growth during the last decade indicated a tendency for governments to lift spending when revenue permitted with insufficient regard to the quality of that spending.

In particular, the budget deficits of the last six years substantially reflect the staggering rise in core Crown operating spending (excluding finance costs) from 27.1% to 33.2% of GDP between the 2003/4 and 2008/9 fiscal years.

“Even though all the major political parties made returning the government books back to surplus a priority, their campaign promises turned the spending spigot back on despite the tenuous nature of projected surpluses,” said Dr Wilkinson. “A strong, independent fiscal watchdog is needed to keep governments more focused on stopping wasteful spending and responding effectively to the fiscal challenges of an ageing population.

“Proactive adjustments to the policy settings now would reduce the risk of a repeated experience of spending profligacy followed by fiscal stringency to reduce escalating public debt.”

The report's main recommendations are to:
• Strengthen existing fiscal rules to make it easier for political parties to resist excessive spending pressures;
• Continue work on putting tax and/or spending rules in place that would force greater justification for spending increases;
• Establish an independent fiscal council to guard the public purse by strengthening the effectiveness of fiscal rules through public monitoring and reporting;
• Focus policies more on facilitating wealth creation through productivity growth. This would best help future generations and make an ageing population more affordable;
• Make it easier for middle- and higher-income households to spend their own money directly rather than via government. This would allow government spending to focus more on alleviating poverty and providing public goods; and
• Increase the role for price discovery and competition in health and education, particularly learning from Singapore.

Guarding the Public Purse is co-authored by Dr Bryce Wilkinson and Khyaati Acharya.

Download Report Summary
Download Publication (PDF)

About the New Zealand Initiative
The New Zealand Initiative is an evidence-based think tank and research institute, which is supported by a membership organisation that counts some of the country’s leading visionaries, business leaders and political thinkers among its ranks.

Our members are committed to developing policies to make New Zealand a better country for all its citizens. We believe all New Zealanders deserve a world-class education system, affordable housing, a healthy environment, sound public finances and a stable currency.

The New Zealand Initiative pursues this goal by participating in public life, and making a contribution to public discussions.

For more information visit www.nzinitiative.org.nz

ENDS

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