Friday, 17 May 2013

Yesterday's Budget and the transparency of fiscal policy

We sometimes get tempted to feel that things are done better in other countries - policies are smarter, incomes are higher, they have proper soccer teams - but there's one area in particular where we can credibly say we are among the world's best (maybe the best), and that is the transparency around fiscal policy.

It may not be the most exciting thing in the world to excel at, but let's give three loud cheers for the Fiscal Responsibility Act 1994. Our governments have to produce regular, complete, short- and long-term disclosure, on a conventional General Accepted Accounting Principles (GAAP) basis, of their current and future tax and spending commitments. They have to show the current and projected state of the government's   balance sheet, and they have to disclose all those pesky off-balance-sheet items that governments tend to use when they want to keep expensive future bills or other embarrassments out of the voters' gaze.

We saw it again yesterday, with credible multi-year projections of taxes, spending, and debt, and with full disclosure of off-balance sheet items (in the 'Specific Fiscal Risks' part of the BEFU). We saw some alternative scenarios modelled, and we got the separate forecasts of tax revenue produced by the IRD and Treasury (they weren't much different, as it happened). In many countries, if there were conflicting agency views of the likely tax take, even the mere fact of disagreement would be swept under the carpet, and the numbers themselves would certainly never see the light of day.

The Act, in short, has proved to be an excellent watchdog on what New Zealand governments do and plan to do. Apart from being good practice in itself, it helps to prevent the sort of nonsense that happened (for example) in Ireland before it all turned to custard. In 2006, Ireland was supposedly running a useful surplus (2.9% of GDP), and in 2007 was still marginally in the black. In reality, the underlying position was out of control. Tax revenues were (temporarily) swollen by the government's share of the red-hot property market. Shorn of the government's slice of the property speculation game, the fiscal accounts were massively underwater - by 5.6% of GDP in 2006 and by a stonking great 8.4% of GDP in 2007 (all figures from the IMF's database, with the 'true' position being the IMF's measure of the 'structural' balance).

So it may be on the dull and policy-wonk end of the spectrum, but the Fiscal Responsibility Act has become an indispensably valuable part of good policy governance.

Before getting too holier than thou about the whole thing, though, it's worth adding that we needed it. I've been going to Budgets and Budget analysts' lock-ups (the embargoed pre-Budget access to the Budget  materials) since the mid 1980s, and my abiding memory of the earlier ones is this: what hornswoggling swindle are they trying to pull off this year?

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