1. © The Treasury/code Fiscal Institutions in New Zealand: The question of spending caps and spending reviews John Janssen February 2011

2. © The Treasury/code A timeline of budget management From 1989: Fixed Nominal Baselines From 1997: Fiscal Provisions For details and fit with overall fiscal legislation refer: Fiscal Institutions in New Zealand and the Question of a Spending Cap http://www.treasury.govt.nz/publications/research-policy/wp/2010/10-07 From 2002: Fiscal Management Approach From 2011: Fiscal Management Approach +

3. © The Treasury/code Fixed Nominal Baselines Prior to 1989 the budget process involved regular adjustments to personnel costs Operating and capital adjusted annually with 1-year ahead forecasts only Early 1990s – fixed nominal baseline over a 3-year forecast period that changed only with specific policy decisions Formula-driven indexation to non-departmental spending (eg, inflation indexation of transfers; volume changes)

4. © The Treasury/code Operating balance for 1997/98: Forecast and policy changes

5. © The Treasury/code Fiscal Provisions 1997 Budget introduced a $5 billion (cumulative) spending cap on new initiatives over fiscal years 1998 – 2000 Spending cap sat on top of fixed nominal baselines and formula-driven indexed items Rules established to determine what counted against the spending cap Spending cap re-labeled as fiscal provisions – for both operating and capital Included as line items in fiscal forecasts (3 years ahead)

6. © The Treasury/code Decomposition of operating expenses

7. © The Treasury/code Fiscal Management Approach 2002 Budget re-labeled the fiscal provisions as operating allowances and capital allowances Shifted the focus to the paths of operating balance and debt rather than just the nominal allowance Fiscal allowances reviewed twice a year with reference to updated forecasts and progress against fiscal objectives (especially debt-to-GDP)

8. © The Treasury/code Sources of spending change Anticipated price and volume effects for formula driven items built into forecasts (eg, rising cost of pensions from population ageing) Discretionary initiatives as part of the fiscal allowance. Expectation that allowances adjusted only in response to structural changes in the fiscal outlook Changes in forecast costs due to revisions of initial forecast (eg, higher than anticipated take-up)

9. © The Treasury/code Revenue surprises

10. © The Treasury/code Operating allowances

11. © The Treasury/code Operating balance

12. © The Treasury/code Aims of proposed spending cap Increase transparency around the total level of spending with more focus on baselines, relative to discretionary allowances Provide some inertia in response to revenue surprises Looked at experiences of Sweden, Netherlands and Finland

13. © The Treasury/code Key features of proposed cap Absolute dollar figure for operating expenses Exclude unemployment expenses and finance costs Set for three years with the third year set on a rolling basis Margin of 1% to act as a buffer for unforeseen events Cap set by current administration rather than prescribed in legislation Transparency around potential breaches and policy reaction

14. © The Treasury/code Risks around spending cap: complexity; flexibility; target rather than upper limit; still cycle versus trend identification challenge (especially in rolling third year) Current system places a cap on discretionary spending via the operating and capital allowances – which have been set at much lower levels than mid-2000s Increase the range of expenses subject to scrutiny – to improve control over higher-than-expected increases in expenses Set aside a portion of the existing allowance to deal with these Selected approach – FMA +

15. © The Treasury/code Shift resources to frontline services (headcount cap for core government administration) Improve balance sheet management (publication of detailed investment statement) Investigate mixed ownership model for some commercial assets Alternatives to public provision (eg, PPPs) Better administrative and support services Drawing on skills beyond the core public services (eg, Defence Review; Review of Expenditure on Policy Advice) Other changes

16. © The Treasury/code Future developments? Recent Taskforce suggestion that Public Finance Act be amended to require the Minister of Finance to specify a five-to-ten year target for future operating expenses (capacity exits in Act but not typically used) Independent Fiscal Council Taxpayer Bill of Rights – limit spending growth to inflation rate and population growth, with any higher spending subject to a referendum

17. © The Treasury/code A timeline of budget management From 1989: Fixed Nominal Baselines From 1997: Fiscal Provisions From 2002: Fiscal Management Approach From 2011: Fiscal Management Approach +

18. © The Treasury/code Main lessons Classification – discretionary/other; cycle/trend Context – surplus environment (pressure to revise a cap upwards); deficit environment (shift to other tools such as reviews) Change – some change is inevitable as people learn the rules Continuity – credibility and understanding of broad approach – with adjustments at the margin

19. © The Treasury/code Extra slides

20. © The Treasury/code Changes in Core Crown operating expenses relative to 2009/10 year