Mon Dec 4

Nicola Willis warns of fiscal ‘snakes and snails’ – her first mini-budget will be a test of NZ’s no-surprises finance rules

Written by Michael Ryan, Teaching Fellow in Economics, University of Waikato

New finance minister Nicola Willis has claimed she was blindsided ^[1] by the state of the government’s books. Days after stepping into the role, she said:

The outgoing government has left us with some nasty surprises. There are some fiscal risks that are pretty significant that we’re going to have to work hard to manage.

Willis has promised to deliver a mini-budget before Christmas ^[2] to show the “true state of the New Zealand economy and the government’s finances”.

But is it possible for an outgoing government to leave what Willis has called “snakes and snails ^[3]” for the incoming government to deal with? Or is this just the normal politicking of any new administration wanting to look good by comparison?

New Zealand has long had legislation designed to prevent fiscal surprises from happening – the Public Finance Act 1989 ^[4] and the Fiscal Responsibility Act 1994 ^[5] (which was incorporated into the Public Finance Act in 2004).

The Fiscal Responsibility Act, in particular, was meant to prevent the problems faced by Jim Bolger’s incoming National government in 1990 from happening again. Technically, at least, there should be far fewer snakes or snails for a new government to slip on.

The opening of the books

Bolger said he pushed for greater fiscal transparency ^[6]. The surplus forecast by the previous Labour government had been produced, in part, by some creative accounting.

He also had to deal with the near collapse of the Bank of New Zealand ^[7] due to major losses caused by deregulation and some bad loans ^[8]. The government held a majority share in the bank, which eventually received a bailout before being sold in 1992.

According to Bolger, the outgoing prime minister Mike Moore claimed

on many, many, many occasions the budget was balanced, it was in surplus, which was totally false. There was no surplus. There was a huge deficit.

Jim Bolger in front of old National Party sign.

Former prime minister Jim Bolger said his government faced nasty surprises, including the near-collapse of the Bank of New Zealand. Patrick Riviere/Getty Images ^[9]

Reducing fiscal uncertainty

The Public Finance Act requires ^[10] regular fiscal reporting, including fiscal strategy reports, budget policy statements and economic and fiscal updates.

The reporting is intended to promote the full disclosure of all relevant fiscal information in a timely and systematic manner.

One of the required reporting documents is the Pre-election Economic and Fiscal Update (PREFU ^[11]) – Treasury’s economic forecast for the country and the government’s fiscal outlook.

As well as giving a broad overview of the goverment’s finances, the PREFU helps prevent major policy reversals by an incoming government, by ensuring the economic and fiscal information available to them is as complete as possible.

It’s harder for a party to claim it can no longer afford a policy if it was well informed. By promoting transparency and policy predictability, the provisions of the Public Finance Act can be seen to be reducing uncertainty from fiscal policy.

While uncertainty is a difficult concept to measure in economics, my own soon-to-be-released research suggests the Act has been successful in achieving this goal. I found net tax and government spending uncertainty were approximately a third lower between 1994 and 2017 than they were between 1972 and 1989.

The result is perhaps more surprising considering the arrival of coalition politics in 1996. Fiscal policy is subject to more uncertainty (or is less predictable) when made by a group of parties with different ideologies.

Could the 2023 PREFU have been wrong?

The 2023 PREFU was 164 pages long. About a quarter of the document is dedicated to “Risks to the Fiscal Forecasts”. With such an extensive examination ahead of the 2023 election, you would expect the risk of a shock to be low.

There are four possible explanations for Nicola Willis’ apparent surprise:

The Treasury may have missed some fiscal risks. This seems unlikely given the comprehensive statement of fiscal risks in the PREFU.
New significant risks may have developed since the PREFU was published in September.

The risks Willis referred to may have been mentioned in PREFU, but it was the magnitude of certain risks that surprised the incoming government. If this is the case, could more be done to communicate the magnitude in future?
Finally, this is all smoke and mirrors from the incoming government to walk back on election promises. Concessions in the coalition agreements with ACT and New Zealand First may have constrained National’s ability to complete its agenda.

Which is the more plausible explanation? Willis has promised more detail in the coming days. But irrespective of the explanation, we need to keep in mind the broader context.

Yes, the odd surprise may happen. But New Zealand’s fiscal policy legislation is pretty good at promoting transparency. If there is a surprise, it is unlikely to be of the magnitude Bolger experienced in 1990. We should be grateful for this.