Were Budgets 2020 and 2021 Illegal?

Dr Bryce Wilkinson
Insights Newsletter
30 September, 2021

Parliament, not government, passes legislation. Legislation is law. Government Ministers must comply with the law. If they do not, and get a way with it, really bad things can happen.
The Fiscal Responsibility Act 1994 aimed to stop chronic government deficit spending that induces a debt spiral that ends in a searing recession. That was New Zealand’s 1974-1992 economic experience, in a nutshell.

That Act’s provisions are now in Part II of Public Finance Act 1989. They specifically require governments to comply with enumerated principles of responsible fiscal management.

Prominently, the government must achieve and sustain public debt at a prudent level to “provide a buffer” against future events that could “impact adversely”.

Such adverse events occur too often for comfort. In addition to self-inflicted crises they include natural disasters, wars, global financial crises and serious health epidemics.

Such adverse events can push public debt above its otherwise prudent levels.

The Public Finance Act allows for such variations. But only if (1) the departure is temporary and (2) the Minister of Finance explains three things: the reasons for the departure; the intended remedial response; and the timetable for restoring prudent levels.

Budget 2019 preceded awareness of Covid-19. In it the government committed to reducing net core Crown debt to 20% of GDP “within five years of taking office” and to “maintaining it at prudent levels thereafter”. Specifically, it would keep it within a 15-25% of GDP range.

Covid-19 subsequently “impacted adversely” on government finances. Budget 2020 projections showed large non-temporary departures from the government’s 15-25% range. It did not set any timetable for remedying the situation. Nor did it set a new target range.

Budget 2021 failed to restore compliance. Treasury projected net debt to peak at 48% of GDP in 2023 and to still exceed 30% of GDP in 2033. That is not a temporary departure.

Budget 2021 baldly and inconsistently asserted that debt “remains at prudent levels through the forecast and projection periods”. This is also Treasury’s view. But these Treasury’s projections simply assume no further adverse shocks. That is not a prudent approach.

What is needed is a careful assessment of how badly things could go wrong from here and therefore how large a buffer would be desirable.

Parliament and the Auditor-General should demand greater accountability and compliance from government than such bland, target shifting, complacency. Are they? Time may be short.

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