There’s a fragility to rules-based orders that has been around for as long as those orders have.  

So long as people generally agree that it is good to be bound by the rules, and that trying to change the rules is better than ignoring or breaking them, a rules-based order can persist. People can make important personal and business choices knowing important aspects of the world around them are durable.  

But ultimately, the only thing that makes any rules binding is willingness to be bound by them. The rules are iron when everyone expects that that willingness is broadly shared and persistent. When that expectation fails, those rules are written on mere parchment that crumbles away to nothing. 

I’m not writing today about the test facing America’s constitutional order. The President there is ignoring a unanimous Supreme Court decision. That test is serious. Hopefully America will have passed the test by the time this column goes to print.  

I’m writing instead about something local and more mundane.  

The Treasury released its draft Long-Term Insights Briefing. One part of it stands out, over on page eighty-three.  

Treasury there suggested a new Independent Fiscal Institution. Those bodies, internationally, provide an independent view on economic forecasts and long-term fiscal projections. They sometimes provide their own forecasts and policy costings. Some of them also monitor government compliance with fiscal rules.  

New Zealand has simple fiscal rules that are far less constraining than you might have thought.  

Any government can decide to spend as much money as it likes, so long as tax revenue is high enough to cover the cost.  

Those rules loosen in emergencies like earthquakes and pandemics. But in normal times, governments mainly need to ensure their spending and taxation intentions are aligned. 

If a new government wants to double its spending, it is perfectly free to do so – if it increases taxes by enough to pay for it. If a different government wants to cut taxes in half, nothing in the rules will say it cannot – so long as that government also cuts spending by enough. 

The rules really constrain against using debt to cover a government’s normal operating expenses.  

They stop governments of the left from increasing spending on current services while punting the cost out to future taxpayers.  

They also stop governments of the right from cutting taxes while running large deficits.  

Or, at least, that is how it works when governments are willing to be bound by the rules.  

And governments’ willingness to be bound by the rules may depend on their supporters’ belief that those rules have meaning.  

Like the Bill of Rights Act, the Public Finance Act is only words written on paper. 

It is Parliament’s prerogative to break the rules. Our institutions are then meant to inform voters when a breach has happened. Alerted to the breach, voters can exercise judgment and accord reward or punishment as they consider necessary.  

But voters must know the breach has happened. 

And at page 83, Treasury warns that its primary function “is to be a trusted advisor to the government of the day”, which could conflict with any increased role in providing public scrutiny.   

We saw tension during Covid. The government combined laudable and necessary spending on the Covid-response with a very substantial increase in permanent government spending – spending that persisted long after the Covid emergency ended.  

Treasury noted that the wage subsidy scheme and health system response amounted to only about half the increase. Some spending increases were more permanent, like increases to main benefits and an expanded school lunch programme.  

The government’s revenue and spending are both larger fractions of economic activity than before Covid. But growth in spending was larger.  

Governments can always increase social spending or cut taxes. The Public Finance Act only requires the two to balance under normal economic conditions – that there not be a structural deficit.  

Barring one minor blip, the public accounts have been in structural deficit since 2020. Structural deficit in 2020 was perfectly defensible under the Act. After 2022, not really. And, in December’s update, Treasury expected 2025’s structural deficit to be 2.7% of potential GDP. 

The Act does not enforce itself.  

Treasury has effectively said that it cannot be trusted to tell us when a government is breaking the Act, because its responsibility is to any Minister breaking the Act, not to us.  

An independent watchdog, responsible to Parliament rather than to the Minister of Finance or the government of the day, could help. But only if voters have a constitutional spirit and respond to a watchdog’s warnings of substantial uncorrected breaches.  

Without that spirit, every Act is written on mere parchment and no fiscal institution’s warnings can help us.  

A country that shrugs at minor infractions of rules has already written its permission slip for major ones. 

To read the full article on The Post website, click here.