The true state of public finances is not meant to surprise any incoming government.
The Public Finance Act 1989 aimed to prevent any outgoing government from handing an incoming government the kind of horrors David Lange and Roger Douglas found in the books in 1984.
The Act requires Treasury to provide a Pre-Election Fiscal Update twenty to thirty working days before polling day. Treasury’s update must include forecasts of government revenues and expenditures, along with risks to both, so everyone knows the state of the accounts.
But there remains a problem. Treasury must take the government at its word on discretionary spending, even if the claims are just a bit implausible.
An incoming National government can set a sounder footing through a Parliamentary Budget Office.
The problem is easy to illustrate.
Treasury’s fiscal updates, whether the Half-Year Fiscal Update, the Budget Economic and Fiscal Update, or the Pre-Election Fiscal Update, show the same kind of pattern in expected government expenditures.
Most of the time, core Crown expenses for the next two years will be a bit higher than in the current year, measured as a fraction of GDP. But four to five years from now, they will return to where they have been – or at least lower than their peak.
You will find this medium-term ‘hump’ in spending in every fiscal update since 2017’s Half-Year Fiscal Update – barring Budget 2021’s. Covid meant a huge increase in government expenditures; nobody should have been forecasting increases from that level. But the Treasury forecasts always predict a decline in spending by the end of the forecast window.
The problem almost certainly pre-dates Labour’s election in 2017; I just have not checked the earlier accounts.
Treasury is the government’s lead economic advisor but is also beholden to the Finance Minister. If the Finance Minister asserts the government will stick to very tight budget allowances, Treasury must forecast as though they believe it. If the Finance Minister also claims politically popular spending programmes will be cancelled in three years, Treasury must pretend to believe that too.
Treasury’s credulity has some bounds. The most recent Pre-Election Fiscal Update noted that future operating allowances only made room for “critical cost pressures”. It also warned that “in recent times, government’s final allocations have exceeded the signalled Budget allowance.” Consequently, an incoming government that wanted to stick to the plan would face implausibly hard choices: in Treasury-speak, “significant trade-offs will be required.”
In short, governments have learned to game the Public Finance Act. So long as a government claims it will return to fiscal rectitude in future, the books will look just fine by the end of the forecast window. It’s just that the numbers are quite literally unbelievable.
You can trust Treasury’s Pre-Election figures to accurately assess the current state of the books. It’s an improvement over what Muldoon handed to Lange. But the forecasts are built on sand.
It is not ideal.
Voters need an accurate assessment of whether any current fiscal problems are just a blip, or whether they will persist. Treasury forecasts that always predict a return to surplus by the end of a forecast window, so long as the Finance Minister is happy to make a few heroic assumptions, do not help.
And Parliament has a more challenging time holding executive government to account without a believable forecast of the path Cabinet is setting.
An incoming National government has a chance to fix the problem by undoing an error National made while in opposition.
In 2017, the Green Party proposed an independent Parliamentary Budget Office. Labour agreed. But offices of Parliament require cross-party support, and National scuppered the deal.
Independent budget offices are common internationally. The OECD’s database currently tallies 34 such institutions.
They take on different tasks in different places.
Over seventy percent set their own work programme within the bounds of their mandate. For example, Australia’s Parliamentary Budget Office recently released work demonstrating the effects of inflation and tax bracket creep. Similar work would be valuable in New Zealand.
Less than fifteen percent of independent budget offices cost election platforms – a fairly costly task.
But two thirds of independent budget offices assess the reasonableness of official fiscal forecasts and provide a public opinion. And just under half publish evaluations of the government’s performance in fiscal forecasting.
The Labour-Green proposed office would have provided independent costings of political party platforms. National’s objections centred on the office’s proposed election costings function, but the other roles taken on by such an office are far more important.
An incoming coalition government should revisit proposals for an independent Parliamentary Budget Office.
It could provide assessments of the fiscal forecasts without having to believe implausible claims about future spending.
It could also run rolling reviews of existing spending programmes. New spending bids receive much more scrutiny than programmes that roll on unchanged from year to year. However, new spending in each budget is typically small relative to longstanding programmes that may be far from fit for current purposes.
And it could provide support that would help Parliament to function more effectively. The Finance and Expenditure Committee could particularly benefit from independent advice.
The Public Finance Act’s requirement for Pre-Election Fiscal Updates greatly improves on prior practice. But those updates’ forecasts are no longer believable. Parliament and voters deserve better.
A Parliamentary Budget Office would help.
To read the article on the NZ Herald website, click here.