The Fiscal Responsibility Act 1994: The astonishing success of a weak non-binding policy

The Fiscal Responsibility Act 1994 (FRA) shouldn’t have worked to cement fiscal discipline into the New Zealand budgeting practices, the wider political discourse and become part of New Zealand’s constitution. “All” it requires governments to do is explain their fiscal actions and fiscal intentions, with the Treasury keeping score. The FRA leaves it to the government of the day to define fiscal success. The result, however, has been a series of governments of all political hues striving for fiscal balance and low debt. Like a bumblebee that can in fact fly, this new paper explains how the FRA has become a pollical force even though it wasn’t legally enforceable. It brings out that the conditions for the policies to succeed were quite subtle. While some of the FRA principles have been highly effective, other elements, such as the 40-year fiscal and economic outlook have achieved almost no traction. Parliamentary scrutiny has been missing in action, while monitoring by economic commentators and financial markets has proven effective. One crucial condition for success has been the role of the Treasury’s statutory independence when it undertakes its economic and financial forecasting and reporting roles. As well as looking at past success, the paper raises interesting questions about the current fashion for independent fiscal institutions (IFI). The New Zealand government is currently consulting on whether New Zealand should follow this fashion.