Fiscal Rules and Public Expenditure Management - Case Study (2): New Zealand

No other OECD country has implemented economic and fiscal structural reforms as comprehensively or as radically as New Zealand. However, the oft-cited paradox of these reforms was that it took more than 10 years for economic performance to improve. Since the Asian currency crisis in the second half of the 1990s, the New Zealand economy has been among the top performers among OECD countries and has maintained a fiscal surplus. Despite its good overall performance, the weakness of New Zealand's economic fundamentals has been pointed out and the improvement of productivity has been called for.

The ambitious administrative and fiscal reform was largely completed with the introduction of the Fiscal Responsibility Act in 1994. The Act, which is frequently referred to as an innovation worldwide, stipulates a responsible fiscal management framework based on rules and targets for fiscal policy. Although the mixed member proportional representation electoral system introduced in 1996 is likely to result in frequent coalition governments in New Zealand, and this has raised concerns that this will lead to deterioration in fiscal discipline, the Act has prevented public finance from deteriorating. From the perspective of expenditure control in the annual budget process, however, New Zealand has been through a repeated process of trial and error and its institutions are not yet entirely robust. Political pressure to spend more is growing in the era of the fiscal surplus, so there is an increasing risk of deterioration in fiscal discipline. Although there has been no significant change in the overall policy framework established to date, the radical nature of the reforms so far has created inconsistencies in some areas and New Zealand is still in the process of reforms. Among the issues relating to public expenditure management are risk control (strengthening expenditure controls) and more comprehensive assessment systems.