Nicola Willis is considering a new fiscal rule and independent watchdog after recommendations by the OECD

New Zealand needs to tighten its fiscal rules to prevent politicians from overspending in government and over-promising during election campaigns, the OECD says. 

The Organisation for Economic Cooperation and Development (OECD) published its bi-annual economic survey on Monday afternoon in Wellington. 

Among many recommendations, it advised the Government to strengthen its fiscal framework to ensure the country was kept on a sustainable track. 

“The experience over the past five years with spending slippage, as well as debates and uncertainties about the costings of political party promises, suggests that the framework has shortcomings,” it said. 

A specific new spending target and an independent fiscal institution could be set up to help deal with both of these weaknesses.

Currently, the Government is bound by two fiscal rules: staying below a debt cap and delivering a small operating surplus across an economic cycle.

The OECD said these rules had not prevented “spending slippage”. It specifically called out the Labour Government for increasing its operating allowances without enough explanation. 

A $3 billion increase in the operating allowance for Budget 2022 was announced in the Budget Policy Statement and explained only as a “one off” to cover pressing health needs. 

The following year, a $1.4 billion increase to the operating allowance was not explained at all. 

“Positive revenue surprises, due to the economy performing better than expected, have at times been used to increase spending beyond what was planned,” it said. 

Existing fiscal rules don’t prevent this practice. The OECD suggested adopting a target for discretionary spending growth which the Government could be held accountable for. 

This target would not change if revenue rose unexpectedly and would put pressure on the Government to bank, rather than spend, any spare cash. 

Finance Minister Nicola Willis said she was interested in that suggestion but thought the operating allowance should be a strict constraint on spending. 

Her predecessor had treated the operating allowance, signaled in the budget policy statements, as “an aspirational goal he never, ever met,” she said. 

Willis has not set a specific operating allowance for the upcoming budget, let alone the next two, but said she would stick to whatever she announces later this month. 

Costing unit

While Willis would’ve been pleased to hear a non-partisan authority criticizing Labour’s spending, her party didn’t get away entirely unscathed either.

The report also noted that incorrect policy cost estimates during elections created a risk of slippage when a party got into government and actually implemented its ideas. 

“Inaccuracies in the cost of the major political party proposals risk sub-optimal policy and further slippage, especially as these costings are presently often provided by consultants who do not always have access to all the necessary fiscal information,” it said. 

The most high-profile cost mistake in 2023 was National’s foreign buyer tax which may have overestimated the revenue by $500 million a year. 

However, other parties also had questionable policy price tags. Labour picked the wrong start date for its GST policy, throwing off the first year cost by $250 million.

Other policies, such as Te Pati Maori’s wealth tax plan, received almost no scrutiny at all.

An independent fiscal institution (IFI), also known as a policy costing unit, could reduce the risk of fiscal sustainability being thrown off track by large errors. 

“If an NZ IFI was given this costing function it could help the democratic process by switching the debate from the veracity of the costings, where it has been focussed in the past two parliamentary elections, to the merits of the policy itself,” it said. 

These kinds of institutions abroad are often used to independently scrutinize budgets and estimates created by executive governments. 

However, NZ’s Treasury already has enough independence to carry out that function and the “genuine gap” appeared to be in pricing policy proposals, the OECD said. 

Willis said she was actively considering creating some sort of independent fiscal institution.

“Do I see a case for increased fiscal scrutiny in the future, both through Parliament and potentially through another entity? Yeah, I can see that could be that case.”

Willis said she was looking at whether the Auditor General could be tasked with scrutinizing fiscal policy, in addition to its current work. 

And, that she was intending to discuss an election policy costing unit with opposition parties. 

“I've previously indicated my interest in some sort of independent costings unit — so that our election campaigns can be more about the big philosophical, economic arguments and less about decimal places,” she said.

The creation of an entity to provide political parties with independent and non-partisan policy costings is a step closer today, according to Finance Minister Grant Robertson and Associate Finance Minister James Shaw.

Under the previous Labour-led government Cabinet recommended an independent Parliamentary Budget Office be established, with the status of an Officer of Parliament, to provide political parties with independent and non-partisan policy costings. However, it required the consensus of opposition parties, and the then-National leader Simon Bridges didn't support it.