English Bill: Public Finance (Fiscal Responsibility) Amendment Bill — In Committee Third ReadingText is incorporated into the Bound VolumeEnglish Bill: Public Finance (Fiscal Responsibility) Amendment Bill — In Committee Third Reading[Sitting date: 27 August 2013. Volume:693;Page:12902. Text is incorporated into the Bound Volume.]Hon BILL ENGLISH (Minister of Finance): I moveThat the Public Finance (Fiscal Responsibility) Amendment Bill be now read a third time. One of the strengths of governance in New Zealand that is internationally recognised has been the broad political support for the Fiscal Responsibility Act of 1994 and subsequent amendments to it. If I can just remind the House of the essential structure of that Act which we are amending the provisions specify a set of principles for responsible fiscal management in the conduct of fiscal policy. They are principles we often look to. First the principles require Governments to achieve and then to maintain for instance prudent levels of debt; second the provisions require regular public reporting by the Government on the extent to which fiscal policy is consistent with those principles; and third and probably most important the provisions of the current Act provide for regular independent updates from Treasury including a pre-election update and a statement on the long-term fiscal position every 4 years.The provisions are not prescriptive about fiscal strategy—in particular they do not define for instance what a prudent level of public debt is recognising that different levels are appropriate in different circumstances. They essentially require transparency for the Government to set out its objectives and intentions and then report against those. In practice I think successive New Zealand Governments have found that the framework has a pretty good balance of transparency and flexibility—that is on the one hand it is well within the power of the Government to change the fiscal objectives provided that it says that that is what it is doing but on the other hand it does lead to systematic transparency. These institutional arrangements are now recognised and used internationally because of the proven benefits for fiscal management. These amendments that we are debating today and putting through the House are simply improving what is already a well-proven framework.I will pick out just a couple of the amendments because I think they are quite important. One is a new reporting requirement for the Government to look back and assess its performance against its fiscal strategy. Why does that matter? You would think that that is what would happen. Well it does not actually happen. What actually happens is that the Government announces a Budget then over the subsequent 12 months Treasury revises its forecasts for that 12-month period at least twice—that is at the half-year update and then at the following Budget. Treasury adjusts its forecasts for the 12-month period according to the most recent information which means that by the time you get to the end of that 12 months and the public accounts are released the Government is actually comparing the actual out-turn with the most recent Treasury forecast which could be two cycles away from the original Budget.This tends to hide significant variations from what the Budget was. For instance the out-turn for the 2012-13 year will be compared in the first instance under the usual framework with the most recent Treasury forecast which was actually done in May. You can imagine that the forecast done in May will show a much smaller variance against the end-year figures than the forecast done in the Budget 12 months ago. So it hides variation. It also means that the Government is not inclined to look into what actually happened over that 12 months in order to understand what was driving any significant shifts. It is not prompted to do that because the variances look small. In my view just from watching these cycles over the years it is actually quite important that the Government looks back and that we have institutional arrangements that require that to happen because in the absence of those arrangements it simply has not happened.A second feature of these amendments which I think is probably generally agreed is that the Government is a bit more transparent over issues such as the interaction offiscal and monetary policy and the impact of decisions today on future generations. I want to deal with those just briefly. In respect of the effect of decisions today on future generations what we have learnt from I think recent years the last decade or so is that decisions that look relatively small in the short term can have significant long-term outcomes. It is quite telling in my view that every time Treasury has done a long-term fiscal forecast the outcome of that has looked better than the previous forecast and that is going right back to 2000. We now have 12 years or 13 years of these forecasts in different forms. Each one paints a more favourable picture of our ability to manage an ageing population. Some might say that that is false comfort but I think the provisions of this Public Finance (Fiscal Responsibility) Amendment Bill are going to ensure that it is pretty clear what the track is out in the future and that Governments are well aware of the longer-term implications both positive and negative.The other amendment that is part of this bill is around the interaction of fiscal and monetary policy. That is really just codifying I think what has been practised by different Governments over the last 10 years to 15 years. It is pretty clear that it is to everybody’s benefit that the Reserve Bank in taking its positions about monetary policy has a good understanding of what the Government’s fiscal policy is. As far as I can see there has always been satisfactory communication between Governments and an independent Reserve Bank over that issue. So I would not imagine that this amendment is going to make much difference to the practice but it will codify it. This is just adding a couple more tools to the tool kit that New Zealand Governments have to retain prudent fiscal management.If there is an area that I think still needs further work in the future it is the way that Governments deal with capital. Governments have large balance sheets. There is going to be a bit of a tendency I think for the policy focus to shift to capital and the balance sheet away from operational spending because operational spending is now quite transparent. Changes in it have to be made transparent. There is a general public expectation that we should have a Budget in surplus and then make prudent dispositions of those surpluses. That is going to tend to push the political debate to other ways of redistribution other ways of shifting value around in our communities. Those are going to be much less transparent if they are conducted through the balance sheet. I think that might be a fair way to represent some of the current policies of the Opposition for instance but it is not to say that Governments might not be tempted to push in that direction. So getting some greater transparency around the use of the Government’s balance sheet and changes in the value of that balance sheet driven by policy decisions is probably one of the next challenges in the further evolution of our Fiscal Responsibility Act.I commend this bill to the House. It takes us further along a track that has been good for New Zealand. It has had broad support and I hope that that support will be reflected in the House.