New Zealand the model

Willem Buiter talks about the New Zealand model of public financial management;

It is a near-universal rule of time management that the urgent but not necessarily terribly important takes precedence over the important but not terribly urgent. Economic policy making is no exception to this rule. I was therefore pleasantly surprised to read in the papers that Peter Orszag, Director of the Congressional Budget Office (CBO) said on September 9 that “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget”. The CBO is the (non-partisan) federal agency within the legislative branch of the US government that acts as a congressional budget watchdog and among whose responsibilities is the projection of the budgetary consequences of proposed legislation.

Why does it matter that the revenues, outlays, assets and liabilities of Fannie and Freddie be put into/onto the budget and balance sheet of the US Treasury? It won’t help or hinder the resolution of the current financial crisis. What is does, is strike a blow for accountability for the use of public funds. It enhances the quality of the information available to the Congress and to the public at large about the federal government’s financial exposure (including its contingent exposures) and about future expected or planned sources and uses of funds. Without high-quality information and without transparency, there can be no accountability for the use of tax payers’ money. Peter Orszag therefore struck a blow for good governance, for better government and for checks and balances....

The only government in the world that gets close to providing all the relevant information to have a go at constructing its comprehensive balance sheet is the government of New Zealand. Since 1989, the Public Finance Act 1989 (PFA) requires the New Zealand government to pursue its policy objectives in accordance with the following principles of responsible fiscal management:

* Maintaining debt at a prudent level by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenue.
* Achieving and maintaining net worth at levels which provide a buffer against factors which may adversely impact on net worth in the future.
* Managing prudently the fiscal risks facing the Government, and;
* Pursuing policies which are consistent with a reasonable degree of predictability about the level and stability of taxes for future years.

That’s rather waffly, but the implementation of these principles is anything but. The PFA requires the government to present, in each financial year, two reports outlining Government’s fiscal policy: the Budget Policy Statement (BPS) and the Fiscal Strategy Report (FSR). The BPS has a short run focus setting out policy goals that will guide the Government’s Budget decisions and priorities. The FSR is presented with the Budget and must state the Government’s long term objectives for fiscal policy over a period of at least 10 years and the Government’s short term intentions for fiscal policy over a period of three years. The FSR must also provide projections of fiscal variables to show progress towards meeting the long term objectives (Progress Outlooks).

In addition, the Treasury is required to publish, at least every four years, a Statement of the Long Term Fiscal Position. This has a horizon of at least 40 years and identifies how demographic and other changes may impact the fiscal position.

Added to this are serious attempts to value such contingent liabilities as guarantees, and to calculate the fair value of such contingent political commitments as social security retirement benefits.