The challenge of fiscal surprises: Nicola Willis’ first mini-budget and New Zealand’s no-surprises finance rules

New Zealand’s new finance minister, Nicola Willis, has expressed astonishment at the findings in the government’s financial records shortly after assuming office. Willis has asserted that the previous government left behind significant fiscal risks that will necessitate careful handling. In response, Willis has committed to presenting a mini-budget before Christmas to offer an accurate depiction of New Zealand’s economy and the government’s finances.

New Zealand has a well-established legislative framework, including the Public Finance Act 1989 and the Fiscal Responsibility Act 1994, aimed at averting fiscal surprises. The latter was crafted to prevent a recurrence of the fiscal challenges encountered by the National government in 1990. This legislation is intended to minimize fiscal hurdles for an incoming government.

The reporting requirements under the Public Finance Act, such as fiscal strategy reports, budget policy statements, and economic and fiscal updates, aim to promote full transparency and timely disclosure of fiscal information. The Pre-election Economic and Fiscal Update (PREFU) plays a crucial role in providing vital economic and fiscal information to mitigate major policy reversals by incoming governments.

Despite the complexities of coalition politics that emerged in 1996, the Public Finance Act has effectively reduced uncertainty in fiscal policy. Research indicates a significant decrease in tax and government spending uncertainty since the Act’s implementation, even in the context of coalition politics.

The 2023 PREFU was anticipated to minimize the possibility of fiscal surprises through its comprehensive analysis and assessment of fiscal risks. However, Nicola Willis has expressed surprise at the fiscal situation after the election, leading to speculation about the potential reasons for this. The incoming government may have been genuinely caught off guard by undisclosed fiscal risks, or there may have been constraints from coalition agreements affecting the government’s ability to fulfill its promises.

Regardless of the reasons behind the surprises, it is crucial to recognize the effectiveness of New Zealand’s fiscal legislation in promoting transparency and mitigating the kind of fiscal shocks experienced in the past. While surprises may still occur, they are unlikely to reach the scale witnessed in previous instances, for which we should be grateful.

In conclusion, Nicola Willis’ forthcoming mini-budget will undoubtedly test New Zealand’s no-surprises finance rules. Whether the surprises were a result of overlooked risks or political constraints, her response to these challenges will be a significant early task for the new finance minister.