John Armstrong: English leaves fiscal cap on the hat rack

A fiscal cap would be a major advance on the once-revolutionary Fiscal Responsibility Act of the early 1990s. Photo / NZ Herald

An idea whose time has come, gushed the Business Roundtable's Roger Kerr last month in eager anticipation of something his organisation has long hankered for being delivered in Thursday's Budget.

Kerr was licking his lips at the prospect of Bill English importing a radical new weapon into the Minister of Finance's fiscal arsenal - a formal fiscal "cap" or "ceiling" which would place a strict limit on how much governments spend.

Having set their caps, governments would have to control their spending habits and stay within the ceiling or face wounding accusations they could not manage the books.

Kerr already knows he is going to be disappointed. Despite hinting six months ago he was considering introducing such a cap, English has put the concept on the backburner, preferring other methods of cutting out what he sees as fiscal flabbiness in the public service.

A fiscal cap would be a major advance on the once-revolutionary Fiscal Responsibility Act of the early 1990s which is credited with pressuring finance ministers to run Budget surpluses unless there is a good reason - such as the recent global crisis - not to do so.

However - as far as politicians on the right are concerned - the Fiscal Responsibility Act has not spawned a similar discipline when it comes to curbing government spending.

While the Fiscal Responsibility Act requires the Finance Minister to state his or her long-term objectives for government spending along with forecasts of amounts, there are no political sanctions to force him or her to stick to those targets.

As an example of such profligacy, Act's Sir Roger Douglas, whose party has held hopes that National would back its bill legislating for a spending cap, repeatedly points to the more than 42 per cent increase in spending in nominal dollar terms during the final four years of the last Labour-led Government.

Overseas experience shows vast variations on how caps are applied and the leeway allowed before they are breached.

Finland, Sweden and Holland have long had ceilings on parts of their Budgets. These caps are generally set over three years and are put in front of their respective Parliaments.

There are exemptions which allow ceilings to be breached. But the setting of such caps is now an established feature of the political system.

Far tougher regimes have been applied in the United States, where referendums have forced state governments to maintain current spending levels with exemptions only for inflation and population increases.

Such stringency is part and parcel of Act's Taxpayers Rights Bill, which National is required to allow to go as far as select committee stage at least.

English's reference last December to the success of some countries in using spending caps followed recommendations from the Treasury that some kind of "fiscal anchor" was needed.

Officials said such a cap would signal to international investors that the Government was committed to spending control.

However, the Treasury also acknowledged a cap might be too inflexible to deal with rapidly changing economic conditions - a view shared by the Prime Minister.

Rather than being hog-tied to a fiscal cap, English has his own more flexible methodology for bringing discipline to public spending.

A one-time Treasury official, he has told the chief executives of Government departments they will receive no budget increases over the next three or four years, given the need to move back into surplus.

English is also applying a tight cap to the $1.1 billion in new spending in this week's Budget.

The allowance for new spending is essentially his self-imposed fiscal cap. He says he is committed to restricting annual increases in that $1.1 billion figure to just 2 per cent from next year.

With next year being election year, that is a big ask of any government.