Spending Cap (People’s Veto) Bill - First Reading

I move that the Spending Cap (People’s Veto) Bill be now read a first time.  At the appropriate time I intend to move that the Bill be referred to the Finance and Expenditure Committee.

The Bill is a timely response to New Zealand’s challenging economic circumstances.  It will provide more certainty around the growth in government spending, greater spending restraint, and will improve the transparency of spending decisions. 

The Bill will lead to government objectives being delivered through a state sector that takes up a smaller share of the economy.  A smaller, more efficient state sector will allow a lower tax burden over time, supporting higher economic growth and higher living standards.

The Bill also responds to weaknesses in our current legislative framework.  The fiscal responsibility provisions of the Public Finance Act focus on achieving and maintaining a prudent level of government debt and on the operating balance required to achieve that.  The Public Finance Act has served us well in that regard, and helped New Zealand bring its net core Crown debt down from 56% of GDP in 1992 to 5.6% in 2008.

But the Public Finance Act has not prevented core Crown expenses from rising as a share of gross domestic product.  We have seen government expenses soar from 28.8% of GDP in 2004 to a forecast 36% in 2011.  It has been easier for governments to increase spending, than to reprioritise and drive greater efficiency within the existing base of spending.  This Bill is designed to place greater disciplines on governments, deliver greater value for the taxpayers’ money, and protect New Zealand’s growth prospects.

The Bill has two main elements.  The first is a spending cap that limits the annual increase in core Crown expenses to the rate of population growth multiplied by the rate of inflation.  The second is a requirement that any proposed spending increase above that cap be subject to a binding referendum on whether the cap is to be raised to allow for that increase.

The spending cap for a financial year beginning 1 July is based on the product of the annual percentage change in the resident population and the consumer price index.  This “rate of increase” is based on data for the twelve months ending 30 September in the year prior to the financial year for which the cap is being set. That rate is then applied to core Crown expenses from the previous financial year.

The spending cap provides for a small number of sensible exclusions.

For example, the cap is designed to allow fiscal policy to continue to play a stabilising role in response to the economic cycle and shocks.  Unemployment benefit expenses are therefore excluded from the cap so that they can continue to expand and contract through the economic cycle in a counter-cyclical way.

Borrowing expenses are excluded from the cap as these are effectively limited by the Government debt objective, required under the Public Finance Act 1989.

Similarly, capital expenditure is excluded from the cap because it is constrained by the debt objective and the fact that the operating expenses associated with capital expenditure would need to be met from within the cap

The Bill provides for national emergencies, such as natural disasters, where it is appropriate to exclude expenses incurred in responding to an emergency.

Impairment losses on assets (such as student loans), which are recorded as an expense, are also excluded from cap. These tend to be volatile from year to year and hard to forecast, and therefore difficult to manage within the cap.

The Bill fits with the annual budget cycle by requiring that the spending cap for a coming fiscal year be publicly announced in the Budget Policy Statement ahead of the Budget. Indicative caps for the following two financial years must also be disclosed.

The Minister of Finance would be subsequently required to state, when presenting the annual financial statements of the government to Parliament, whether expenses were within the cap for that year. If not, the Minister must explain why expenses were incurred in excess of the cap, and what measures will be taken to ensure compliance in future.

The Government may, at any time, initiate a binding referendum on a proposal to increase the spending cap for a specified financial year. The Bill requires any referenda to be held under the provisions of the Referenda (Postal Voting) Act 2000.
The question put to electors requires a simple “yes” or “no” response and is specified in the Bill.  If a majority of votes cast in a referendum favour the proposal to increase the spending cap, then the cap is raised by the specified amount.

A referendum may be held on a proposal to increase the spending cap for the financial year ahead, or to increase the indicative spending cap for a subsequent year. It is envisaged that a referendum on the latter proposal would fit better with the budget cycle. In such case, a referendum could be held twelve months before the start of that subsequent financial year, allowing time for the result to be reflected in the Budget strategy and process relating to that financial year.

The Spending Cap (People’s Veto) Bill has its origins in the Taxpayer Rights Bill, which I had drafted as a private member’s bill during the previous term of Parliament.  

The National-ACT confidence and supply agreement provides for the Taxpayer Rights Bill to be referred to the Finance and Expenditure Committee as a government bill.

That Bill has been refined so that it focuses solely on limiting the growth in expenses, thereby allowing for future taxation to be lower. It has also been renamed the Spending Cap (People's Veto) Bill to better reflect its intent – capping the annual growth in spending and allowing people a direct say over any higher increase.

New Zealand is grappling with the hangover of too much spending and too much debt.  Putting New Zealand back on to the right path will require restraint and a determination to never again allow excessive public spending to drive up interest and exchange rates, and to drive out growth.  The Spending Cap Bill will help provide that restraint, and will support that determination.

I commend the Spending Cap (People’s Veto) Bill to the House.