As a result of the National-Act coalition agreement, New Zealand is to have a legislated ceiling on increases in central government core Crown operational spending.
 
The ceiling will apply to core Crown operational spending, excluding spending on natural disasters, write-downs of asset values, the unemployment benefit and the costs of serving government debt.
 
The ceiling will increase annually to allow for inflation and population growth.
 
The OECD’s 2009 review of the New Zealand economy commended consideration of a spending limit in order to make “resources more predictable and budgets more symmetric” through time. It also recommended a local government spending cap that “should be legally binding unless overwritten by specific voter approval.”
 
The Business Roundtable had published a discussion document in 2004 that identified the desirability of improvements to spending disciplines of this nature.
 
As if to prove the roundtable’s point, the government increased core Crown operational spending per capita, other than on the unemployment benefit and the costs of servicing government debt, by a staggering 50% in the five years to 2009, while the consumer price index rose 16%.
 
In today’s dollars, the rise in spending in those five years exceeded $3300 dollars for every man, women and child resident in New Zealand. The increase alone exceeds central government’s reported total annual operational spending from 1840 until the 1940s, in today’s dollars.
 
Nor were New Zealanders impoverished in those times; their average income per capita was among the highest in the world since at least as far back as 1870.
 
The increase in government spending is the prime cause of New Zealand’s underlying fiscal deficit problems since 2009. The Reserve Bank is also surely correct that it contributed materially to the competitiveness problems facing our exporting and import-competing businesses from 2004 (by putting upwards pressure on interest rates and the exchange rate).
 
Perhaps the government’s major economic decision during the last three years was to stop further growth in spending, rather than to fully or largely reverse the increase. This modest decision has tax implications.
 
The latest government spending, inflation, and population projections indicate that core Crown spending per capita in the year ended June 2016, excluding spending on the unemployment benefit and the costs of servicing the public debt, will be of the order of $14,000 in today’s dollars. This is only around $1000 lower than its level in the year ended June 2009.

The new spending cap will tangibly express the government’s commitment to maintaining spending discipline. As such, it should help those investing in New Zealand’s export and import-competing sectors to feel more confident that the value of their investments will not be undermined by unexpectedly large public sector growth.
 
Under the cap, it will be illegal for a government to pass an appropriations bill that would breach the ceiling. If unplanned spending increases cause the ceiling to be breached after the event, the minister of finance will have to explain the breach to parliament and the government’s remedial intentions.
 
Contrary to the alarmist views expressed by at least one academic writer, it is a modest measure. As already mentioned, it will not embarrass the government as planned spending through to 2015/16 rises more slowly than the forecast rise in the ceiling.
 
It will (rightly) not prevent governments from running fiscal deficits during recessions. It will not limit capital spending. It will not stop governments from spending citizens’ money through more indirect means, such as via tax breaks or the use of regulations that direct private spending.
 
Moreover, a government that wishes to eliminate the ceiling, or relax it by legislative amendment, can do so by cobbling together a bare parliamentary majority. The only real protection for a politically inconvenient ceiling is the test of public opinion.
 
A sensible concern is that governments might keep within the ceiling by maintaining politically expedient spending, such as interest free student loans, while cutting back on highly desirable public good spending, such as public health inoculations.
 
However, dollars spent wastefully crowd out better quality spending even if there is no ceiling. There is a need for better discipline of spending quality even if there is no overall spending limit.
 
Imposing greater disciplines on the evaluation of individual spending programmes would not he hard in principle. What is missing in practice is greater political willingness to impose such disciplines.
 
If the spending cap makes the problem of the lack of adequate evaluations of individual spending programmes more pressing, that might not be a bad thing.