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NZ must weigh market impact of fiscal plans under law change

Thursday 26th April 2012

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Future governments will have to weigh up the impact of their spending plans against the potential impact on interest rates and the currency after the National-led administration tinkers with the Public Finance Act.

Finance Minister Bill English told a business audience in Wellington the government will tweak the act in next month’s budget to introduce more “checks and balances on ministers’ spending decisions and their long-term effects.”

That will come in tandem with new legislation to introduce a spending cap linking increased expenditure to population growth and inflation as part of its governing arrangements with the Act Party.

One of the changes to the act on the table would mean future administrations have to “consider the impact of their fiscal strategy on the broader economy, in particular interest rates and exchange rates,” English told the Wellington Employers’ Chamber of Commerce.

Last month, Treasury boss Gabriel Makhlouf said his department recommended changes to the act that would let governments structure their spending with economic cycles so as to avoid putting pressure on interest rates and the currency.

Earlier this week, fund manager AMP Capital Investors said it expects the official cash rate will probably settle at a lower than normal level of 4.5 percent with tight fiscal and monetary policy running in tandem.

English said governments would also have to set out priorities for spending, revenue and the balance sheet, and account for fiscal policy decisions on future generations.

The proposed legislation would likely be tabled in the middle of the year, and is part of its supply and confidence agreement to secure the Act Party’s one vote.

“The government will consult other political parties on the proposed changes, which we will include in a bill to be introduced around the middle of this year,” English said.

Spending on natural disasters, finance costs, unemployment benefits and asset impairments would excluded, as those are “either beyond the government’s control or they help stabilise the economy in a downturn,” English said.

If an administration breached the cap, it will have to front up and explain why, as well as outline how it plans to keep within the cap in the future.

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