Spending cap lacks flexibility when times get tough

Future governments need the flexibility to respond to future economic shocks effectively and shouldn't be hamstrung by self-imposed spending caps, Green Party Co-leader Dr Russel Norman said today.

A legislated cap on government spending is part of the Confidence and Supply Agreement with the ACT Party and will be enacted through amendments to the Public Finance Act.

"A spending cap in the wake of the 2008 global financial crisis would have been a disaster for New Zealand," said Dr Norman.

"Had a spending cap been in place in 2008, the National Government would have already exceeded it by $3.7 billion of additional government spending, even after you allow for extra spending on unemployment benefits, finance costs, asset impairments, and natural disasters.

"A government that arbitrarily has its hands tied on spending can't use its balance sheet to buffer our small open economy from major economic shocks.

"An indiscriminate cap on spending is not a smart way to run an economy."

Treasury is not in support of spending caps. In its regulatory impact statement on ACT's previous attempt to institute a cap through the Spending Cap (People's Veto) Bill, it said "The Treasury does not support imposing constraints on the ability of government to set fiscal strategy via hard parameters in legislation."

"Colorado's experience with spending caps has demonstrated that they don't serve the public interest well, particularly for the most vulnerable. The state experienced declines in health and education funding, reductions in local government services, and enacted 27 new tax refund measures as a way to circumvent the cap," Dr Norman said.

"Colorado even suspended vaccinations for children in an attempt to keep spending within the arbitrary cap.

"It's those that rely on the provision of government services that will inevitably come out worst if National and ACT can find the numbers to pass this regressive legislation."


Attachments
Parliamentary Library Analysis of previous National Government spending, December 6, 2011 (PDF) - 357.05 KB