New Zealand is globally recognised for its robust institutional framework. It ranks highly in all of the World Bank’s Governance Indicators, illustrating its institutional strength, as shown in Chart 3.
Form of Government
New Zealand is a sovereign state with a democratic parliamentary government based on the Westminster system. Its constitutional history dates back to the signing of the Treaty of Waitangi in 1840, between the British Crown and the indigenous Māori people.
The New Zealand Constitution Act 1852 provided for the establishment of a Parliament with an elected House of Representatives. Universal suffrage was introduced in 1893. New Zealand has the British monarch as titular Head of State. The Queen is represented in New Zealand by the Governor-General, appointed by her on the advice of the New Zealand Government.
As in the United Kingdom, constitutional practice in New Zealand is an accumulation of convention, precedent and tradition, and there is no single document that can be termed the New Zealand constitution. The Constitution Act 1986, however, updated, clarified and brought together in one piece of legislation the most important constitutional provisions that had been enacted in various statutes. It provides for a legislative body, an executive and administrative structure and specific protection for the judiciary.
Legislative power is vested in Parliament, a single chambered body designated the House of Representatives. Members are elected for three-year terms through general elections. It currently has 120 members. Eligible residents over 18 years of age may vote in general elections.
The executive government of New Zealand is carried out by the Executive Council. This is a formal body made up of the Cabinet and the Governor-General, who acts on the Cabinet’s advice. The Cabinet itself consists of the Prime Minister and his/her Ministers, who must be chosen from among elected Members of Parliament. Each Minister supervises and is responsible for particular areas of government administration. Collectively, the Cabinet is responsible for all decisions of the Government.
As a result of a referendum held in conjunction with the 1993 election, New Zealand changed from a “First Past the Post” (FPP) system of electing Members of Parliament to a “Mixed Member Proportional” (MMP) system of proportional representation. Under MMP, the total number of seats each party has in Parliament is proportional to that party’s share of the total list vote. This change was put in place for the 1996 election.
The judicial system in New Zealand is based on the British model. By convention and the Constitution Act 1986, the judiciary is independent from the executive.
Chart 3: Percentile Ranking on Key Governance Indicators
Source: World Bank Worldwide Governance Indicators-2016
Monetary Policy Framework
The Reserve Bank of New Zealand (RBNZ) was established as a Central Bank in 1934. The Reserve Bank of New Zealand Act 1989 (the Act) cemented its independence. It is responsible for monetary policy and financial stability policy.
Under the Act monetary policy is directed towards maintaining stability in the general level of prices. The Governor of the RBNZ and the Minister of Finance sign a Policy Targets Agreement (PTA). It sets out the policy target for monetary policy which must be consistent with maintaining a stable general level of prices.
Under the current PTA, signed in March 2018, the policy target is to keep future annual CPI inflation between 1 and 3 percent over the medium-term. More specifically there is a “focus on keeping future inflation near the 2 percent mid-point”. However, the RBNZ will implement a flexible inflation targeting regime. In particular the Bank is required to seek to avoid unnecessary instability in output, employment, interest rates and the exchange rate in the pursuit of the price stability target. It must also have regard to the soundness and efficiency of the financial system.
The Government is undertaking a review of the monetary policy framework as set out in the Act. The major elements of the Review are:
- amending the legislative objective of monetary policy to include consideration of maximum sustainable employment alongside price stability; and
- providing for a committee decision-making model for monetary policy at the Reserve Bank.
Under the amended Act the PTA will be replaced by a Remit for the monetary policy committee. The Government expects that the amended Act will come into force in 2019.
The RBNZ maintains the ability to intervene in the foreign-exchange market to influence the level of the exchange rate for monetary policy purposes. Such intervention may occur when the exchange rate is deemed exceptional and unjustified by economic fundamentals and when doing so is consistent with the PTA.
The RBNZ is also responsible for promoting the maintenance of a sound and efficient financial system. This includes the implementation of prudential policies, such as capital and liquidity standards, macro-prudential policy and undertaking supervision of banks. In May 2013, a Memorandum of Understanding was signed that defined macro-prudential policy and its operating guidelines. Its objective is to increase the resilience of the domestic financial system and counter instability arising from credit, asset price or liquidity shocks.
Chart 4: NZ Official Cash Rate
Fiscal Policy Framework
The Public Finance Act 1989 requires the New Zealand Government to be transparent in both its short- and long-term fiscal objectives and to maintain prudent debt levels. Recent and current Governments have a strong commitment to prudent fiscal management.
The Public Finance Act stipulates the Treasury must publish economic and fiscal forecasts twice a year. These occur at the time of the mid-year Budget (Budget Economic and Fiscal Update – BEFU) and at the end of the calendar year (Half Year Economic and Fiscal Update – HYEFU). The Treasury must also provide a Pre-election Economic and Fiscal Update (PREFU) prior to general elections, which occur at least every three years. The forecasts extend for four years beyond the current fiscal year ie, “the forecast period”.
Without parliamentary authority, the Government has no authorisation to incur expenses and capital expenditure and spend public money. An Appropriation Act is the means by which Parliament approves expenses and capital expenditure for the Government for the coming year.
This is supplemented by spending that is authorised under Permanent Legislative Authority which continues in effect until revoked by Parliament. The payment of interest on debt is an example of spending authorised under Permanent Legislative Authority.
The Government formally communicates its fiscal strategy twice a year, typically alongside the Budget and HYEFU. The Government sets out its short-term intentions and long-term objectives with respect to core parameters such as debt, operating expenses, operating revenue, the operating balance and net worth. The Fiscal Strategy Report is released alongside the Budget. The Budget Policy Statement is generally released alongside HYEFU.
The Government’s most recent Fiscal Strategy Report was published in May 2018 and highlights five Budget Responsibility Rules underpinning its fiscal strategy.
These are to:
- Deliver a sustainable operating surplus across an economic cycle.
- Reduce the level of net core Crown debt to 20% of GDP within five years of taking office (the current Government took office in October 2017).
- Prioritise investments to address the long-term financial and sustainability challenges facing New Zealand.
- Take a prudent approach to ensure expenditure is phased, controlled and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to
- Ensure a progressive taxation system that is fair, balanced and promotes the long-term sustainability and productivity of the economy.
In addition, the Government recognises the importance of maintaining a sustainable New Zealand Government Bond (NZGB) market. The Budget Policy Statement, December 2017, includes a commitment to maintain levels of NZGBs on issue at not less than 20% of GDP over time, even if net core Crown debt were to fall below 20% of GDP.
In the year ended 30 June 2015 (2014/15) the Government achieved an operating surplus for the first time since the global financial crisis. In 2016/17 the operating balance before gains and losses was a surplus of NZD 4.1 billion (1.5% of GDP). Surpluses are forecast to be sustained across the forecast period, reaching 2.1% of GDP in 2021/22.
Core Crown expenditure, as a percentage of GDP, was 27.8% in 2016/17 and is expected to remain close to this level over the forecast period.
A core Crown residual cash surplus was achieved in 2016/17. In the current and subsequent three fiscal years, forecast capital spending is expected to lead to core Crown residual cash deficits. In 2021/22 a surplus is forecast to be restored.
Net core Crown debt was 21.7% of GDP in 2016/17. This ratio is forecast to gradually decline, to 19.1% in 2021/22.
The Financial Markets Authority Act 2011 establishes the Financial Markets Authority (FMA) as New Zealand’s market conduct regulator. The FMA is an independent Crown Entity whose main objective is to promote and facilitate the development of fair, efficient and transparent financial markets.
The FMA enforces financial markets legislation, including the Financial Markets Conduct (FMC) Act. The FMC Act 2013 regulates the offering and trading of investments and the provision of certain financial services. It regulates the operation of securities and derivatives exchanges and trading behaviour on those exchanges. It also provides general prohibitions on misleading and deceptive conduct in financial markets. New Zealand Government Securities are “securities” for the purposes of the FMC Act.
Table 1: Summary of the Treasury's Economic and Fiscal Forecasts
|Year Ending 30 June||Actual
|Real GDP (production basis, annual average % change)||3.3||2.8||3.3||3.4||2.7||2.5|
|Real GDP per capita (production basis, annual average % change)||1.2||0.7||1.3||1.7||1.3||1.3|
|Unemployment rate (annual average %)||5.0||4.5||4.4||4.1||4.1||4.2|
|CPI inflation (annual average % change)||1.4||1.5||1.4||1.7||1.9||2.0|
|Current account balance (% of GDP)||(2.7)||(2.6)||(3.1)||(3.0)||(3.0)||(3.1)|
|Fiscal (% of GDP)|
|Core Crown tax revenue||27.6||27.3||27.5||27.8||28.1||28.3|
|Core Crown expenses||27.8||28.1||28.5||28.2||28.3||28.0|
|Total Crown operating balance before gains and losses||1.5||1.1||1.2||1.7||1.7||2.1|
|Core Crown residual cash||0.9||(0.4)||(1.3)||(0.5)||(0.6)||0.2|
|Net core Crown debt||21.7||20.8||21.1||20.6||20.2||19.1|
|Net worth attributable to the Crown||40.3||40.4||40.9||41.7||42.7||44.2|
Source: Stats NZ, the Treasury Budget Economic and Fiscal Update 2018