New Zealand is globally recognised for its robust institutional framework. This institutional strength is demonstrated through high rankings across each of the World Bank’s Governance indicators, shown below.
Source: World Bank Worldwide Governance Indicators – 2018
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 indigenous Māori people and the British Crown.
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. As such, there is no single document that can be termed the New Zealand constitution. The Constitution Act 1986 however, updated, clarified, and combined 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 titled the House of Representatives. The 120 members are elected for three-year terms through general elections. 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 – 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 her/his 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.
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.
As a result of a referendum held in conjunction with the 1993 election, New Zealand changed from a “First Past the Post” system of electing Members of Parliament to a “Mixed Member Proportional” (MMP) system of proportional representation. Under MMP each voter has two votes to cast – a party vote and an electorate vote. A party vote helps decide the share of the 120 seats in Parliament that is allocated to each political party, while the electorate vote determines the local member of Parliament. This change was implemented in the 1996 election.
New Zealand is a small open economy and operates on free market principles. A large services sector and sizable manufacturing sector complement an efficient export-oriented primary sector (Chart 2).
New Zealand’s land size is similar to Japan and the UK but with a resident population of 5 million. The climate is temperate, supporting agriculture, forestry and horticulture. It has abundant natural resources and makes wide use of hydroelectric power generation.
External trade is of fundamental importance to the New Zealand economy. Primary sector products, commodities, manufactured products and services are all important sources of export income. Tourism is typically the largest services export, as New Zealand is a popular destination for overseas visitors. Additional services exports include; education, transport, financial and business services, and information technology. Raw materials, consumer goods and capital equipment for industry are key components of New Zealand’s imports.
Chart 2: New Zealand GDP by Industry – Year Ended March 2020
Source: Stats NZ
New Zealand has had a freely floating exchange rate of its currency, the New Zealand Dollar (NZD), since March 1985. There are no exchange controls on foreign-exchange transactions undertaken in New Zealand, with the NZD one of the top ten traded currencies globally.
Monetary Policy Framework
The Reserve Bank of New Zealand (RBNZ), was established as a Central Bank in 1934 and is responsible for monetary policy and financial stability policy. The Reserve Bank of New Zealand Act 1989 (the Act) cemented its independence and introduced inflation targeting.
The focus of monetary policy is to maintain price stability and support maximum sustainable employment. Monetary policy decisions are made by a committee – the Monetary Policy Committee (MPC). A remit is issued from the Minister of Finance to the MPC which sets out the specific operational objectives. The latest remit, signed in May 2019, stated that the objectives are “to keep future annual inflation between 1 and 3% over the medium term, with a focus on keeping future inflation near the 2% mid-point”, and “to support maximum sustainable employment”. In particular, the MPC is required to seek to avoid unnecessary instability in output, interest rates, and the exchange rate. It must also have regard to the efficiency and soundness of the financial system.
A review of the Act is currently underway, and will address the RBNZ’s responsibilities in 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. The review is currently undergoing its third round of consultation, with the advancement of legislation delayed due to COVID-19.
In March 2020, the RBNZ implemented alternative monetary policy via a Large Scale Asset Purchase (LSAP) programme. The Government has provided an indemnity to cover losses the RBNZ may incur as a result of operating the LSAP programme, set as a proportion of specific assets outstanding. The assets currently covered by the indemnity are limited to nominal New Zealand Government Bonds (NZGBs), Inflation-Indexed NZGBs and Local Government Funding Agency (LGFA) bonds.
Chart 3: Cumulative NZGB purchases by the RBNZ under LSAP programme in 2020
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. The current and recent Governments show 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. 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 Financial Markets Authority Act 2011 established 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.
- However, this is expected to be significantly dampened over the year ahead with international borders expected to remain closed for some time due to COVID-19.
- Bank for International Settlements, Triennial Survey, April 2019, percentage shares of average daily turnover.
- Publication of the HYEFU is not required in the year if the PREFU is published between 1 October and 31 December.