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mixture of both tied and general grants by central government. Other sources of revenues for territorial authorities are fines and receipts from operations.

4. Legal provisions for each stage of the budget cycle

4.1. Budget preparation and presentation by the executive

4.1.1. Institutional coverage of the budget

The budget estimates are defined as “a statement of the proposed expenses and liabilities to be incurred by the Crown” (s. 2, PFA). The PFA defines the Crown to mean Her Majesty, inclusive of all ministers of the Crown and all departments. Offices of Parliament, Crown entities and SOEs are excluded from the Crown, as are local authorities governed by the LGA. The budget presented to the Parliament includes forecasts covering all departments and agencies in the central government and requests for appropriations by the Crown, departments and offices of Parliament.

4.1.2. Extrabudgetary funds and earmarking of revenues

The scope of the annual appropriations act is limited to the Crown. There are various funds and legal entities whose budgets are approved by bodies other than Parliament. This is the case notably for Crown entities and other public organisations. The Crown Entities Act 2004 classifies Crown entities into various categories. Separate legislation has established most of these, including the New Zealand Superannuation Fund, the Earthquake Commission, and the Accident Compensation Corporation. While the Crown’s purchases of services from Crown entities and capital injections into them are included in the Appropriation Act, their own revenues and expenditures are not included in appropriations. However, all Crown entities, other public bodies (including the central bank), and SOEs are included in the government’s forecasts of total operating revenues and expense, shown in its fiscal and budget strategy documents.

Some revenues – for example income taxes – are not earmarked for specific expenditures. However, net budgeting – the retention of own revenues by departments and the entities under them – is authorised by the PFA (see below). For example, the levies collected by the Accident Compensation Corporation are retained for its use.

4.1.3. Definition of budget aggregates

In its list of definitions, the PFA does not define fiscal aggregates such as “total operating revenues” and “total operating expenses” which are required for fiscal strategy reports and other documents. However, the definition and coverage are made clear in accounting requirements. In particular, the PFA, as amended in 2004, specifies that annual consolidated financial statements of

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“the Government” include, in addition to government departments, all Crown entities, all organisations listed in another schedule to the act, all offices of Parliament (this includes the Auditor General’s Office), all SOEs (named in the schedule to the SOEA), and the Central (Reserve) Bank of New Zealand.2

4.1.4. Fiscal rules

Qualitative fiscal rules are embedded in the FRA. These rules focus on the levels of debt and net worth, as well as fiscal risk and medium-term macrofiscal stability (Box 2). The size of the operating balance (the most important budget balance under accrual accounting) is the main fiscal policy aggregate used for achieving public debt targets.

The law permits the government to depart from these principles and objectives, but only if a departure is temporary and provided that the Minister of Finance specifies: i) the reasons for departure; ii) the approach the government intends to take to return to those principles; and iii) the period of time that the government expects to take to return to those principles.

4.1.5. The timetable for budget preparation and presentation to Parliament

The FRA requires a budget policy statement (BPS) to be presented to the HR not later than 31 March. The BPS sets out the overarching policy goals that will guide the government’s forthcoming budget decisions, the policy areas it will focus on and how the budget will accord with the most recent FSR. The PFA specifies that the date for presenting the budget to the HR – in the form of a first appropriation act – is before the end of the first month after the start of the financial year. A resolution by the HR could require a different date. In practice, the government typically presents the budget to the HR a month before the start of the fiscal year (which begins on 1st July). The entire budget timetable (Box 3) is decided by the government – the PFA’s deadline is barely relevant to actual practice.

4.1.6. Approval process within the executive

Since the adoption of the FRA in 1994, the above budget preparation calendar is conditioned by the requirement for the minister to present to the BPS no later than 31 March (i.e. three months before the beginning the fiscal year). The amendments to the PFA in 2004 resulted in the BPS becoming more focused on budget priorities, consistent with the government’s fiscal strategy report (see below). Following the BPS – which is a pre-budget statement – Cabinet makes final budget decisions.

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Box 2. New Zealand: Fiscal responsibility (legal provisions)

●Reducing total debt to prudent levels,* so as to provide a buffer against factors that may impact adversely on the total level of debt. When the FRA was first passed in 1994, New Zealand’s public debt level was judged to be too high. The act required the achievement of operating surpluses on government transactions until prudent levels of debt were achieved. Since debt reduction was to be attained by running operating surpluses, the government was prevented from achieving prudent debt levels simply by selling assets.

●Once prudent levels of total debt have been achieved, maintaining total debt at prudent levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues. The principle implies that once prudent levels of debt have been achieved, the government should not borrow to cover operating expenses. This principle is applied over the medium to long term. In the short term, cyclical factors may result in temporary operating surpluses or deficits.

●Achieving levels of net worth that provide a buffer against factors that impact adversely on net worth, that is, to ensure that if the economy is subject to adverse events, the government is able to borrow without undue risk of moving into an unsustainable net worth position. This objective acknowledges that the government’s financial strength depends on its overall balance sheet position, not just debt.

●Managing prudently the risks facing the government, that is, to recognise risk and where possible to take steps to manage it. The objective requires that governments should actively reduce risks inherent in their assets, liabilities, and off-balance sheet items such as guarantees. Governments should also look to reduce the risks around their operating flows, by actively protecting the tax base and managing expenditure risks.

●Pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years, that is, to avoid surprises about future tax rates. The objective reflects the importance of stability in tax rates for private sector planning and hence growth.

*The definition of a “prudent” level of debt is not specified in legislation. It is left to the government to specify this in its budget policy statement and fiscal strategy report, and to justify interpretations to Parliament and the public. This allows the government to change its definition of “prudent” in line with determining factors, including the structure of the economy, vulnerability to shocks, demographic pressures, the cost of debt servicing, and the structure of the Crown’s balance sheet.

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Box 3. New Zealand: Key steps and dates for budget preparation by the government

August-November: Strategic phase. Ministers determine the budget strategy objectives for the coming three years. The Cabinet considers the relative importance of the outcomes the government wants to achieve for the coming budget. Ministers identify priorities for departmental chief executives to guide preparation of budget submissions. Decisions taken during the strategic phase are the basis for the budget policy statement.

December-February: Preparation of vote budgets and development of budget initiatives. Ministers and chief executives prepare draft budgets and “purchase agreements” for the coming year and make budget plans for the following two years.

February-April: Review of budget baselines. Departments refine budget proposals. The mix of inputs may be changed so long as total expenses do not exceed approved baselines. Cabinet considers ministers’ requests and proposed budget documents. Ministers are expected to keep total expenses for each vote within approved levels. Ministers may request Cabinet to change to baseline projections.

Budget day (no later than 31 July): Presentation of budget documents to the House of Representatives (HR). In practice, the budget is often presented in May or June.

July-September: Finance and Expenditure Committee of the HR reviews budget documents and reports to the House by 30 September.

September-October: House debates Finance and Expenditure Committee’s report. HR must pass the appropriation bill within three months of the delivery of the budget by the government.

4.1.7. Documents to accompany the budget law

On budget day, to accompany the first appropriation (estimates) bill for the new fiscal year, the Minister of Finance must present to the HR the following documents (s. 2, FRA):

●Information that supports the first appropriation bill, including some detail on each vote, each appropriation for expenses, and each appropriation for capital expenditure (see Box 4).

●A fiscal strategy report.

●An economic and fiscal update.

●The future operating intentions of each department, with more detailed information required for the first future financial year.