The political legacy of a nonbinding bill

The Fiscal Responsibility Act is also nonbinding but has fundamentally changed how "responsible" fiscal policy is measured by government and viewed by the public

Ruth Richardson visiting Treasury soon after her appointment as Finance Minster. Photo by teara.govt.nz

This week we get a marathon select-committee process of 30 hours after Parliament decided to cut back on the amount of time the public had to comment on the Regulatory Standards Bill, which passed its first reading under urgency. Already, it’s pretty clear that most of the submissions are going to oppose the bill. Many have outlined concerns having to do with the principles and the potential chilling effect the legislation will have on regulation in the public good.

The bill’s proponents continually point to these concerns as hyperbole and not based in reality. The bill is nonbinding they say. It will require lawmakers to justify their laws and to make sure that what they are proposing is in accordance with good lawmaking. As NZ Initiative continually reminds us, Parliament is sovereign. They can make whatever laws they want to. The Regulatory Standards Bill just requires them to say whether those laws are responsible. It’s a simple transparency measure.

None of these arguments address the elephant in the room, which is that this is the fourth attempt to get this bill passed, the original bill was drafted by and for business interests, and if the bill is so innocuous then why has there been a concerted campaign over 20 years to get it passed?

The reason is, of course, that the architects of the bill know exactly what it will do over the long term, and that is to shift the way that government and the public think about “good” lawmaking so that the principles of responsible regulation, which prioritize libertarian individualism and property rights above anything else, will become the de facto barometer by which laws are judged. The bill establishes mechanisms by which an incredible amount of political and public pressure can be brought to bear on this process, including a hand-picked board which is headed by the Minister for Regulation, who is given sweeping powers of inquiry into any sector of government.

And it’s not by accident. Indeed, Seymour has said on multiple occasions that the bill is patterned after the Fiscal Responsibility Act and has the same goal, which is to provide transparency to the lawmaking process in the same way that this Act provided transparency to the fiscal process. If we look at the impact of this Act since its passage, it’s clear that a so-called nonbinding piece of legislation can have profound political effects.

The Fiscal Responsibility Act was introduced by Ruth Richardson as one of the final in a suite of reforms to New Zealand’s fiscal and economic policy that began under the Fourth Labour Government under Roger Douglas. These included the Reserve Bank Act, which among other changes eliminated the focus of the Reserve Bank on employment and stipulated a focus solely on managing inflation.

The Fiscal Responsibility Act, passed a few years later and now included in the Public Finance Act, set forth a number of “principles of responsible fiscal management” which are to guide the government’s budget expenditure (section 26G). These principles are

(a) reducing total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future by ensuring that, until those levels have been achieved, total operating expenses in each financial year are less than total operating revenues in the same financial year; and

(b) once prudent levels of total debt have been achieved, maintaining those levels by ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues; and

(c) achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future; and

(d) managing prudently the fiscal risks facing the Government; and

(e) when formulating revenue strategy, having regard to efficiency and fairness, including the predictability and stability of tax rates; and

(f) when formulating fiscal strategy, having regard to the interaction between fiscal policy and monetary policy; and

(g) when formulating fiscal strategy, having regard to its likely impact on present and future generations; and

(h) ensuring that the Crown’s resources are managed effectively and efficiently.

These principles are not compulsory, but are rather proffered as agreed-upon standards of responsible fiscal management. Government is not required to adhere to these principles legally, and in fact the Act indicates that deviating from them is acceptable under certain conditions if

(a) the departure from those principles is temporary; and

(b) the Minister, in accordance with this Act, states—

(i) the reasons for the departure from those principles; and

(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.

Again, none of this is compulsory in that nothing in the bill legally requires the government to adhere to these principles. But what is compulsory is that the government must report on whether its fiscal practices comply with these principles every six months and three months before an election. This public disclosure is scrutinized and dissected endlessly by the media. This means that a lot of political pressure can be brought to bear on the government depending on whether they are seen to be adhering to good fiscal processes. As stated by Richardson herself

It must also be entirely transparent - the government is compelled to explain publicly why it is not conducting policy in accordance with the principles of responsible fiscal management, and how it intends to return to those principles. The Fiscal Responsibility Act thus provides a powerful discipline on New Zealand governments.

Richardson is right that the Act provides a powerful disciplinary mechanism. But what is this discipline based on? As is the case with the Regulatory Standards Bill, the key is the principles. They put in place a very narrow framework under which “responsible” fiscal policy can be realized. This framework asserts that the most important thing a government can do is manage its finances responsibly, but the definition of “responsible” is very selective. For example, what constitutes a “prudent” level of debt?

One thing the Act has done, in concert with public statements by politicians of all stripes, is to cement in the public view the analogy of the government as a household. Just as a household has to manage its debts, so too does the government. And a government that balances its budget is a good government regardless of other economic and social indicators.

This view of government finances is pervasive in society. Think how much you hear about government debt from every Prime Minister or Finance Minister. Balancing the budget is the most important thing. Sorry but we just can’t spend money on that, we all have to tighten our belts. The result is entrenched austerity and lack of public investment. Willis is still, over half her term in government, justifying her cuts to public services on the basis of government debt, which she is blowing out to levels greater than the last government with her tax cuts for the wealthy. She is torpedoing the economy in her attempts to balance a budget, a move that betrays her utter lack of economic understanding or her ideological purity. Either way, one would hardly describe her as a responsible fiscal manager, even by Richardson’s narrow criteria.

Putting aside the fact that government is not like a household, as governments issue their own currency, something that regular households cannot do and this completely changes the economic equation, I’d just like to remind us here that none of this shift in fiscal policy was mandated by the Act. The only thing that was mandated was regular reporting by government about how well its budget priorities accorded with the principles of responsible fiscal management. In other words, what was described as a transparency measure to help the public understand the government’s budget has fundamentally shifted the way the public views government finance. And this shift has prioritized a narrow, ideological view of what it means to be “responsible” fiscal managers. A view that prioritizes debt, inflation, and economic growth and efficiency at the expense of all other outcomes.

These are not universally agreed-upon principles of fiscal responsibility. They are not even based on evidence that adhering to them is good for economies and nations. They are ideological, and as with everything else ideological, they become their own ends. It doesn’t really matter whether reducing debt or balancing the budget is producing positive social and economic outcomes. What matters is whether the budget is balanced.

The fact that Seymour has cited this specific Act, which prioritized and enshrined in the public consciousness a set of ideological, narrowly-defined principles of “responsible” fiscal management, as the template for what he hopes his Regulatory Standards Bill will do is telling in the extreme and should be worrying to everyone. His bill puts in place modes and methods of political power that will very much do the same thing that the Fiscal Responsibility Act has done.

By requiring ministers and other lawmakers to make publicly-available statements about whether their legislation adheres to the principles of responsible regulation, it will lead over time to the entrenchment of these principles—defined and interpreted by himself—as the benchmark by which government and the public will measure good legislation. This will allow ACT’s extreme libertarian ideology to pervade every aspect of government even if they aren’t in power. Debt, efficiency, individual freedoms, and property rights will be the most important considerations of government. As long as budgets and laws adhere to these principles of responsible fiscal and regulatory lawmaking, it won’t matter what material effects these laws have in the lives of New Zealanders and on society generally. As has been the case with fiscal austerity, largely driven by the Fiscal Responsibility Act’s nonbinding influence, the end result of the nonbinding Regulatory Standards Bill will be a failure to invest or legislate in the public interest, deepening inequality and cementing the power of the wealthy.