Treasury plans to smooth 'revenue surprises'

VERNON SMALL
Last updated 11:14 04/07/2014

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Treasury is working on a radical plan to set up a new "jam jar" fund to hold extra tax revenue to smooth income variations.

It says the "stabilisation fund" could operate as a stand-alone agency and be put in place if further debt repayment became politically unpalatable.

The fund was one of three options outlined in a pre-Budget Treasury document late last year and released yesterday.

It said there were three broad, but not mutually exclusive, options for so-called "revenue surprises".

They were to pay down debt, commit it to "one or more existing funds (or 'jam jars'), and create a new form of fund or jam jar (eg a stabilisation fund)".

In the short term there was scope for debt reduction.

"However, at some point this approach may be difficult to sustain if the political appetite for debt reduction begins to diminish," it said.

"To manage future political pressures that may limit the attractiveness of further debt repayment, at some point we would recommend committing future revenue surprises to other funds on the balance sheet."

There were several options such as the New Zealand Superannuation Fund (NZSF), the Earthquake Commission's Natural Disaster Fund (NDF) that was emptied by the Christchurch earthquakes and the Accident Compensation Corporation.

"Of these options, the first two have communications attractions in that either their funding has been explicitly 'interrupted' [NZSF], or they have recently been drawn down [NDF]."

Officials said payments into the NZSF would be an option once debt had fallen to 20 per cent of GDP, but the NDF "could be an earlier option".

But a new fund would allow "banked" surprises to be used "subsequently and explicitly for macro-stabilisation purposes."

They would be used to counteract the economic cycle to "act as a complement or alternative to using changes in debt as a buffer to manage volatility in revenues".

The fund could be a "notional form" managed by the debt-management office or a stand-alone entity.

Treasury noted it intended to "conduct further analysis of options for the creation of a new 'stabilisation fund'."

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