Cyclicality of Fiscal Policy in New Zealand from 1988 to 2024

This analytical note finds that discretionary fiscal policy was acyclical on average from 1988 to 2024. Within this sample period, there are indications that discretionary fiscal policy was counter-cyclical in some periods and pro-cyclical during others. The results suggest that discretionary fiscal policy was counter-cyclical from the mid-1990s up to the start of the COVID 19 pandemic. In contrast, the results suggest that fiscal policy was pro cyclical in the early 1990s and during 2021-2024. A review of the historical events at the time suggests some reasons why this may have occurred. In the late 1980s and early 1990s, pressures on fiscal sustainability motivated fiscal consolidation even as the economy was weak. From 2020, fiscal policy loosened in response to the COVID-19 pandemic with the intention that this would be counter-cyclical to reduce the severity of the anticipated economic downturn. From late 2020 however, the economy turned out to be much stronger than expected (perhaps, in part, caused by the strength of fiscal stimulus itself, along with substantially looser monetary conditions). Combined with expenditure that was enduring rather than temporary, this resulted in large fiscal deficits while the economy was operating above capacity.