A second reading is planned later today for Act MP John Banks’ spending cap bill.

The bill is a result of the National-Act coalition agreement and would apply a legislated ceiling on increases in central government’s operational spending, excluding spending on natural disasters, write-downs of asset values, the unemployment benefit and the costs of serving government debt.

It would link the rate of inflation and the rate of population change, would increase annually to allow for inflation and population growth and would allow the public to vote for an increase in the spending capthrough a binding referendum.

The OECD's 2009 review of the New Zealand economy commended consideration of a spending limit in order to make "resources more predictable and budgets more symmetric" through time. It also recommended a local government spending cap which "should be legally binding unless overwritten by specific voter approval".

It is now easier for governments to spend more, rather than to reprioritise within existing spending.

The government states this bill will provide "more certainty in relation to the future growth in government spending, ensure a degree of spending restraint and improve the transparency of spending decisions".

It believes this will then allow for a lower tax burden on the economy over time, supporting higher economic growth and higher living standards.

The idea was first introduced by former ACT MP Rodney Hide in September 2011.

At the time, he said it was a timely response to challenging economic circumstances.

“New Zealand is grappling with the hangover of too much spending and too much debt.

"Putting New Zealand back on to the right path will require restraint and a determination to never again allow excessive public spending to drive up interest and exchange rates and to drive out growth.

"The spending cap bill will help provide that restraint and will support that determination.”