Public Finance Act

From The Commercialisation of New Zealand, p.173-176.

Keywords: Governance

The PFA had two main features. First it put the government accounting onto a new basis, which was largely parallelled by commercial practices, based on Generally Accepted Accounting Practice (GAAP), set down by a non-government board of the Society of Accountants.

In many ways the new form of financial statements required by the PFA represented a major step forward, incorporating the developments in public sector accounting and financial reporting since the previous public finance act of 1977. At a superficial level they are easier to read and understand by the layperson. Government accounting was switched to an accrual method, which avoided oddities such as the practice of the Ministry of Works finding it had unspent funds, and purchasing shingle before the end of the financial year, selling it after to recover the cash. The new financial statements also require disclosure of contingent liabilities, which means the government will not be able to hide potential costs which may arise from its decisions without telling parliament, as occurred with many of the Think Big projects.

But there are oddities. For instance the balance sheet (or, as it is now known, ‘statement of financial position’) shows a deficit in the Crown Balance, but ignores the sovereign right to tax, which swamps any of the other items in the account. Noting that many countries’ tax revenue exceeds 40 percent of GDP, the sovereign right could be valued at least $360b,[1] whereas in June 1995 total reported assets were $54.5b and liabilities $57.6b (a deficit on the reported government balance of $3.1b). The omission is to make the financial statements almost totally meaningless as a measure of the strength of the government’s position.

The neglect probably reflects not only that the right to tax is difficult to value, but there being no commercial equivalent, the underlying conceptual issues were not addressed. Perhaps it reflects the commercial sector’s hostility to the power of a government to tax. Whatever the rights and wrongs, it is clear that it is difficult to give any meaningful interpretation of the Crown Balance other than the arithmetic difference between a certain set of assets and liabilities, valued in a certain way.

A significant feature of the PFA was the change in the arrangements by which the government of the day acquired monies from parliament. First there was the jargon: Ministers sought ‘outcomes’, while departments delivered ‘outputs’ ‘contracted’ by the minister to enable the achievement of desired government outcomes. Ministers would ‘purchase’ from the departments (strictly it is with the chief executive of the departments, see below) to provide the desired outputs, and parliament votes the requested funds. One can see in this new arrangement, the introduction of a market and commercial notions.

While one may idealize these arrangements, arguing it enhances accountability, the practicalities are rather messy. Consider the finance vote, whose 1995/6 ‘outcome’ was:

“The appropriations in Vote Finance will make an important [sic] contribution to a number of the Government’s strategic objectives for the public sector. They will fund policy advice aimed primarily at the maintenance and acceleration of economic growth, and a number of strategic objectives in other areas, including enterprise and innovation, external linkages, education and training, social assistance, Treaty claims settlement and health.”[2]

One is not overwhelmed with the impression of clear outcomes desired by the Minister (and in truth his actual desires are more likely to be to get reelected, make people feel better off, and lead a quiet but respected life). Now look at first ‘output class’ of Treasury, ‘Policy Advice: General Economic and Fiscal Strategies’:

“Provision on the economy, including the government’s overall economic and fiscal strategies and macroeconomic forecasting and monitoring.”

Well, yes. One is left with the impression that those in Treasury who recommended the conceptual framework of the PFA did not consult with their colleagues as to whether it was practicable in Treasury (any more than those colleagues consulted with other departments on their policy proposals). The hard notion of an output has reduced to a warm fuzzy, as is true for the many other outputs of all the government departments. How a parliament or minister is to judge objectively the quantity (let alone quality) of such an output is a mystery. Perhaps it is a facade to give the impression that there was some accountability, or that there was greater accountability than in the past.

How a game is scored affects the way it is played. A system dominated by commercial accounting practices with their emphasis of the measurement of profit is going to reduce the significance of activities which do not make a profit. Not surprisingly government departments were pushed into corporatizing and privatizing their activities or contracting them out to the private sector. That which remained were seen as cost centres, with the benefits of what was supplied reduced tending to be neglected.

In 1995/6, parliament voted $5.8m for the Treasury output class described above. How is one to decide that is the right amount? Prior to the 1989 statute, parliament had voted an amount to reflect the inputs of the activity: so much for wages and salaries, so much for transport, so much for buildings, so much for miscellaneous expenses, and so on. One had some idea of how many officials were being provided and, quality aside, that gave some idea of the amount of activity. This detailed parliamentary control became less functional with the new responsibilities of chief executives under the SSA.

The term ‘purchase, explains the fallacy. As Chapter 2 described, when someone purchases bread they have a reasonably clear idea what it is they are obtaining, and they do so in a reasonably competitive market. Neither of these properties apply to the `purchase’ of advice from Treasury. (In regard to the second property, the transaction is between a monopsonistic minister and a monopolist department, for Ministers do not have the opportunity to tender to other institutions for the advice they receive using the funds provided for Treasury.) When we purchase bread, we are not greatly concerned about the inputs that went in to make the bread because the output is reasonably well defined (and competitively delivered). Where it is not, the input and production processes are of far greater interest. For instance a woman purchasing a dress is likely to examine the material, the stitching and the cut, even where it is made – as well as looking at the label.

The input approach is not necessarily superior to the output one. Both have defects. What is relevant is the way in which a pseudo-commercial approach was uncritically adopted. While both sides (supply and demand, inputs and outputs) were addressed, the balance was swung to the reduction of the usage of resources at the expense of the provision of service. Under very great pressure because of the stagnation of the economy and the fiscal deficit, the government kept arguing that gains could be made by reducing the resources available to departments, and cut the available funds. Departments, already under pressures from burgeoning demands often as a result of the economic stagnation, tended to reduce service as a means of coping with the reduced resources available to them. There was no real mechanism for the government to assess this service reduction. While people felt it, and often indicated their resulting distress to the politicians, there was no effective means for parliament to evaluate the service cuts either, other than to parade glaring instances. The final section of this chapter examines one dreadful outcome.

1. Using a real discount rate of 10 percent p.a.
2. It is not relevant for this study’s purposes but the government has a set of nine Strategic Results Areas (SRAs), alluded to in this outcome. In one sense the SRAs are platitudinous too, but they are not without their interest. It is instructive that the 1993 ones excluded any reference to culture, heritage, leisure, or nationhood, or to the requirements of a liberal democracy. The omissions are probably a start-up oversight, and will be included in some way in the next set of SRAs.