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New Zealand Economic and Financial Overview 2016

Public Finance and Fiscal Policy

Public Finance

Public Sector Financial System

No public money may be spent, or expenses or capital expenditure incurred, by the Government except pursuant to an appropriation by Parliament. The primary method of appropriation is annual appropriation which provides for most of the expenditure or the Government, and which requires the passage of one or more Appropriation Acts by Parliament each year. This is supplemented by permanent appropriation, which covers principally the payment of interest on debt and certain fixed charges of the Government, and which is provided by permanent legislative authority.

All borrowing by the Government is undertaken under the Public Finance Act 1989, which provides that the Minister of Finance may, from time to time, if it appears necessary or expedient in the public interest to do so, raise a loan from any person, organisation or government, either within or outside New Zealand, on such terms and conditions as the Minister deems appropriate.

In 1994, the fiscal deficit in New Zealand was eliminated after 10 years of difficult political decision-making and management reform. Reform of the public sector financial management system was an integral component of this. New Zealand's public sector financial management system is now underpinned by four key pieces of legislation: the State Sector Act 1988; the Public Finance Act 1989, which since 2004 has included the provisions of the previous Fiscal Responsibility Act 1994; the Crown Entities Act 2004; and the SOEs Act 1986.

State Sector Act 1988. This Act defines the responsibilities of chief executives of departments and their accountability to Ministers. The main objectives of the Act are to improve productivity, to ensure that managers have greater freedom and flexibility to manage effectively and at the same time to ensure that managers are fully accountable to the Government for their performance. This has led to the formulation of performance expectations between Ministers and chief executives. These contracts specify expectations of performance and provide a basis for assessment, which may result in a combination of rewards or sanctions.

Public Finance Act 1989. The Public Finance Act 1989 provides the legislative basis for improving the quality and transparency of financial management and information. This is an essential component of the accountability arrangements established under the State Sector Act.

The driving principle behind the Public Finance Act is a move of focus from the inputs departments consume to what they produce. Hence, budgeting and reporting is on an output basis rather than relying solely on information relating to inputs. Departments were made responsible for outputs (the goods and services they produce) while Ministers were made responsible for selecting the output mix to achieve government outcomes (desired goals). An amendment in 2013 provides greater financial flexibility by enabling outcome-based appropriations where all of the component categories contribute to a single overarching purpose.

The Act requires the Crown and all its sub-entities to report on a basis consistent with NZ GAAP. This has significantly improved the comparability and reliability of the financial information reported. In addition, the Act specifies other Crown disclosures specific to the public sector, such as a statement of unappropriated expenses and capital expenditure and a statement of emergency expenses and capital expenditure.

Consistent with the output focus, the Public Finance Act outlines requirements for ex ante information essential for a robust system of government budgeting. The Act specifies a number of specific disclosures required for the Estimates (the Government's Budget documentation), including for each appropriation what is intended to be achieved and how performance will be assessed, with reporting on what has been achieved with each appropriation required at the end of each financial year. The Act also requires departments to publish strategic intentions at least once every three years and to report on progress against them in their annual reports.

The Public Finance Act also specifies the reporting requirements for mixed ownership model companies, PFA Schedule 4 organisations and PFA Schedule 4A companies.

Crown Entities Act 2004. The Crown Entities Act establishes the governance and accountability regime for Crown entities which are bodies owned by the Crown that are not departments, SOEs, mixed ownership model companies, PFA Schedule 4 organisations or PFA Schedule 4A companies. Among the accountability requirements are statements of intent (at least once every three years), annual statements of performance expectations, and annual reports and financial statements.

State-Owned Enterprises Act 1986. The SOEs Act establishes the objectives, governance and accountability requirements for commercial businesses owned by the Crown. The accountability requirements include annual statements of corporate intent, annual reports and financial statements, and half-yearly reports.

From 1991, government departments and Offices of Parliament have been required to prepare financial statements consistent with NZ GAAP. The first set of financial statements for the combined Crown (the Government of New Zealand) was produced for the six months ended 31 December 1991. The first annual set was produced for the financial year ended 30 June 1992. From 1 July 1992, the statements also included the Crown's interest in SOEs and Crown entities. Monthly Crown Financial Statements are published for the period from the beginning of the financial year to the end of each month from September onwards.

Fiscal Responsibility Provisions

The Fiscal Responsibility Act 1994 promoted consistent, good- quality fiscal management. This Act has now been repealed but its provisions have largely been incorporated into Part 2 of the Public Finance Act 1989.

Part 2 of the Public Finance Act 1989 now provides the legislative framework for the conduct of fiscal policy in New Zealand. The Act encourages better decision-making by the Government, strengthens accountability and ensures more informed public debate about fiscal policy.

Part 2 works by requiring governments to:

  • follow a legislated set of principles of responsible fiscal management, and publicly assess their fiscal policies against these principles. Governments may temporarily depart from the principles but must do so publicly, explain why they have departed and reveal how and when they intend to conform to the principles
  • publish two fiscal responsibility documents: the BPS and the FSR. These documents focus on different aspects of the Government's fiscal policy. The BPS has a shorter-term focus. It sets out the over-arching policy goals that will guide the Government's Budget decisions and the Government's priorities for the forthcoming Budget. The FSR sets out the Government's long-term fiscal strategy and explains how that strategy accords with the principles of responsible fiscal management
  • publish economic and fiscal forecasts (Economic and Fiscal Updates - EFU) twice each financial year: at the time of the Budget and again before the end of the calendar year. The Treasury is also required to publish an EFU prior to a general election. In addition, the Treasury is required to publish, at least every four years, a Statement on the Long-term Fiscal Position, looking out at least 40 years. The first such Statement was presented to Parliament in June 2006, the second in October 2009 and the third in July 2013
  • present all financial information under GAAP
  • provide an investment statement to the House of Representatives prepared by the Treasury at least once every four years describing the state and value of the Crown's significant assets and liabilities
  • require the Treasury to prepare forecasts based on its best professional judgement about the impact of policy, rather than relying on the judgement of the Government. It also requires the Minister to communicate all of the Government's policy decisions to the Treasury so that the forecasts are comprehensive, and
  • refer all reports required under the Act to a parliamentary select committee.

These requirements mean that the government of the day has to be transparent about both its intentions, and the short and long-term impact of its spending and taxation decisions. Such transparency should lead governments to give more weight to the longer-term consequences of their decisions and should, therefore, lead to more sustainable fiscal policy. This increases predictability about, and stability in, fiscal policy settings, which helps promote economic growth and provides a degree of certainty about the ongoing provision of government services and transfers.

Part 2 of the Public Finance Act 1989 establishes a set of principles for use as a benchmark against which the fiscal policies of the Government can be judged by Parliament and its Finance and Expenditure Committee.

These principles are to:

  • reduce debt to prudent levels to provide a buffer against future adverse events
  • run operating surpluses until prudent debt levels are achieved
  • maintain prudent debt levels by ensuring that, on average, total operating expenses do not exceed total operating revenues (ie, the Government is to live within its means over time, with some scope for flexibility through the business cycle)
  • achieve and maintain levels of net worth to provide a buffer against adverse events
  • manage prudently the risks facing the Crown
  • have regard to efficiency and fairness, including the predictability of tax rates, when formulating revenue strategy
  • have regard to the interaction between fiscal and monetary policy when formulating fiscal strategy
  • have regard to the likely impact on present and future generations when formulating fiscal strategy, and
  • ensure the Crown's resources are managed effectively and efficiently.

The presumption is that governments should follow these principles. Governments are allowed to depart temporarily from these principles if they wish. The legislation requires, however, that a government specify its reasons for departure from the principles, how it expects to return to the principles and when. This recognises the difficulty of attempting to anticipate all future events and, therefore, the need for some short-term policy flexibility, but also requires that departures are transparent and should only be temporary.

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