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2014 Investment Statement

Executive Summary

The 2014 Investment Statement is the first to be produced by the Treasury since the recent amendments to the Public Finance Act 1989. It examines the composition and state of the Crown balance sheet - what the government owns and owes - and discusses the principles of efficient balance sheet management. It builds on the existing suite of government publications designed to bring transparency and accountability to the public sector.

New Zealand has long been recognised as a world leader in public sector management, and this extends to management of its balance sheet. In recent years there has been a growing emphasis on Crown balance sheet management resulting in better practice, but there is still room for improvement. The major conclusions of the Statement, and areas identified as requiring further work, analysis or improved management, are summarised in this Executive Summary.

Effective balance sheet management underpins living standards

Every year New Zealanders make a significant contribution to support government activities through the taxes and levies that they pay. Last year tax receipts were around $58 billion. In addition the core Crown borrowed around $14 billion through the issuance of Government bonds - this, plus interest, must be repaid by future taxpayer contributions. A significant portion of these funds go to supporting the Crown's balance sheet.

With over $240 billion in assets, $170 billion in liabilities and $70 billion in equity, the Crown's balance sheet is large - assets alone are worth more than a full year of total output from the economy. That means many families' indirect share of the Crown's assets and liabilities would typically be second only in value to the family house and mortgage.

The size of the balance sheet reflects the growth in the role of government over time. The balance sheet has changed significantly in the last 20 years and will continue to change in the future. It will grow as the economy grows and, in particular, as holdings of financial assets increase as a result of governments' efforts to partly prefund the future costs of superannuation. Those assets will form a relatively greater proportion of the Crown's portfolio of assets over time. The Crown's contingent and implicit liabilities will also grow with time. Recent events have shown the effect these can have on the Crown balance sheet.

The implications of these changes will require ever more astute management. Flexibility will need to be maintained to ensure the balance sheet remains fit for purpose and risk management issues will need greater attention than in the past.

It is this outlook that makes it increasingly important to ensure that the balance sheet underpins living standards for New Zealanders. This is about value for money. More efficient balance sheet management would open opportunities for governments to either spend more on raising the quality and quantity of services - such as education and healthcare - or alternatively to lower the Crown's tax take, which would mean more money in taxpayers' pockets.

Strong balance sheet management, with the use of performance targets, can also complement efforts to raise the economy's productive performance. This can be done through promoting macroeconomic stability by helping to manage risks to the wider economy, and by increasing the availability of resources to the private sector by using assets more productively. It also allows governments to achieve an equitable distribution of benefits, costs, and risks across current and future generations and helps with the management of looming long-term fiscal challenges due to population ageing and demographic change.

Area of focus:

  • Governments should consider the use of specific performance targets in meeting the requirements under the Public Finance Act to outline a strategy for managing the Crown's capital and balance sheet.

Governments need to be efficient and effective in the use of resources 

Governments have limited resources with which to deliver on their objectives. The capital employed in asset ownership is never free and assets need to provide benefits greater than the inherent costs of ownership.

Governments need to clearly identify the outcomes sought, and subject investment alternatives and delivery mechanisms to rigorous evidenced-based evaluation of costs, benefits and risks.

Public ownership needs to be assessed against its ability to deliver on outcomes and value for money, and should not be seen as the default setting. Different interventions have led to very different balance sheet outcomes. Governments have used different methods to advance public policy objectives over the years. For example, while a majority of schools are owned by the Crown, early childcare education has a large element of publicly funded private provision.

Ineffective management of assets and liabilities has real costs to New Zealanders. Poor investment decision making not only reduces the resources available to fund priorities directly, but also can result in unnecessary additional operating expenditure.

Changes to society and demographics will occur in the future. Flexibility in balance sheet management is needed to ensure that as circumstances change, the composition of the balance sheet remains appropriate and value for money is still assured.

While there has been a significant improvement in balance sheet management practices in recent years, the information collected for this Statement suggests that these practices are still not as good as they should be across the public sector. Significant Crown investment occurs without being subject to a formal process that ensures it aligns with overall government priorities. That means while individual agencies may be making investment decisions that reflect their own priorities, assets may be better deployed to reflect governments' long-term priorities.

The analysis in this Statement suggests there may be a case for greater coordination in asset performance and investment decision making, and stronger settings in the form of guidance, direction, or monitoring to sharpen incentives and improve balance sheet management practice. In some cases it may be necessary to review decision making arrangements to facilitate more coordinated cross-sector capital investment to better align agency priorities with governments' long-term priorities.

Areas of focus:

  • Ensure settings bring about more rigorous capital investment decision making and support asset management practice to improve alignment between investment and governments’ long-term priorities.
  • Explore how capital could be recycled to meet changing demands and priorities without incurring unnecessary costs.

More systematic collection and use of information is necessary

New Zealand is a leader in fiscal transparency and financial reporting and has well- developed systems to support this. However, the Crown's understanding of non-financial performance and risk information could be improved.

Better information is needed to support decision making that takes into account the Crown's aggregate balance sheet position. High quality information is vital to implementing more rigorous investment decision making and balance sheet management from a whole of Crown perspective.

This Statement has attempted to collate a significant amount of information. This process was challenging and ad hoc, as the Crown currently does not have the systems and processes in place to capture the information needed in a robust manner.

Area of focus:

  • Develop a structured, systematic and robust mechanism for the collection of better information required to support more rigorous investment decision making and deliver on actions discussed in this document.
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