Managing in a Changeable Operating Environment

The environment the Treasury faces has changed dramatically over the past year and it is continuing to do so. The global economic situation has deteriorated significantly and it seems likely that a high degree of uncertainty will persist for some time. In addition, we are advising a new Minister and Government with a different set of priorities. The Treasury's success over the next few years will depend on our ability to adapt to these changing circumstances and to continue to provide sound and useful economic advice that positions New Zealand well for the coming years.

Four main factors characterise this new operating environment.

1 The financial crisis

The deterioration in the global economic and domestic fiscal situation, and how to manage through it, is a central issue for the Government and the Minister of Finance, and for the Treasury as their principal economic and fiscal advisor. The situation is dynamic and volatile; external and domestic events continue to emerge and uncertainty remains around the likely depth and duration of the recession. Keeping abreast of the current situation and anticipating emerging issues requires fleet-footedness, flexibility and pragmatism.

The diagnosis underlying our existing strategic framework - lifting New Zealand's long-run productivity including work on our SRAs - remains robust. However, the current situation requires a change in focus of effort in these areas, with more emphasis on taking opportunities to address the long-term challenges as they arise; scoping and considering practical options for change, and making these happen. The Government has also introduced new policies, such as the wholesale and retail deposit guarantees, that require a larger operational role in assessing and managing risk.

2 Ministerial needs and expectations

The new Government clearly signalled its priorities for the Treasury in letters between the Minister of Finance and the Prime Minister in early 2009. These priorities focus on managing through the downturn, making the New Zealand economy more productive and making government expenditure more productive and effective.

For the period covered by this SOI, the Government expects the Treasury to assist it to:

• progress its economic and fiscal priorities, including leading change processes within and beyond the public sector
• understand the current situation, its implications for New Zealand's economy and to identify, manage and mitigate emerging risks
• anticipate, and in many cases take a leadership role in giving effect to changes to policies, incentives and institutional settings to ensure New Zealand is well-placed to return quickly to robust and sustainable productivity-led growth, and
• anticipate and deal with challenges as the international and domestic economic situation unfolds.

In all of the above, the Treasury is expected by Ministers to take a leadership role, as an economic and fiscal advisor, and as a Central Agency.

3 Focus on constraining State sector spending while improving performance

A key challenge in State sector performance is the Minister of Finance's expectation that the Treasury as a Central Agency provides advice that considers issues across portfolios and the State sector. One of this Government's priorities is to deliver real discipline around government spending and extract better value within much tighter expenditure constraints.

The Treasury employs a range of tools to drive improved performance and governance. These include systemic approaches as well as some advice specific to particular sectors. The current focus in this area involves work on the “responsibility model”, the State sector's performance framework, Capital Asset Management practices and stronger financial monitoring.

4 Our changing world and its impacts on the way we work

The new environmental challenges we face mean that the Treasury must adapt its working style to meet different expectations and circumstances. In particular, we must:

• be more flexible, shifting resources to deal with temporary but important issues, and
• accommodate new functions to deliver on the Government's priorities; these may require different skills outside the scope of our policy advice, including more specialised in commercial and financial management.

These organisational challenges will inform and influence the way in which the Treasury develops its organisational strategy over the next year.