1  Introduction

1.1   When to use this Primer

This primer seeks to improve the quality of proposals by providing guidance on the issues that should be considered and how proposals will be assessed by the Treasury. It should be used when:

• Preparing policy proposals
• Preparing Cabinet papers with financial and/or economic implications, where consultation with Treasury is required (refer to the Cabinet Office step-by-step guide [2]), including:
  • proposals where additional funding is not sought from the Crown, but expenditure exceeds the financial delegation limits set out in Cabinet Office Circular CO(99)7, [3] and
  • proposals for regulatory interventions[4]
• Preparing papers to joint ministers acting under a delegation from Cabinet where approval is being sought from the Minister of Finance
• Preparing papers to individual ministers
• Preparing budget initiative proposals submitted as part of the annual Budget process
• Preparing business cases including those submitted to Treasury to support any proposal seeking additional funding (operating or capital) required by CO(02)17[5]
• Preparing internal approval papers in accordance with departmental delegations, and
• Reporting on a department’s future performance as required by section 40 (d) of the Public Finance Act 1989 including:
  1. the impacts, outcomes or objectives achieved or contributed to by the department, and
  2. the cost effectiveness of the interventions that the department delivers or administers.[6]

The Primer could also be a valuable resource within the wider Public sector, for example by Crown entities, SOEs, local and regional Government, the NGO sector, academia and the consulting community when:

• Preparing and/or assessing spending proposals seeking new funding, or
• Evaluating the value for money of existing expenditure or pilot initiatives.

1.1.1  Who should use the CBA Primer?

Cost Benefit Analysis can be undertaken on many different levels of detail and sophistication. This Primer is targeted at public sector policy and financial analysts with little economic or financial knowledge. It is intended to provide simple, accessible and practical assistance. To accomplish this, it provides a basic overview of Cost Benefit Analysis in a New Zealand public sector context, with particular emphasis on the basic questions that are likely to arise. For more complex issues or more detailed guidance the reader is referred to other more detailed sources (see Bibliography) or the relevant Treasury Vote team.

1.2  Cost Benefit Analysis

1.2.1  Economic scarcity and its effect on resource allocation

Like all countries, New Zealand has limited resources. The public sector is a major user of the country’s available resources, and as such, should ensure that it makes a significant positive contribution to the economy and society in relation to the resources it consumes. The efficient use of resources has a major impact on the welfare and living standards of citizens.

Government decision-makers require assurance that proposals for new spending will result in a net increase in national welfare and meet Government’s public policy and fiscal objectives. No new proposal should be adopted without first answering:

• what are the specific outcomes sought?
• are there better ways to achieve these outcomes?
• are there better uses for these resources?
• is this an appropriate role for government?[8]

Resource scarcity means that a decision to proceed with one proposal may preclude proceeding with other proposals. There are always alternatives that need to be compared, even if it is a choice between doing “proposal X” and not doing “proposal X”.

1.2.2  What is Cost Benefit Analysis and how can it help?

Cost Benefit Analysis (CBA) is an economic assessment tool. By quantifying all costs and benefits in monetary terms, and discounting, it is possible to determine the net benefits (or costs) of a proposal in today’s dollars. These net benefits/costs can then be used to quantitatively rank alternative proposals:

• between a given proposal and the status quo, or
• between competing proposals.

Decision-makers can be provided with a consistent basis for assessing proposals and can be better informed about the implications of using economic resources. CBA can also be used to test the effectiveness of a proposal after it has been implemented.

1.2.3  Where does Cost Benefit Analysis fit into the overall assessment process?

Cost Benefit Analysis (CBA) is just one of the process steps required to prepare a policy or spending proposal. A fully developed proposal should encompass:

This primer assumes that the first three steps outlined above have been addressed as a precursor to analysing the options.