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Costing of Political Party Policies

Page updated 29 May 2017

The following is a set of high-level guidance on how to cost political party policy proposals. Treasury aims to facilitate a consistent approach to costing policy proposals across the public sector.

Introduction

This site provides high-level guidance on how to cost political party policy proposals. It draws attention to the more significant or sensitive aspects of cost-benefit evaluation and fiscal estimation. However, it stops short of providing a full manual on costing spending or revenue proposals.

The term “policy proposal” should be interpreted widely. In particular, it includes options under discussion, even if these are not formally proposed.

Why it’s Important to Follow Agreed Protocols

The State Services Commission (SSC) has published procedural guidelines for state sector agencies in relation to the 2017 election period (refer Guidance for the 2017 Election Period: State Servants, Political Parties, and Elections, which includes an appendix titled Guidelines for Costing Party Political Policies). Additionally, there is guidance on the SSC site on support for political parties engaged in negotiations to form a Government (refer Negotiations between political parties to form a government: guidelines on support from the State sector).

The SSC guidance anticipates that State sector agencies may become involved in costing of political party policies in a number of different situations. It is important that the correct protocols be applied in each situation, as set out in the table below.

Table 1: Authority Required to Undertake Costings in Different Political Situations
  Political Situation Required Authority for Undertaking Costing
1 For party political purposes (usually, though not exclusively, during an election campaign) Minister of Finance or a Minister responsible for a portfolio
2 During a period of government formation Prime Minister
3 Required as part of normal government operations (including during an election campaign) Minister of Finance or a Minister responsible for a portfolio

Regardless of the reason for costing a policy proposal, all costings should be carried out in accordance with good-practice guidelines. The guidance that follows complements the published guidelines on the SSC website.

Treasury's Role

Treasury aims to facilitate a consistent approach to costing policy proposals across the public sector. As the primary economic and fiscal advisor of the Government, Treasury's normal business is to advise on the implications of Government policies. Additionally, as the SSC guidance indicates, there is scope for Treasury to play a key role in the development and/or review of costings of political party (government or non-government) policy proposals.

In many cases Treasury will have an advisory, rather than lead, role in the costing of policies, and departmental chief executives will have prime responsibility for costing and reporting on policy proposals in accordance with the SSC published guidelines.
The actual extent of Treasury's involvement in such costing exercises should be determined on a case-by-case basis, taking account of such factors as the source of the costing request, relative availability of required expertise in Treasury and the agency receiving the request, and whether Treasury holds relevant information that the agency receiving the request does not.

The level of Treasury involvement should be the extent necessary to ensure that the economic and fiscal costings provided to Ministers for decision-making are as complete and reliable as possible. This means capturing all key aspects of the policy proposal in the costings, including the potential flow-on effects on tax revenue and/or transfer payments.

Approach to Preparing Cost-Benefit Analysis

Why use cost-benefit analysis

The objective of preparing an economic costing is to model real resource flows at true market value. Modelling real resource flows enables comparisons to be made of the social costs and benefits of a proposal using dollars as a common yardstick.

Economic cost-benefit analysis is important to decision-making. Calculating the economic cost of a policy proposal aggregates all the resource costs over a set timeframe into a single estimate measured at a common point in time. Ministers can then compare these costs with the benefits, whether quantified or not, when deciding whether to proceed with the policy proposal under consideration.

Dealing with costs and benefits that are difficult to quantify

Good economic cost-benefit analysis practice involves capturing all identifiable costs and benefits and including them in the analysis. However, there may be intangible costs or benefits (including costs or benefits resulting from behavioural changes) that are difficult to quantify or monetise for the purpose of the analysis. Therefore, a case-by-case judgement should be made as to whether or not to include any particular intangible cost or benefit in an economic cost-benefit analysis.

Establishing costs and benefits

Establishing the counterfactual is an important prerequisite in developing economic cost-benefit analysis, as this enables those costs and benefits that flow from the proposal to be considered relative to a defined measure. 

For most proposals the common costs and benefits to be included for analysis are:

  • direct establishment costs (eg, staff, information technology, rent, etc)
  • purchase of fixed assets
  • indirect establishment costs (eg, other overheads and negative externalities)
  • direct establishment benefits (eg, reduced operating costs)
  • indirect establishment benefits (eg, positive externalities)
  • release of capital
  • residual values
  • positive or negative changes in outcomes (eg, reduced traffic accidents).

A useful rule is to include only those costs and benefits that involve the actual use of resources and that would be affected by the proposal under consideration.

Calculating economic cost

The specific assumptions that should be used when calculating the economic cost of a policy proposal are outlined below. Any departure from these default assumptions should be clearly stated and explained.

Table 2: Assumptions for Calculating Economic Cost of Policies
Issue Default Assumptions Possible Variations
Scope of analysis National economy

'International analysis' if dealing with trade agreements or proposals that have spill-over effects across countries

'Whole-of-government' for fiscal costings/implications (typically for Treasury use)

'Financial analysis' for proposals that are agency- or department-specific and that have no or minimal effects on the economy

Form of analysis Consider the impacts of a proposal across all sectors of the economy (general equilibrium analysis) Analyse the impacts from the perspective of a single sector or department (partial equilibrium analysis or 'financial analysis')
Period of analysis Economic life of the underlying proposal or assets over 30 years Longer than 30 years where benefits or costs to the economy emerge slowly (eg, childhood education)
Financing/capital charge costs Exclude Include for financial analysis or if material to the analysis
Intangibles Include if these can be reliably measured Exclude and conduct a qualitative assessment if these cannot be reliably measured
Depreciation Exclude  
Taxes

Taxes payable that arise from the proposal should be included

Include GST

Exclude tax revenue, as this is a transfer rather than a net gain

Adjust for tax if competing proposals contain differences in the treatment of taxation
Transfer payments (eg, social welfare benefits)

Exclude if there is no net impact on the economy

Consider deadweight costs [1]

Include deadweight costs if significant and measurable

Discount rate See Discount rates below.
Fees Do not net off fee revenue from the costs of providing services (ie, show fee revenue and gross costs separately) Consider deadweight costs

Treasury has developed a simple cost-benefit model called CBAx, publically available at http://www.treasury.govt.nz/publications/guidance/planning/costbenefitanalysis/cbax. This could be of practical use when developing cost-benefit advice.

Discount rates

Typically we use a 'present value' approach when estimating economic cost. The appropriate discount rate to use in cost-benefit analysis has been the subject of much debate. Treasury's most recent review of real discount rates for cost-benefit analysis concluded that the following real rates should be used:

Category Rate
Default rate (for projects that are difficult to categorise, including regulatory proposals) 6.0% p.a.
General-purpose office and accommodation buildings 4.0% p.a. 
Infrastructure and special-purpose (single-use) buildings (water and energy, prisons, hospitals, hospital energy plants, road and other transport projects) 6.0% p.a.
Telecommunications, media and technology, IT and equipment, knowledge economy (R&D) 7.0% p.a.

For more information about how these discount rates were arrived at see Public Sector Discount Rates for Cost Benefit Analysis.

Calculating the Fiscal Impact

In addition to understanding the economic merits of any policy, Ministers are typically interested in understanding the fiscal impact; that is, how the policy proposal will impact the Crown's forecast fiscal aggregates, such as the operating balance before gains and losses (OBEGAL) and core Crown net debt.

Fiscal costings and long-run economic costings differ in five key respects, as follows:

  • Economic costings include effects on all sectors of the economy, whereas fiscal costings focus on the government sector only.
  • Economic costings discount future cash flows over the economic life of the policy proposal (typically 30 years), whereas fiscal costings estimate the nominal impact on the Crown financial statements over the forecast period (typically 5 years).
  • Economic costings reflect real resource use, whereas fiscal costings can include resource transfers and accounting items such as depreciation, capital charge and financing costs (where relevant).
  • Economic costings do not distinguish between capital and operating costs, whereas fiscal costings make that distinction.
  • Income tax impacts, GST and other indirect taxes are included in economic costings of proposals that relate to Crown expenditure on goods and services, but are generally excluded from fiscal costings. This is because fiscal forecasts already include forecast tax flows, and it is assumed that particular policy proposals can be funded out of existing spending provisions.

The relationship between economic analysis and fiscal analysis is illustrated in the diagram below:

Figure 1: Linking Economic and Fiscal Impacts
Figure 1: Linking Economic and Fiscal Impacts.

Where long-run economic costings are materially different from the short-run fiscal costing (eg, due to macroeconomic effects, timing of spending, capital costs, etc), these two costings should generally be identified and reported separately.

The focus of fiscal costings is on estimating the initial impact of proposals on the key fiscal aggregates over the forecast horizon (currently five years). Due to inherent uncertainty over the timing and impact of second-round effects (eg, finance costs), Treasury typically excludes these from its estimates of the fiscal impacts of policy proposals.

The fiscal items that may be relevant include:

  • the initial impact on the operating balance before gains and losses (OBEGAL) in the Statement of Financial Performance
  • any fiscal risks and contingent liabilities arising, eg, from Government guarantees

and, if they differ from these initial impacts:

  • the cash effect (in terms of operating, investing, and financing cash flows) and the initial impact on core Crown net debt
  • the change in total Crown net worth
  • any other significant changes within the Crown's Statement of Financial Position.

The specific assumptions that should be used when calculating the impact of a policy proposal on the fiscal aggregates are outlined below:

Table 3: Assumptions for Initial Impact of Policies on Fiscal Aggregates
Issue Default Assumption
Operating expenditure

GST exclusive

Exclude other indirect taxes

Transfer payments

Include transfer payments, net of income tax

Capital expenditure

GST is generally not applicable

Include depreciation, capital charge and financing costs (where relevant) in the operating statement impact

Financing costs Include if it is clear the policy would not be funded from existing fiscal provisions (operating and capital allowances)

It may also be necessary to report the specific changes to appropriations, which may differ from the impact on the operating balance (eg, if savings offset a portion of the cost). These are often not required until the later stages of a costing exercise, such as when specific options have been agreed.

Fiscal costs and benefits for the operating statement are allocated to fiscal years in accordance with accrual accounting concepts. They are recognised when they are incurred (ie, when a good or service is delivered).

Fiscal management approach

The fiscal forecasts currently include new funding allowances for future Budgets to manage uncertainty, cost pressures and new policies[2]. The current fiscal management approach is for future policy decisions affecting expenses or capital expenditure to be met either through reprioritisation or from within the existing provisions in the fiscal forecasts. By implication, future policy decisions are only risks to the fiscal forecasts to the extent that they cannot be managed from within:

  • existing agency baselines or the Operating Allowance for operating expenditure, or
  • existing agency balance sheets or the existing Crown balance sheet (including the Capital Allowance) for capital expenditure.

Notes:

  • [1]A deadweight cost is a cost to the economy arising from the imposition of a tax or regulation. The decision on whether to include deadweight costs in the analysis should be made on a case-by-case basis.
  • [2]New operating spending is managed through the Operating Allowance, new capital spending is managed through the Capital Allowance, and these allowances are disclosed in the Notes to the Forecast Financial Statements in the Treasury's Economic and Fiscal Updates.
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