1 Introducing State Sector Financial Management
The purpose of New Zealand's financial management and performance reporting system and the governance structures within which it operates
The Purpose of State Sector Financial Management
New Zealand's state sector financial management system aims to:
- help the government of the day translate its strategy into action
- focus spending on outcomes sought by the Government
- promote informed decision-making and accountability
- identify and actively manage fiscal and non-fiscal risks
- encourage a responsive, prudent, efficient and effective state sector.
The aims are achieved through the planning, decision-making and scrutiny processes that culminate in the delivery of the Government's Budget, incentives for managing efficiently, and reporting and feedback processes. These processes run in parallel for the whole government reporting entity (outer cycle, below) and for individual agencies (inner cycle).
- Figure 1: Key Documents in the Financial Management Cycle
Chapters Three, Five and Eight will describe each process, and the role and content of the key documents, in more detail.
Understanding the financial management and reporting system requires knowledge of the constitutional environment in which it operates.
The financial management system supports the Government's accountability to Parliament, in particular, through the appropriation system and parliamentary scrutiny of the Government's performance. Chapters Four and Nine outline how these practices work.
The state sector comprises a range of organisations and organisational types, with different governance and accountability arrangements. Chapter Six explains financial decision-making and accountability structures employed for organisations in the state sector. This chapter and the next will introduce some key concepts underpinning the financial management system. First, we look at the environment in which the system operates.
Constitutional Structure of the State Sector
The state sector includes:
- the Sovereign in right of New Zealand, which includes Ministers of the Crown and all departments (section 2 of the Public Finance Act 1989)
- offices of Parliament
- Crown entities
- state-owned enterprises
- organisations named or described in Schedule 4 of the Public Finance Act 1989.
State sector financial management operates in the context of New Zealand’s constitutional and administrative structures. New Zealand is a constitutional monarchy and a parliamentary democracy. New Zealand’s constitutional arrangements are framed by legal documents such as the Constitution Act 1986, decisions of the courts, and in convention. The Treaty of Waitangi is regarded as a founding document of government in New Zealand.
The Constitution Act 1986 recognises the Sovereign as the Head of State of New Zealand and that the Governor-General is appointed as the Sovereign's representative in New Zealand.
Parliament (the legislature) is the supreme law-making authority in New Zealand. It consists of a single House of Representatives (the House) whose members are elected by the people of New Zealand, and the Governor-General as representative of the Head of State.
Parliament has full power to make laws and a Bill passed by Parliament becomes law when the Sovereign or the Governor-General assents to it. Parliament controls the public finances. The Constitution Act 1986 states that the Crown may not levy taxes, raise loans or spend public money except by or under an act of Parliament.
Each Parliament has a term of three years, unless it is dissolved earlier.
The leader of the party, or of the largest party in a coalition that has the confidence of the House, is Prime Minister and head of the executive branch of the Government.
The Executive Council is the institution through which the Government formally advises the Governor-General. Members are appointed by the Governor-General on the advice of the Prime Minister. All Ministers of the Crown are members of the Executive Council. Only Members of Parliament may be appointed as Ministers of the Crown.
The Prime Minister assigns one or more portfolios to each Minister, who will then lead the development of policy within the portfolio(s). Portfolio responsibilities also include control of public financial resources (under terms set by Parliament in the appropriation process), oversight of state sector organisations and duties under relevant legislation. Individual Ministers are supported in their portfolios by one or more departments. The more senior Ministers are in Cabinet, which is chaired by the Prime Minister. Cabinet makes all significant government policy decisions.
Select committees are groups of Members of Parliament appointed by the House to consider and report on specific areas of government activity. On behalf of Parliament, select committees also scrutinise and hear public submissions on Bills (draft legislation), scrutinise proposed appropriations for each portfolio (Vote) and review the performance of state sector agencies. The Finance and Expenditure Committee (FEC) is most directly involved in the financial management system.
- Appropriation is the process through which Parliament authorises the government of the day to spend public money and incur expenses and capital expenditure. Chapter Four discusses appropriation in some detail.
- Local authorities are largely autonomous and not part of the state sector. They have limited revenues, are financially independent from the central government, run their own financial management systems, and are not part of the Government reporting entity.
- ‘On the Constitution of New Zealand: An Introduction to the Foundations of the Current Form of Government’, Sir Kenneth Keith, July 1990.