Costing of Political Party Policies

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

• Introduction
• Required to Follow Agreed Protocols
• The Treasury's Role
• Approach to Cost-Benefit Analysis
• Calculating the Fiscal Impact

Introduction

This site provides basic guidance on how to cost political party policy proposals. It draws attention to the fundamental aspects of (i) cost-benefit evaluation and (ii) fiscal costs estimation. Please refer to fuller guidance on costing spending or revenue proposals, including the Treasury's Guide to Social Cost Benefit Analysis and CBAx Tool.

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

Required to Follow Agreed Protocols

The Treasury must always be consulted on requests for the costing of political party policies, whether for party-political purposes or for government purposes, at any time, including during the lead-up to an election.

Requests to cost political party policies can only be approved by the Minister of Finance or a Minister responsible for a portfolio.

The State Services Commission's General Election Guidance identifies common principles and obligations that will assist those who work in the State Services during the lead-up to, and in the period immediately after, the 2020 general election. It includes a section on Government processes during and after an election. The section discusses the process for political parties to access information during Government formation negotiations and requires that the Treasury be consulted on any requests for costings.

The Treasury's Role

The extent of the Treasury's involvement in requests to cost political party policies will be determined on a case-by-case basis. This will take into account such factors as the source of the costing request, the relative availability of necessary expertise in the Treasury and in the agency receiving the request, and whether the Treasury holds relevant information that the agency receiving the request does not.

Agencies should contact their Treasury Vote team as soon as they have been requested to do policy costing work. The Treasury can then advise on the best approach for ensuring the economic and fiscal costings provided to Ministers for decision-making are as complete and reliable as possible (ie. capture all key aspects of the policy proposal in the costings, including the potential flow-on effects on tax revenue and/or transfer payments), as well as determine its appropriate level of involvement.

Approach to Cost-Benefit Analysis

Why use cost-benefit analysis?

The objective of preparing an economic evaluation is to estimate the total societal impacts of a policy option. This enables comparisons to be made of the societal cost and benefits of a proposal using dollars as a common yardstick. Non-monetised impacts should also be considered.

Economic cost-benefit analysis is important to decision-making. Calculating the economic costs and benefits of a policy proposal aggregates all the impacts over a set timeframe into a single estimate measured at a common point in time. Costs can be compared 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 to include any particular intangible cost or benefit in an economic cost-benefit analysis. The Treasury can help with this judgement.

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 viable alternative or the status quo. 

The analysis can include a wide range of positive or negative changes in outcomes (eg. fewer traffic accidents). See, for example, Treasury's Living Standards Framework for wellbeing domains to consider.

Common financial costs and benefits to be included 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.

Estimating economic cost and benefits

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.

The Treasury has developed a simple, publicly-available cost-benefit model called 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. The Treasury's most recent review of real discount rates for cost-benefit analysis has assessed that the following real rates should be used:

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

Calculating the Fiscal Impact

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

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 estimating the initial impact of proposals on the government's financial statements over the forecast horizon (currently five years). Due to inherent uncertainty over the timing and impact of second-round effects (eg. finance costs), the 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 net core Crown 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:

These assumptions should be made clear to users of the costing information.

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 usually not required until the later stages of a costing exercise, such as when specific options are being 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. It needs to be clear whether the fiscal costs can be managed from within:

• existing agency baselines or the allowance for total forecast new operating spending for operating expenditure, or
• existing agency balance sheets or the Crown balance sheet (including the allowance for new capital spending) for capital expenditure.

Policy proposals are only risks to the fiscal forecasts to the extent they cannot be managed within the existing fiscal parameters.