A Guide to the Public Finance Act 2005

Foreword#

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The year 2004 marked the first major change to New Zealand’s public management system in a decade, when Parliament passed the Public Finance (State Sector Management) Bill. The Bill, which resulted in significant amendments to the Public Finance Act 1989, grew out of a desire to improve performance and integration across New Zealand’s public sector.

The importance of this milestone should not be underestimated. An efficient, effective and innovative state sector is critical to achieving higher living standards for New Zealanders. Also, maintaining the level of trust New Zealanders have in the integrity of the Government’s financial systems is fundamental to our democracy.

The Public Finance Act provides a framework for pursuing these goals. It represents the foundation of accountability systems for the resources provided by taxpayers to the New Zealand Government, and which the Government administers on our behalf.

The changes which were made to the Public Finance Act have, of course, resulted in a number of changes to the financial and administrative procedures that are required to be followed by government departments, Crown entities and other public institutions. The purpose of this guide is to provide information for users on the purpose of the changes to the Act, what the new requirements are, who they affect and how they fit into the Government’s budgeting and reporting cycle.

The structure of the guide follows that of the amended Public Finance Act, with specific chapters on appropriations, fiscal responsibility, Crown reporting, departmental reporting, financial powers, and the budgeting and reporting cycle.

I am confident the guide will be a valuable tool for Members of Parliament, public servants, students and other interested members of the public. I commend it to all readers.

John Whitehead
Secretary to the Treasury
August 2005

Introduction#

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This Guide provides an overview of the requirements of the Public Finance Act 1989 as amended in 2004 (the Act). Its primary audience is likely to be staff in Government departments, Offices of Parliament and others who need a working understanding of the Act. In addition it should be a useful reference for Crown entities, Members of Parliament and interested members of the public, including students and readers from other jurisdictions with an interest in public financial management in New Zealand.

The Guide focuses on the legislative requirements of the Act in relation to departments, Offices of Parliament and the Government as a whole. The more detailed requirements and expectations associated with the Act’s implementation are set out in more specific documents such as Treasury Instructions, Budget guidance or Cabinet and Treasury circulars, many of which can be found on the Treasury website.

The information in this Guide is provided for general information only and should not be treated nor relied on as a substitute for proper legal or professional advice on the interpretation of particular legislative provisions or their application to particular circumstances or entities.

Using this Guide#

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This introductory chapter explains some general points or ideas that are central to interpreting and understanding the Act, starting with the principle of parliamentary control over public finances, and including the roles played by accrual accounting and independent audits. It also includes a list of web sites containing information on aspects of public financial management in New Zealand.

The remaining chapters of this Guide follow the structure of the Act.

Chapter 2 discusses the purpose of appropriations (parliamentary authorisation for the incurrence of expenses and capital expenditure) and the nature of the appropriation system. It focuses on the requirements of Part 1 of the Act.

Chapter 3 outlines the principles of responsible fiscal management and describes the fiscal reports and statements prepared in accordance with Part 2 of the Act.

Chapter 4 outlines the requirements for consolidated financial statements of the Government reporting entity set out in Part 3 of the Act.

Chapter 5 describes a departmental chief executive’s financial management responsibilities and explains the role of external departmental reports in giving an account of a department’s projected and actual financial and non-financial performance. The requirements of the Act in relation to departmental reports are set out in Part 4 of the Act while Part 5 deals with special reporting requirements for newly established and disestablished departments.

Chapter 6 outlines the principle of ultra vires and the requirements of Parts 6 and 7 of the Act. These parts deal with the borrowing of money, issuing of securities, use of derivative transactions, investment of funds, operation of bank accounts, giving of guarantees and indemnities, and the management of trust money.

Charts are also provided to show how the key phases in the preparation of the budget by the Government relate to the parliamentary process, and to provide an indication of the timing of the budget.

The nature of parliamentary control of public finances#

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In New Zealand’s system of government, Parliament is the supreme law-making authority and ultimately provides authority for all governmental activity.

One of the prime means by which it is able to scrutinise and control the Government is through the regular process of granting financial authority to the Government. Section 22 of the Constitution Act 1986 makes this point explicitly, stating that it is not lawful for the Crown (the legal person in whose name the Government acts) to levy a tax, borrow money, or spend public money except by or under an Act of Parliament.

The Public Finance Act provides the core legislative framework within which the Government can borrow money or spend public money. This framework provides for both the rights of Parliament to give informed authority for, and scrutiny of, government borrowing and activity, and the need for the Executive to have sufficient ability to effectively and responsively manage the affairs of the Government.

Legislation governing the use of public financial resources#

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The Public Finance Act exists to govern the use of public financial resources, notably to:

• provide a framework for parliamentary authorisation and scrutiny of the Government’s expenditure proposals and management of the Government’s assets and liabilities
• establish lines of responsibility for effective and efficient management and use of public financial resources
• specify the principles for responsible fiscal management in the conduct of fiscal policy and require regular reporting on the extent to which the Government’s fiscal policy is consistent with those principles
• specify the minimum financial and non-financial reporting obligations of Ministers, departments, Offices of Parliament and certain other agencies
• provide for the application of financial management incentives and for the accountability of specified central government organisations, and
• safeguard public assets by providing statutory authority and control for the borrowing of money, issuing of securities, use of derivative transactions, investment of funds, operation of bank accounts and giving of guarantees and indemnities.

The Public Finance Act is not the only Act that establishes requirements for the use of public resources.

• The State Sector Act 1988 sets out general administrative and oversight arrangements for (mainly) core government public services designed to maintain appropriate standards of integrity and conduct and support efficient and responsible management within the state sector.
• The Public Audit Act 2001 provides for the Controller and Auditor-General (the Auditor-General) to be an officer of Parliament and sets out the law relating to the audit of public sector organisations. The Auditor-General provides independent assurance to Parliament and the public that public sector organisations are operating and accounting for their performance in accordance with Parliament’s intentions.
• The Crown Entities Act 2004 reformed the law relating to Crown entities to provide a consistent framework for the establishment, governance, and operation of Crown entities and to clarify accountability relationships between Crown entities, their board members, their responsible Ministers on behalf of the Crown, and the House of Representatives. The Act provides for different categories of Crown entities with each category having its own framework for governance, clarifies the powers and duties of board members in respect of the governance and operation of Crown entities and sets out reporting and accountability requirements for Crown entities.
• The State-Owned Enterprises Act 1986 (SOE Act) outlines the principles governing the operation of state enterprises and establishes requirements for the accountability of state enterprises and the responsibility of Ministers.

Broad principles#

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Since the late 1980s, New Zealand’s public sector management system has focussed on promoting public sector performance. Details of New Zealand’s reforms are well documented elsewhere[1]. This performance management approach emphasises, among other things, clear objectives and clear lines of responsibility, greater freedom to manage, and a corresponding expectation of greater accountability for results. Such a system requires good measures of performance that interested external parties can trust. In the areas of financial reporting, budgeting and budget controls, the Public Finance Act attempts to meet these objectives by requiring the Government and all public sector entities to prepare financial information that:

• uses accrual accounting concepts and statements
• is in accordance with financial reporting standards approved by an independent standard setter, and
• in the case of annual financial statements, is audited by an independent auditor.

These key principles, which are applied throughout the Public Finance Act, are explained in more detail below.

Accrual accounting concepts and statements#

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Each individual reporting entity (for example, a department) and the Government as a whole prepare financial forecasts and statements using the accrual basis of accounting.

The following table summarises the features of these reports.

The accrual basis of accounting was adopted by the New Zealand Government because it provides a more comprehensive set of information than cash accounting. It supports the Government’s commitment to provide comprehensive and transparent financial reports.

For example, accrual financial statements provide information on:

• assets and changes in the value of assets due to use or changes in market conditions
• liabilities including amounts owed to suppliers, and long term obligations such as accumulated employee leave entitlement and unfunded pension liabilities
• the overall financial position of the individual entity or the Government
• the impact of exchange-rate and interest rate movements on the value of financial assets and liabilities
• the full cost of goods and services used or consumed within a given period, regardless of when ordered, received or paid for, and
• cash flows during the period are reported in a separate statement.

Accrual information is less subject to manipulation than cash information. Because the accrual basis recognises expenses when they are incurred rather than when they are paid there are limited incentives to shift payments between periods inappropriately.

An accrual budgeting system focuses on costs to be incurred rather than funds to be obligated or spent. Accrual budgets provide a more comprehensive financial picture of proposed activities and the impact of those proposals on the operating costs of individual entities.

Parliamentary authority for budget (appropriations) is also expressed in accrual terms. Accrual appropriations mean that Parliament’s control is effectively exerted when the use of public money or resources is committed as expenses are recognised at the point at which an obligation is incurred, which is usually prior to when the flow of cash occurs. Authorisation of total expenses ensures that the total level of Government activity is transparent to Parliament. Any incentive to favour activities with non-cash costs is avoided.

Some key dates associated with the adoption of accrual accounting are shown below.

Independent accounting standards#

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The Act requires that the financial statements (and financial forecasts) of the Government and each individual department be prepared in accordance with generally accepted accounting practice (GAAP) in New Zealand. GAAP is an objective and independent set of rules that governs the recognition and measurement of financial elements such as assets, liabilities, revenues and expenses. For example, GAAP requires that expenses and revenue be shown separately except in the limited circumstances where GAAP permits offsets.

The financial reporting standards that are the core of GAAP in New Zealand are approved by the Accounting Standards Review Board (ASRB) – an independent body established by the Government. The ASRB approves standards for application by both the public and private sectors.

The Government uses independently established rules for financial reporting in order to give users of reports a high level of confidence in the relevance and reliability of the information. The alternative, the Government setting its own standards, was rejected because of the credibility issues that this would raise.

Notwithstanding the special characteristics of Government, the Government applies the same financial reporting standards as applied by other reporting entities in New Zealand. This means that public sector financial statements can be more readily understood by a wide range of people. It has also allowed the Government to recruit accountants from the private sector and enhanced the ability of accountants to move from one sector to the other.

The approval of New Zealand equivalents to International Financial Reporting Standards by the ASRB in 2004 has led to even greater harmonisation of New Zealand’s financial reporting standards with international standards.

Comparability#

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As discussed above, the accrual basis of accounting and the associated GAAP rules on recognition and measurement guide the preparation of financial statements, budgets and forecast financial statements, and the associated parliamentary authorisation of budgets. The consistent application of the same accounting rules and policies between these sets of financial information permit direct comparisons between forecast and actual results and information over time.

GAAP requires that entities disclose the accounting policies applied and details of any changes in policies from the previous reporting period. This enhances the comparability of information between entities.

Independent audit#

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Public sector organisations are accountable to Parliament for their use of public resources and the exercise of powers conferred by Parliament. As part of its accountability requirements, Parliament seeks independent assurance that public sector organisations are operating, and accounting for their performance, in accordance with Parliament’s intentions.

The Auditor-General provides this independent assurance to both Parliament and the public.

Offices of Parliament#

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There are currently three Offices of Parliament as defined in the Public Finance Act: the Office of the Controller and Auditor-General, the Parliamentary Commissioner for the Environment and the Office of the Ombudsmen.

The requirements of the Act in relation to departments are modified slightly to acknowledge that Offices of Parliament act on behalf of Parliament. For example, the Speaker of the House of Representatives is the Responsible Minister in respect of an Office of Parliament[2] and the appropriation requests of Offices of Parliament are commended by way of an address by the House of Representatives to the Governor General. (Sections 2(1) and 26E).

Intelligence and security departments#

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There are currently two intelligence and security departments:

• the New Zealand Security Intelligence Service, and
• the Government Communications Security Bureau.

The requirements of the Act in relation to these departments are modified to address needs of national security. For example, intelligence and security departments present one aggregated appropriation request.

Appropriations#

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Introduction#

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This Chapter:

• explains what an appropriation is and the purpose of appropriations
• explains the rationale behind accrual-based, output-focussed appropriations
• describes the legislative process for appropriations and the link between appropriations and the budget process
• outlines the responsibilities of Ministers, departments and the Treasury in relation to appropriations
• describes the various types of appropriations, the requirements in relation to specifying and using these appropriations and the consequences of breaching the limits of an appropriation
• explains how the usual appropriation requirements are varied in respect of Offices of Parliament and intelligence and security departments, and
• explains how the controller function operates.

Constitutional role#

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Traditionally, in Westminster-based parliamentary systems, the Crown may tax, borrow or spend only as authorised by Parliament. Parliament’s initial focus was on controlling the right to tax but it subsequently exerted control over spending as well. These constitutional principles developed over a number of centuries and were the subject of much conflict between Parliament and the Crown.[3]

New Zealand has adopted these constitutional principles. Under section 22 of the Constitution Act 1986 it is unlawful for the Crown to spend any public money unless it has been authorised by an Act of Parliament. Annual Appropriation Acts which specify the nature and amount of appropriations are the main way in which Parliament authorises the use of resources by the Executive.

In the past appropriations were cash-based. Progressively since 1989, appropriations have been accrual-based. This means that parliamentary control is exerted at the point at which a financial obligation is entered into, rather than at the point when that obligation is discharged or paid. This makes parliamentary control more effective. The appropriation constraint is applied at the point when the decision to incur a liability is actioned; the constraint doesn’t act as a possible barrier to settling properly incurred liabilities.

Although the primary point of control has shifted from cash to accrual, modern appropriations (as specified in sections 4 to 6 of the Act) are still consistent with the requirements of the Constitution Act.

• Section 4 states that expenses or capital expenditure must not be incurred unless authorised by an appropriation or other statutory authority.
• Section 5 states that public money must not be spent unless in accordance with statutory authority.
• Section 6 authorises the spending of public money to meet expenses or capital expenditure incurred in accordance with appropriations – that is, section 6 links the spending of public money to appropriations.

What is an appropriation?#

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An appropriation is the means by which Parliament gives legal authority to the Crown and Offices of Parliament to use resources. Appropriation Acts are the primary mechanism by which Parliament authorises Ministers to incur (on the Crown’s behalf) expenses and capital expenditure in the day-to-day administration of government.[4]

Appropriations are a constraining authority only – there is no obligation on the Crown to incur any expense as a result of being granted an appropriation. On the other hand, overspending and transfers between appropriations are strictly governed by the requirements of the Public Finance Act.

The legislative process#

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The Public Finance Act specifies the appropriation-related documents that are required to be presented to the House of Representatives at the time the Government’s Budget is presented to the House on Budget day.[5] These documents are:

• an Appropriation Bill (section 7(2)), and
• the Estimates and any other supporting information (sections 13-15).

Appropriation Bills#

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An Appropriation Bill sets out the details of each annual and multi-year appropriation in accordance with the Public Finance Act. In addition to the main Appropriation Bill presented in conjunction with the Budget, there may be additional Appropriation Bills during the financial year (a financial year runs from 1 July to 30 June).

• Authorisations for changes to appropriations are outlined in an Appropriation (Supplementary Estimates) Bill that is introduced and generally passed towards the end of the financial year. There may be more than one Supplementary Estimates Bill but this is rare.
• Subsequent authorisation for spending that has occurred without proper authority is sought by way of the Appropriation (Financial Review) Bill. This Bill is generally presented to the House in the following financial year.

A diagram outlining the possible timing of various Appropriation Bills and Imprest Supply Bills in a typical year is shown at the end of this document.

Estimates#

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The Estimates is a document that provides information on each appropriation in an Appropriation Bill. For each appropriation the Estimates include details of the Vote, Minister(s) responsible for appropriations, administering department and appropriation type, amount, scope and period. The Estimates also identifies the Responsible Minister for each department and the projected balance of net assets of the department (apart from intelligence and security departments) at the end of the financial year (section 13).

A Supplementary Estimates document is also presented with each Appropriation (Supplementary Estimates) Bill (section 16). Information on all changes to the information provided in the main Estimates as a consequence of the Appropriation (Supplementary Estimates) Bill must be provided (section 17).

Other supporting information#

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Other supporting information must also be provided to the House. This other supporting information includes explanations of intended impacts, outcomes or objectives for each appropriation, comparative information (individual and aggregate) and information on appropriations conferred by Acts other than an Appropriation Act (section 15). This supporting information may be included in the same document as the Estimates or could be presented separately.

Imprest supply legislation#

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Imprest supply is a statutory mechanism that allows Parliament to provide the Government with the authority to incur expenses or capital expenditure in advance of appropriation by way of an Appropriation Act.[6] Imprest supply is required for two reasons:

• the first Appropriation Bill for the year is not normally passed before the beginning of the financial year, and
• the changing nature of Government activities and unexpected demands means it is impossible to adequately foresee all future expenses and capital expenditure.

The first Imprest Supply Bill is introduced and passed prior to the beginning of the financial year. It provides the sole financial authority from the start of the financial year until the Appropriation (Estimates) Bill for that year is passed (normally within three months of the Budget being presented).

The second Imprest Supply Bill seeks financial authority additional to that provided in the Appropriation (Estimates) Act. It is introduced on the day of the third reading of the Appropriation (Estimates) Bill is to be taken and is debated simultaneously with that third reading debate. The second Imprest Supply Bill ensures that the Government has sufficient supply to implement decisions taken after the Main Estimates were finalised and to meet any increases in demand-driven expenses or other risks or contingencies in excess of the amounts appropriated in the Appropriation (Estimates) Act. Appropriations for expenses and capital expenditure incurred under the authority of the second Imprest Supply Bill are sought in the Appropriation (Supplementary Estimates) Bill.

Budget process#

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As well as being an instrument of parliamentary control, appropriations are also one of the most important levers of control Ministers have to implement their policies. Appropriation limits cannot be exceeded without appropriate approval and subsequent ratification, and appropriations may be used only in accordance with their specified scope. By agreeing the appropriations to be submitted to Parliament, Ministers are determining both the extent and nature of government activity in the year ahead.

The requirements of the Act influence many aspects of the Budget process. For example:

• the budget expenditure baselines that project future government expenditure forward into future years are framed by current appropriation specifications, and
• when considering proposals for changes to expenditure baselines for items such as new budget initiatives, Ministers will record financial decisions, and departments will make financial recommendations in terms of changes to specific appropriations.

Role and responsibility of Ministers#

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Ministers are responsible to Parliament for the use of appropriations as designated in the Estimates. They retain this responsibility, although they may delegate the authority given by those appropriations to departmental chief executives. This is illustrated by the requirement for Ministers to provide an explanation for any unauthorised spending.

Appropriations are grouped together in Votes. Parliament authorises the Minister or Ministers responsible for appropriations within a Vote to incur the expenses or capital expenditure outlined in the appropriations. Although a Vote may be the responsibility of one or more Ministers, it is administered by one department.

Departments’ role in managing appropriations#

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Prior to the start of the financial year, departments are responsible for providing information necessary to prepare the Estimates (section 19).

During the financial year, they are responsible for carrying out their activities in accordance with appropriations. As well as appropriations covering the expenses and capital expenditure of the department, they may also be responsible for administering appropriations for expenses or capital expenditure to be incurred directly by the Crown, for example, appropriations for outputs provided by entities other than departments or Offices of Parliament or for benefits.

Departments must ensure that all expenses and capital expenditure (both departmental and non-departmental) is in accordance with the authority provided. They therefore need to be vigilant to ensure that:

• appropriations are not exceeded unless the overspending is explicitly approved under another provision, and
• appropriations are used only for the purpose for which they were intended.

Regular exception reporting is required to highlight potential breaches of appropriations and to allow either corrective action to be taken or appropriate authority to be sought prior to any overspending occurring. Departments must report monthly (from September) to Treasury on the use of appropriations.

After the end of the financial year, departments’ annual reports must contain a Statement of Appropriations reporting actual expenses and capital expenditure incurred against each appropriation or other authority they administer, and actual expenses incurred costs against each class of outputs included in an output expenses appropriation (section 45B).

The appropriation process represents an external control exerted on the executive by the legislature. In addition to this statutory authority process, there is an internal authorisation process whereby Cabinet delegates financial authorities to Ministers responsible for appropriations and departmental chief executives. Chief executives have authority to spend within the limits defined by Cabinet. There are specific limits for defined areas of financial commitment, expense or expenditure that Cabinet considers present a high level of risk for the Government (details of these authorities and limits are determined and promulgated by Cabinet).

Role and responsibility of the Treasury#

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The Treasury is responsible for:

• preparing Budget documents, including the Appropriation Bills, Estimates and Imprest Supply Bills
• monitoring the need for and the use of imprest supply
• preparing the monthly monitoring report on appropriations for the Auditor-General, and
• obtaining assurance that there is an adequate system of internal control designed to provide reasonable assurance that transactions are within statutory authority and reporting on that to Parliament.

Parliamentary scrutiny and reporting#

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Parliament scrutinises the Executive’s spending proposals by way of debate and select committee examination in accordance with the procedures set out in the Standing Orders of the House of Representatives.

Following the delivery of the Budget Speech, there is an immediate debate on the Budget. The Estimates are then referred by the Finance and Expenditure Committee among various select committees for examination. Select committees can examine documents and require the attendance of individuals, including Ministers and officials.

Each select committee to which a Vote or part of a Vote is referred requires the Vote Minister concerned to answer a detailed questionnaire about its plans for the coming financial year. The select committee hears evidence from senior officers of the department and, often, from the Minister before reporting back to the House. Standing Orders require select committees to report back on the Estimates within two months of the delivery of the Budget. The reports of select committees on Estimates are then considered by the House in a series of debates known as the Estimates debate.

Although Parliament authorises appropriations, it is the Government’s role to initiate the appropriations process. Also, under the financial veto rule (contained in Standing Orders) the Government can veto proposed amendments to any Bill that, in its view, would have more than a minor impact on the composition of a Vote.

Supplementary Estimates are also examined by select committee, usually the Finance and Expenditure select committee. The Appropriation (Supplementary Estimates) Bill is usually debated only with a second reading debate. The Appropriation (Financial Review) Bill, which seeks retrospective approval for overspending, is also debated only once, a debate in committee of the whole House.

Select Committee review of departmental documents is discussed in Chapter 5.

Dimensions of appropriations#

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Appropriations are specified using the following three dimensions:

• amount
• scope, and
• period.

Amount#

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Appropriations are limited by amount (section 8). Appropriations are generally for a fixed amount (one exception being revenue dependent appropriations described later) and specified in New Zealand dollars. However the legislation does allow for other options.

Appropriation amounts generally exclude goods and services tax (GST) – this reflects the fact that GST is not generally an expense to the Crown and is consistent with the basis on which fiscal forecasts and financial statements are presented. Section 6 provides authority for the actual payment of GST.

Because the Crown has no control over movements in the market price of assets it would be inappropriate to require losses caused by changes in the market value of assets or liabilities (termed remeasurements in the Act) to require appropriation by Parliament before being incurred. Such expenses are therefore exempted from the requirement for appropriation.

However, appropriations are required where:

• ministerial decisions or actions cause unfavourable changes in the carrying amounts of assets or liabilities. Such changes require an appropriation (the section 2(1) definition of a remeasurement excludes such changes), and
• the Government, or a department acting on the Government’s wishes, disposes of an asset at less than fair value. The difference between fair value and the consideration received is essentially a grant or a gift and, as such, requires authorisation.

Scope#

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All appropriations are limited by scope (section 9). The scope of an appropriation determines the permitted uses to which that appropriation can be put, and any conditions on that use.

Although not specified in the legislation there are a number of expectations about scope in practice. Any statement of scope for an appropriation needs to be sufficiently specific about the range of activities, actions or functions covered to allow an external judgement to be made about whether the Crown has complied with its terms. It also needs to reflect the type of appropriation to which it is allocated. It should be sufficiently specific to act as an effective constraint against non-authorised activity but it should not be so tight that it prevents the Crown from operating in an effective manner.

Appropriation types#

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Different types of expenses have different features when being scrutinised for effectiveness and efficiency. Therefore, each appropriation must be allocated to specified types of expense or capital expenditure and different types of expense or capital expenditure cannot be combined in the same appropriation. The types of appropriation are:

• output expenses
• benefits or other unrequited expenses
• borrowing expenses
• other expenses
• capital expenditure, and
• expenses and capital expenditure of an intelligence and security department.

Each type of appropriation is discussed below.

Output expenses#

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Output expense appropriations authorise expenses to be incurred by departments or other entities in supplying outputs to parties external to the entity. The expenses authorised include both direct expenses and indirect expenses allocated to those outputs.

Output appropriations encourage the Government and Parliament to focus on the goods and services to be delivered by an entity in respect of the appropriations. They permit attention to be directed to the value obtained from government expenditure as much as how that expenditure was made. They also provide departments with autonomy in determining the appropriate input mix, and where necessary, to alter that input mix during the period.

Prior to the adoption of accrual accounting by the New Zealand Government, appropriations controlled the amounts that could be spent under various categories of cash payments (for example, salaries) in respect of broadly defined programmes. Such traditional input-based appropriations did not support the focus on deliverables and constrained the way in which resources could be used to deliver outputs.

Output scope specifications are required for each class of outputs including, where appropriate, each individual class of outputs included in a multi-class output expense appropriation. Central agencies regularly provide guidance to assist in determining the scope of output classes. In general terms the scope description of an output class should:

• have an external focus
• cover goods or services that are similar in nature
• not cover goods or services covered by other output class scope descriptions
• be comprehensive
• be verifiable
• be controllable by the agency, and
• be informative.

Output expense appropriations are for the expenses to be incurred by the Crown and Offices of Parliament. In the case of departments, which are not separate legal entities from the Crown, the expense to be incurred by the Crown is the same as the expense to be incurred by the department.

In the case of external entities, the expense to be incurred by the Crown is the amount the Crown has agreed to pay the entity for the outputs or to reimburse the expenses to be incurred by the entity in supplying the outputs. The scope of an output expense appropriation should specify whether the appropriation is authorising the reimbursement of expenses or whether it is authorising the price to be paid for goods and services. The distinction is important as the cost may not equal the price and this affects the accountabilities between the two cases.

Multi-class output expense appropriations#

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The Act allows for multi-class output expense appropriations. As the name suggests this is a single appropriation that covers more than one output class (section 7(3)(b)). Such appropriations must be approved by the Minister of Finance and when presented to Parliament for approval must be accompanied by an explanation of why the output classes have been grouped.

This provision permits the Crown to reallocate resources between output classes within a multi-class appropriation without seeking further parliamentary approval. This allows the Executive more flexibility in resource allocation decisions and, where a range of outputs contribute to an outcome, permits a greater focus on outcomes.

Despite the ability to group output classes for the purpose of appropriations, full transparency is maintained by providing Parliament with information on each of the individual output classes, both at the time of the Estimates and when reporting actual results against that authorised.

Benefits or other unrequited expenses#

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Benefits or other unrequited expenses are transfers incurred by a Minister on behalf of the Crown generally to individuals for the benefit of those individuals. The Crown receives nothing directly in return for making this type of payment. Examples include the unemployment benefit and New Zealand Superannuation.

The scope specification for benefits and unrequited expenses should include a reference to relevant legislative authorities, government policies or approval processes.

Borrowing expenses#

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Borrowing expenses include interest and other financing expenses for loans or public securities. Borrowing expenses are managed by the Treasury on behalf of the Minister of Finance.

The scope specification for a borrowing expense appropriation should identify the borrowing to which the expenses relate.

Other expenses#

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“Other expenses” is a residual type of appropriation intended to provide authority for expenses that are not covered by one of the previous expense appropriation types.

Most “other expenses” appropriations are non-departmental. However, a department may incur non-output related expenses such as costs associated with a restructuring that would be authorised by way of an “other expenses” appropriation.

The scope specification for “other expenses” will vary depending upon the nature of the expense. As with other types of appropriations, the scope specification for other expenses should be specific enough to act as an effective constraint against non-authorised activity, but not to inappropriately constrain activity that is intended to be authorised by the appropriation.

Capital expenditure#

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Capital expenditure is defined by the Act as the cost of assets acquired or developed. It is therefore an accrual rather than a cash concept. Capital expenditure that requires approval by way of annual appropriation includes:

• the cost of the acquisition of any ownership interest in other entities (for example, the purchase of shares in a State-owned enterprise or other entity)
• the cost of the purchase of a tangible asset, such as land for a national park, by the Government
• the cost of the purchase of an intangible asset, such as fishing quotas, by the Government, and
• the cost of the purchase or creation of a financial asset (for example, by making an advance to a Crown entity) but not including the investment of public money by the Treasury on deposit in a bank or in public securities[7].

The scope specification for capital expenditure appropriations must be explicit about the capital item being purchased or developed. Departments are authorised to incur capital expenditure by using the proceeds of the sale or disposal of any of its assets, together with any working capital held (section 24). Essentially this allows a department to maintain its capability and “manage its own balance sheet”.

The effective constraint on capital expenditure by departments (other than intelligence and security departments) is therefore the total amount of its net worth or net assets. The projected level of net assets at the end of each year is included in Appropriation Acts, and departments must not exceed this level unless the Minister of Finance and Responsible Minister have agreed that a surplus can be retained, or as a result of a revaluation (section 22).

Intelligence and security departments#

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As discussed in Chapter 1, the requirements of the Act in relation to intelligence and security departments have been modified to take into account issues of national security.

These departments receive a single appropriation for all their expenses and capital expenditure (section 7(1)(f)). The scope of these appropriations is determined by the legislation establishing the functions of the intelligence and security department and should be referenced to this legislation.

Offices of Parliament#

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As discussed in Chapter 1, the requirements of the Act in relation to Offices of Parliament have been modified to reflect their direct accountability to Parliament. Offices of Parliament seek authorisation for their activities using the same appropriation types as departments. However, their appropriation requests are presented to the Governor-General on the recommendation of the House rather than on the recommendation of the Government (section 26E).

Period#

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Appropriations are also limited by period (section 10). They may be annual, multi-year or permanent.

Annual#

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Most appropriations are annual appropriations – that is, they are for one financial year. If an annual appropriation is not used in the financial year, it lapses.

Governments may determine administrative rules for “transferring expenses or capital expenditure” into the next year but such decisions will need to be reflected in amendments to appropriations in the following year.

Multi-year#

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Multi-year appropriations give authority to Ministers to incur expenses or liabilities for a maximum period of five years (section 10(3)). Multi-year appropriations must be specified as such in an Appropriation Act. Multi-year appropriations may be appropriate in situations that are well-defined and self-contained, where the costs fall across two or more financial years, but there is considerable uncertainty about the distribution of costs across financial years.

Permanent#

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The statutory authority for some expenses and capital expenditures is provided in Acts other than an Appropriation Act. Such authorisations are termed permanent appropriations. The term permanent legislative authority or PLA has also been used to describe these items.

In many cases the other authorising legislation simply provides that public money may be spent without further appropriation than that section and does not authorise the initiating expense or capital expenditure. To cover such cases, the Public Finance Act provides that any expense or capital expenditure incurred that gives rise to the need for those payments may be incurred without further appropriation (section 11(1)).

Permanent appropriations are generally provided when:

• the Government needs to give an assurance about its ability to make payments (for example, debt repayment), and/or
• Parliament wishes to signal a commitment not to interfere in certain transactions (for example, the salaries of the judiciary).

Expenses or capital expenditure authorised by way of permanent appropriation are to be managed and accounted for by departments in the same manner as annual and multi-year appropriations (section 11(2)). Information on permanent appropriations, including explanations of the appropriation and forecast expenses and capital expenditure expected to be incurred, is provided to Parliament each year in the other supporting information for the first Appropriation Bill (section 15(3)).

Flexibilities in appropriations#

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Compared to other countries, the New Zealand system provides a large number of detailed individual appropriations. Therefore the Public Finance Act and some other legislation provide for some flexibility for Governments operating within appropriations. For example, Ministers need to have some ability to respond to changing circumstances by reallocating resources during the financial year. The rules governing appropriations have to be flexible enough to respond to those changing circumstances, while still providing Parliament with control of the public finances. The legislative flexibilities available within the appropriation system are described below.

Imprest supply authority#

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As noted previously, imprest supply is a statutory mechanism that allows Parliament to provide the Government with the authority to incur expenses or capital expenditure in advance of appropriation by way of an Appropriation Act.

Imprest supply is required as the first Appropriation Bill for the year is not normally passed before the beginning of the financial year; and because the changing nature of Government activities and unexpected demands means it is impossible to adequately foresee all future expenses and capital expenditures.

Imprest supply is subject to certain internal controls. Cabinet approval is required to authorise the use of imprest supply and to agree its inclusion in a subsequent Appropriation (Supplementary Estimates) Bill before it can be used. The use of imprest supply is also monitored by the Controller and Auditor-General.

Interdepartmental output purchases#

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Where a department provides purchases services from another department, the expenses incurred by the second department in the delivery of those services can be incurred without further appropriation up to the amount of revenue earned from the second department (section 20).

This provision is intended to support a “managing for outcomes” approach by reducing compliance costs associated with projects which involve a number of entities. Only one appropriation is required for the overall output expenses associated with a project.

Revenue dependent appropriations#

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Subject to the prior authorisation of the Minister of Finance, departments may, without further appropriation, incur output expenses up to the amount of expected revenue to be received from parties other than the Crown (section 21). Effectively the constraint is variable, depending on the amount of revenue earned, rather than being a fixed amount. As such, revenue dependent appropriations are the main exception to the general rule that the amount of an appropriation is fixed.

This provision was initially restricted to outputs where independent competition existed. In 2004 it was amended so the only requirement is for the Minister of Finance to approve each class of outputs to which the provision is to apply. This approval is likely to be limited to circumstances where there is external pressure which limits price increases.

Transfers between classes of outputs#

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The scope limitation on output expenses means that unused output expense appropriations cannot be diverted for another purpose. In addition to the flexibility provided by imprest supply, the Governor-General can authorise transfers between output expense appropriations (section 26A). This provision can only be used when:

• the amount transferred does not increase any appropriation for output expenses by more than 5%
• no other transfer under this mechanism to that appropriation has occurred during that financial year, and
• the total amount appropriated for output expenses in that Vote is unaltered.

This mechanism is usually used only after the passing of the final Appropriation Act for the financial year.

Emergencies#

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When there is a national disaster or civil emergency the Government may need to act quickly. Sometimes the Government may want to use resources in a declared emergency for which there is no appropriation or other authority. In these cases the Government is able to incur expenses or capital expenditure without a prior appropriation (section 25).

No limit applies to such transactions, but details must be published in the Gazette. The amounts must be included in the Government’s annual financial statements and a subsequent Appropriation Bill so that Parliament can debate and approve them retrospectively. This mechanism is seldom used – typically the expenses and capital expenditures associated with disasters are accommodated through imprest supply.

Expenses or capital expenditure in excess of existing appropriations#

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The Minister of Finance also has a limited authority to approve expenses or capital expenditure outside existing appropriation limits that have been incurred within the last three months of the financial year (section 26B). Such items must be within the scope of an existing appropriation. For each appropriation the Minister can approve an amount up to the greater of $10,000 or 2 percent of the total amount appropriated for that appropriation. Such amounts must be included in a subsequent Appropriation Bill, usually the Appropriation (Financial Review) Bill for confirmation.

Unauthorised amounts#

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Unauthorised expenses or capital expenditure requires subsequent validation by Parliament in an Appropriation Act (section 26C). The Minister must present a report on expenses or capital expenditure incurred without appropriation which sets out the amount of each category of expense or capital expenditure and an explanation by the Minister responsible.

Unauthorised spending must also be reported in the annual financial statements of the Government and the annual report of the relevant department.

Ensuring compliance with appropriation terms#

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The Public Audit Act 2001 (section 15(2)) requires that the Auditor-General audit the appropriations administered by departments or Offices of Parliament. The audit of appropriations involves:

• determining whether transactions and events are appropriately authorised and within relevant appropriations
• testing whether an expense and or capital expenditure charged against an appropriation has been incurred for the purpose for which it was appropriated, and
• ensuring that expenses incurred are for lawful purposes.

This audit is an ex-post or “after the fact” audit and the assurance on this audit is provided to the House after the end of the financial year.

The Public Finance Act also contains measures to provide assurance that the Crown and Offices of Parliament are complying with appropriation terms on a timely basis during the year. These measures are known as the Controller function. Under this function the Controller and Auditor-General monitors the incurrence of expenses and capital expenditure against appropriations on a regular basis throughout the year and has powers to act if a breach has occurred or if there is reason to believe a breach will occur. The Act ensures that the Auditor-General has access to information and the power to exercise this responsibility.

The Act requires that the Treasury supply monthly statements from September of each year to the Auditor-General, to enable the Auditor-General to examine whether expenses and capital expenditure have been incurred in accordance with an appropriation or other authority such as imprest supply. The Auditor-General can also request information under the Public Audit Act 2001.

If the Auditor-General has reason to believe that expenses or capital expenditure have been incurred for a purpose that is not lawful or is not properly authorised, the Auditor-General can require that the relevant Minister report to the House of Representatives on the alleged breach (section 65Z).

The Auditor-General also has the power to stop payments from a Crown Bank Account or a Departmental Bank Account (section 65ZA).

The requirement for the Treasury to provide monthly reports on appropriations and the Auditor-General’s power to require a Minister to report on appropriation breaches were introduced in 2005. They replaced the previous Controller arrangements which involved a daily check on disbursements from a Crown bank account and a periodic Governor-General’s warrant. The changes retain the constitutional principle of an independent check on spending on Parliament’s behalf and the right to prevent payments from bank accounts, but now focuses more attention on obligations as they are incurred rather than as they are being settled.

Appendix 1 Examples#

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This appendix provides some examples of transactions and events and indicates the type of appropriation required, if any.

Fiscal Responsibility#

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Introduction#

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This Chapter:

• outlines the principles of responsible fiscal management in Part 2 of the Act and the intention of those requirements
• notes similar international developments
• describes the reports and statements prepared in accordance with the fiscal reporting requirements of Part 2 of the Act
• describes the responsibilities of the Treasury and Ministers in relation to fiscal reporting, and
• summarises, in an Appendix, the background to the Fiscal Responsibility Act 1994 and the subsequent incorporation of that Act with the Public Finance Act.

Part 2 of the Public Finance Act is founded on two key planks: increased transparency and greater accountability. It achieves this by requiring:

• governments to be explicit about their long-term fiscal objectives and short-term fiscal intentions and to assess them against principles of responsible fiscal management, and
• governments to report on a wide range of economic and fiscal information.

More specifically Part 2 promotes sound fiscal policy and fiscal transparency by:

• requiring that the Government pursue its policy objectives in accordance with the principles of responsible fiscal management set out in the Act
• imposing regular fiscal reporting obligations on the Treasury and Ministers. The reports and statements required include:
  • an annual fiscal strategy report
  • an annual budget policy statement
  • a periodic statement on the long-term fiscal position
  • regular economic and fiscal updates, and
  • an annual statement of tax policy changes, and
  • providing an opportunity for parliamentary scrutiny of these reports and statements.

Principles of responsible fiscal management#

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The Public Finance Act sets out five principles of responsible fiscal management. These principles are summarised below.

Each principle is discussed in turn.

Debt and fiscal balance#

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Historically New Zealand had a high level of public debt which made the economy vulnerable to the impact of adverse events. The first principle is a two-tiered test which was intended to reduce this vulnerability and to sustain the resulting improved position. It requires that debt must be reduced and this reduction must be achieved by running operating surpluses. The second tier of the principle prevents governments from achieving prudent debt levels simply by selling assets.

The second principle requires that the Government maintain debt at prudent levels. In order to achieve this objective a government will need to ensure that operating revenues are greater than operating expenses on a regular basis. That is, a government will need to live within its means over time.

Net worth#

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The third principle requires that the Government maintain a level of net worth that provides a buffer against adverse future events such as economic shocks and demographic changes. The Government needs to consider what level and composition of net worth will allow it to take action to meet these events.

Fiscal risks#

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The fourth principle requires that the Government identifies and manages prudently the fiscal risks facing the Government. Fiscal risks can arise in relation to:

• financial position, for example, changes in the value of assets and liabilities and the potential for off-balance sheet items such as guarantees to give rise to liabilities, or
• operating flows, for example, changes in the tax base and the risk of certain expenditures exceeding budget.

By ensuring that fiscal risks are monitored, the principle helps to reduce the level of uncertainty associated with the Government’s future financial performance and position.

Predictability and stability of tax rates#

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The fifth principle requires that the Government aims to provide a reasonable degree of predictability regarding the level and stability of future tax rates. This principle reflects the importance of stability in tax rates for private sector planning and decision making.

Departures from principles#

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Governments are allowed to depart temporarily from the principles of responsible fiscal management. The legislation requires, however, that a government specify its reasons for departure from the principles, how it expects to return to the principles and when. The Act recognises the need for some short-term policy flexibility, but it also requires that departures are transparent and temporary.

Targets#

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Although the legislation does not specify targets, it provides a framework within which the Government is required to set long-term fiscal objectives. In order to demonstrate that it has acted in accordance with the principles of responsible fiscal management a Government will need to explain these fiscal objectives and review them on a regular basis.

Factors influencing the development of the principles#

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The requirements of Part 2 of the Public Finance Act are based on the requirements of the Fiscal Responsibility Act of 1994. The 1994 Act was intended to require transparent reporting of a government’s fiscal intentions and to encourage governments to consider the long-term consequences of policy decisions (see Appendix 1). The principles established in 1994 can also be seen as a response to concerns about New Zealand’s fiscal performance at that time (refer Figure 1).

Figure 1: Net Public Debt as a Percentage of GDP

Although New Zealand’s fiscal performance has improved since the principles were first established, the principles continue to provide a useful framework for Ministers to consider the long-term consequences of policy decisions.

International developments#

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New Zealand was one of the first countries to legislate principles of responsible fiscal management and require a comprehensive suite of fiscal reports on a government’s short- and long-term fiscal outlook.

Since the passage of the 1994 Act, two international agencies, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) have developed guidelines for jurisdictions attempting to improve fiscal transparency.

International agencies

The IMF Code of Good Practices on Fiscal Transparency (adopted 1998, revised 2001) contains the following general principles:

• clarity of roles and responsibilities
• public availability of information
• open budget preparation, execution and reporting, and
• independent assurances of integrity.

The IMF measures country performance against the Code and publishes this information.

The OECD Best Practices for Budget Transparency are designed as a reference tool for member and non-member countries to use in order to increase the degree of budget transparency in their respective countries.

Two other jurisdictions, Australia and the United Kingdom, have also used similar approaches to New Zealand in developing legislation that establishes principles and requires Governments to operate in accordance with those principles.

Australia#

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The Charter of Budget Honesty Act 1998 (the Charter) aims to improve the Commonwealth Government’s accountability for fiscal policy formulation. The Charter requires that governments release annual fiscal strategy statements (usually with each budget) based on principles of sound fiscal management. Australia’s fiscal framework is consistent with the key features of the IMF Code.

United Kingdom#

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The framework within which the United Kingdom Government formulates and implements fiscal policy (including debt management) is set out in The Code for Fiscal Stability (March 1998).

The Code requires fiscal and debt management policy to be formulated and implemented in accordance with a set of principles of fiscal management.

A government must state explicitly its short- and long-term fiscal policy objectives, and must ensure these objectives are consistent with the fiscal principles embodied in the Code. A government must also report regularly on progress in meeting its fiscal objectives.

Publishing fiscal policy intentions#

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Part 2 of the Public Finance Act requires the Government to set out its fiscal policy and to describe the relationship between this policy and the principles of responsible fiscal management. The Government presents this information in two key documents:

• the fiscal strategy report, and
• the budget policy statement.

Fiscal strategy report#

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The fiscal strategy report sets out the Government’s high-level fiscal strategy.

The fiscal strategy report:

• encourages consistency in fiscal policy over time
• requires that the Government focus on the long-term implications of fiscal policy, and
• allows users to assess the sustainability of the fiscal position and its sensitivity to changes in policy.

Budget policy statement#

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The budget policy statement focuses more on the detailed priorities for the upcoming Budget.

The budget policy statement:

• contributes to fiscal transparency. The statement provides for transparency by avoiding big surprises at Budget time. The Budget Policy Statement may be used as a vehicle for seeking submissions from the public on the proposals outlined in it. Pre-Budget reports are regarded as part of international best practice on budget and fiscal transparency
• encourages consistency in fiscal policy. It encourages consistency between stated intentions and actual budget decisions, and between budget decisions and the principles of responsible fiscal management
• encourages debate on the aggregate impact of the proposed Budget as opposed to the detailed budget allocations within the proposed Budget. This helps make the trade-offs between taxes, expenses, debt and net worth more explicit, and
• provides a key opportunity for debate on the content of the forthcoming budget. This is consistent with an open budget process in which fiscal strategy, budget parameters and priorities are debated.

Long-term fiscal reporting#

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The Act requires Treasury to prepare, at least once every four years, a statement on the long-term fiscal position, covering a period of at least 40 years. The requirement for this statement was introduced in 2004.

This statement is intended to lead to more comprehensive reporting of the issues that could adversely impact on a prudent level of net worth and in this way to assist the Government in making decisions that are consistent with the principles of responsible fiscal management. For example, this statement can provide information on the fiscal consequences of projected demographic changes such as population ageing.

The Act does not specify the contents of the statement. It simply requires:

• a statement of responsibility asserting that the Treasury has used its best professional judgements about the risks and the outlook, and
• disclosure of significant assumptions.

The flexibility in the requirements is intentional. The Act does not require a specific analytical tool (for example, intergenerational accounts) to be used because best practice in this area is still developing and there is no single analytical indicator in widespread use. The Act permits tools and projections spanning a range of issues (for example, retirement income, health, education and the aggregate fiscal position) to be considered.

Economic and fiscal updates#

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In addition to requiring the Government to report on its policy intentions (by way of the Fiscal Strategy Report and Budget Policy Statement), the Act requires the Treasury to publish economic and fiscal updates. Each economic and fiscal update must contain economic and fiscal forecasts for the year to which the update relates and the subsequent two years. The following economic and fiscal updates are required:

• an economic and fiscal update, including a statement of tax policy changes, to be tabled with the Budget
• a half-year economic and fiscal update to be published between 1 November and 31 December, and
• a pre-election economic and fiscal update, between 20 and 30 working days before the date of any general election.

The economic outlook has a significant influence on the fiscal outlook. For example, if strong economic growth is forecast, forecast tax receipts will normally be higher and the cost of unemployment benefit payments lower.

To enhance the transparency and credibility of the fiscal forecasts the Act requires, at a minimum, disclosure of underlying economic forecasts of New Zealand’s GDP, consumer prices, employment and the current account of the balance of payments. The legislation also requires a statement of the significant assumptions underlying the economic forecasts, which allows users to form their own views on the reasonableness and reliability of the forecasts.

To ensure governments publish a comprehensive set of fiscal information, the fiscal forecasts are to include:

• forecast financial statements (including a forecast statement of financial performance, a forecast statement of financial position, a forecast statement of cash flows and any other forecast financial statement required by GAAP) for each of the three years
• a statement of forecast borrowings for each of the three years
• anything else that is necessary to fairly reflect the financial operations for each of those financial years or the financial position at the end of each of those financial years (a financial year runs from 1 July to 30 June)
• a statement of commitments
• a statement of the specific fiscal risks of the Government in relation to government decisions and any other contingent liabilities, including a description of the rules used to identify fiscal risks
• a statement of all significant accounting policies
• comparative budgeted and actual figures
• a statement of all significant assumptions underlying the fiscal forecasts, and
• a statement that shows the sensitivity of the fiscal aggregates to changes in economic conditions.

Reporting on tax policy changes#

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The Act requires that the economic and fiscal update presented with the Budget include a statement of tax policy changes. This statement sets out new government tax policy decisions that have resulted in a material change to the tax revenue forecasts for the financial year to which the update relates and for at least the next two financial years. The statement must also disclose the basis for determining whether a tax policy change is included in the statement.

The requirement for this statement was introduced in 2004. The requirement to report on tax policy changes is expected to make proposed tax changes more transparent by providing information on both expected increases and reductions in tax revenue.

The statement requires a summary of new tax decisions – it does not require a comprehensive statement of tax expenditures as produced by some jurisdictions. The reasons for this are:

• the difficulties with the preparation of a tax expenditure statement (for example, defining the boundaries of tax expenditure, and in obtaining reliable data on the cost and extent of a tax expenditure), and
• the cost of current tax expenditures in New Zealand is relatively low. There would therefore be limited benefit from focussing on tax expenditures.

Disclosure of policy decisions and other circumstances that may influence the future fiscal situation#

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Every economic and fiscal update must incorporate to the fullest extent possible all government decisions and other circumstances that may have a material effect on the fiscal and economic outlook.

Where the fiscal implications of government decisions and other circumstances can be quantified for particular years with reasonable certainty, that quantified fiscal impact is to be included in forecast financial statements. Decisions that are not quantifiable must be disclosed in the statement of specific fiscal risks which forms part of the fiscal forecasts in an economic and fiscal update.

The Act allows for decisions, circumstances or statements to be withheld from disclosure if that disclosure is likely to:

• prejudice the substantial economic interests of New Zealand
• prejudice the security or defence of New Zealand or the international relationships of the New Zealand Government
• compromise the Crown in a material way in negotiation, litigation or commercial activity, or
• result in material loss of value to the Crown.

However, such non-disclosure is allowed only where there is no reasonable or prudent way the Government can avoid this prejudice, compromise or material loss such as by disclosing the nature of the decision but not the fiscal impact. For example, the Government may disclose that it has decided to sell an asset but may withhold the expected selling price on the grounds that this could compromise negotiations over the sale of the asset.

By requiring disclosure of decisions, circumstances or statements except as expressly exempted by the Act, the legislation shifts the bias toward full disclosure. This exposes risks that are material to the fiscal position and encourages governments to focus on and manage those risks. Active risk management should help reduce the volatility in fiscal flows and enhance stability in policy settings.

Accounting and reporting responsibilities#

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Generally accepted accounting practice#

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As discussed in Chapter 1, all financial statements and forecast financial statements prepared under the Act are prepared in accordance with generally accepted accounting practice (GAAP).

Treasury and ministerial responsibilities#

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Preparation and presentation#

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Part 2 of the Act imposes obligations on the Treasury and the Minister of Finance. In relation to each of the reports and statements required by Part 2 of the Act, the Treasury is responsible for the preparation of the economic and fiscal updates and the statement on the long-term fiscal position. The Minister is responsible for presenting these to the House of Representatives. The Minister is responsible for preparing and presenting to the House of Representatives the fiscal strategy report and the budget policy statement.

In some cases, because Parliament may not be in session when a report or statement is produced, the Minister may arrange publication of the report or statement prior to its presentation to the House of Representatives (for example, the budget policy statement and the half-year and pre-election economic and fiscal updates).

The usual time at which these reports and statements are presented to the House of Representatives is shown below.

Parliamentary scrutiny#

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Once reports and statements have been presented to the House of Representatives they are generally referred to an appropriate parliamentary select committee (currently the Finance and Expenditure Committee). The referral of reports to parliamentary select committees is a procedural issue governed by Standing Orders.

As part of their review of documents select committees have the opportunity to examine the Minister of Finance and officials, call in witnesses and obtain expert opinions. They may also obtain independent assessments of reports and statements.

This type of review is an important element in determining the credibility of any government’s fiscal strategy. In addition, the review and parliamentary debate of reports and statements allows more open and transparent budget processes and increases the accountability to Parliament of the Government’s fiscal management.

Statements of responsibility#

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The statement of responsibility produced as part of the economic and fiscal updates highlights the respective responsibilities of the Minister of Finance and the Secretary to the Treasury as follows.

The Secretary to the Treasury relies on the Minister to provide information on all the relevant decisions and circumstances to enable the Treasury to produce credible economic and fiscal updates.

The Minister is responsible for:

• communicating all policy decisions and circumstances with material fiscal or economic implications to the Treasury, and
• asserting responsibility for the integrity of the disclosures in the update, for their consistency with Part 2 of the Act, and for the omission of any decisions, circumstances or statements that have been withheld under the provisions of the Act.

In preparing the update the Treasury must:

• include all information communicated by the Minister
• exclude information withheld by the Minister under the provisions of the Act, and
• use its best professional judgement.

The statement on long-term fiscal position is also required to include a statement of responsibility which notes that in preparing the statement the Treasury has used its best professional judgements about the risks and the outlook and which includes a statement of all significant assumptions.

Treasury may request information#

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In meeting its obligations to prepare the fiscal information required by the Act, the Treasury relies heavily on the information supplied by departments and other entities. Without this information the Treasury would be unable to meet its requirements under the Act. The Act provides that the Treasury may request information from departments and other specified entities to prepare the information required by the Act.

Public availability#

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The reports and statements produced under Part 2 of the Act are required to be publicly available for 6 months following notification of their availability in the Gazette. They can be accessed from Treasury’s web site at http://www.treasury.govt.nz/budgets/.

Appendix 1 Fiscal Responsibility Act#

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Fiscal Responsibility Act 1994#

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The Fiscal Responsibly Act 1994 introduced the principles of responsible fiscal management and aimed to improve fiscal transparency by requiring the presentation of a number of fiscal reports.

In many respects the Fiscal Responsibility Act formalised recently developed reporting practices and provided assurance that these practices would continue (for example, the practice of preparing budget reports for a three-year period). It also extended existing reporting practices (for example, by requiring fiscal forecasting on the basis of generally accepted accounting practice (GAAP)).

As noted earlier in this chapter, the requirements of the Act were partly prompted by New Zealand’s poor fiscal performance in the late 1980s and early 1990s.

The 1994 Act aimed to address these problems and achieve better fiscal outcomes by:

• strengthening the incentives on Ministers to co-operate in setting priorities and to follow an agreed fiscal strategy, and
• providing more regular information to the public on the medium-term fiscal outlook and the decisions that underpinned that outlook.

The principles of responsible fiscal management in action#

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The legislation has provided a framework for Ministers to make responsible fiscal decisions and helped Ministers to focus on the medium- and long-term impacts of current policies.

Although New Zealand’s fiscal position is affected by many factors outside the Government’s control, the principles of responsible fiscal management encourage Ministers to constantly review the likely impact of the economic outlook on the fiscal position and take appropriate action. Examples of the actions that Ministers have taken in order to manage New Zealand’s fiscal position include:

• reorganising the set of government rights and obligations that make up the balance sheet (for example, by fully hedging foreign currency debt and reconfiguring assets and liabilities)
• exerting greater fiscal control over levels of spending, and
• engaging in high-level prioritisation of spending (Warren and Barnes, 2003).

2004 Incorporation into the Public Finance Act#

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In 2004 the Fiscal Responsibility Act was incorporated into the Public Finance Act. The fundamental principles of the 1994 Act were retained. The intention of the merger was to consolidate legislation regarding public finance and make it more accessible. The merger also provided the opportunity to make some amendments to the Fiscal Responsibility Act.

The changes were introduced to align New Zealand’s fiscal reporting with best international practice after assessing legislation in the United Kingdom and Australia, reviewing the best practice guidelines issued by the IMF and OECD, and drawing on experience with the legislation since its introduction.

The 2004 changes are consistent with the overall requirements of the 1994 legislation However these changes did include a number of enhancements as set out below.

Whole-of-Government Financial Statements#

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Introduction#

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This Chapter:

• explains the purpose of producing consolidated financial statements for the Government reporting entity
• describes the contents of the consolidated financial statements of the Government reporting entity, and
• outlines who has responsibility for producing, presenting, auditing and scrutinising the consolidated financial statements of the Government reporting entity.

Before reading this Chapter, readers are encouraged to read Chapter 1 which provides information on relevant features of New Zealand’s public financial management system including the adoption of accrual accounting and the nature of the financial reporting standards applied by the New Zealand Government.

The Act requires that the Government prepare monthly and annual consolidated financial statements for the Government reporting entity (commonly referred to as the financial statements of the Government). The Government’s financial year runs from 1 July to 30 June.

These financial statements provide information for decision-making and are a critical component of the accountability process. The Government uses these statements to give a comprehensive account of its use of resources and its assets and liabilities.

In order to understand these financial statements it is necessary to understand which entities are included in the financial statements of the Government.

Entities included in the consolidated financial statements of the Government reporting entity#

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The Government of New Zealand has three branches: the legislative, executive and judicial branches. The executive branch includes around 40 departments and Ministries. In order to ensure that the activities of all three branches are appropriately reported the concept of the Government reporting entity was developed. The Government reporting entity, as defined in the Act, consists of these three branches and the Sovereign in right of New Zealand (section 2(1)). The Government reporting entity concept is similar to the parent entity in a private sector context.

The financial statements of the Government report on the whole-of-government – they are sometimes referred to as group accounts. The Act (section 27(3)) requires that the annual consolidated financial statements for the Government reporting entity must include the Government reporting entity’s interests in:

• all Crown entities named or described in the Crown Entities Act 2004. These include:
  • statutory entities which are further classified as Crown agents, autonomous Crown entities and independent Crown entities (around 80)
  • Crown entity companies (currently 12)
  • Crown entity subsidiaries
  • school boards of trustees (over 2,500), and
  • tertiary education institutions (around 30)
• all organisations named or described in Schedule 4 (a range of small or unusual entities that do not have Crown entity status but which nevertheless are required to comply with various sections of the Crown Entities Act 2004) (around 50)
• all State enterprises named in the first Schedule of the State-Owned Enterprises Act (around 18)
• all Offices of Parliament (currently three)
• the Reserve Bank of New Zealand, and
• any other entity whose financial statements must be consolidated into the financial statements of the Government reporting entity to comply with GAAP (for example, where the Government holds a controlling interest in a company).

Local authorities are not included in the financial statements of the Government because they are not controlled by the Government. A list of entities included in the financial statements of the Government is available in the financial statements. The statements can be accessed from Treasury’s web site at www.treasury.govt.nz/financialstatements/. A diagram illustrating the entities within the state sector is available on the State Services Commission’s website at www.ssc.govt.nz/display/document.asp?docid=4423.

The financial statements of the Government must present information on the Government’s interests in a large number of entities. The financial statements could present information on these interests by disclosing the Government’s net investment in such entities (measured at cost or fair value). Although disclosure of the net investment is useful, it does not provide readers with any indication of the revenues and expenses, assets and liabilities or cash flows of the entities concerned. Information on each individual entity is provided by way of their separate financial statements, but it is difficult for users to assimilate this information and use it to assess the overall financial operations and financial position of the Government. This is the role of consolidated financial statements.

The Act therefore requires that the Government prepare consolidated financial statements (section 27(1)). In accordance with financial reporting standards, the concept of control is used to determine which investments are consolidated.[8]

The consolidated financial statements of the Government reporting entity are created by combining the financial statements of all the entities described above on a line-by-line basis. For example, the assets and liabilities of all controlled entities are treated as assets and liabilities of the Government. Transactions between the entities within the consolidated group are eliminated to ensure they are not double counted.

Comparison of projected performance and actual results#

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The financial statements of the Government are used by the Government to demonstrate its accountability for its actual financial performance against forecasts. The Act requires that the Government produce both forecast financial statements (Part 2) and monthly and annual financial statements (Part 3).

The Act’s requirements in relation to forecast financial statements are discussed in Chapter 3.

The monthly statements provide timely information for external users to monitor the Government’s progress in relation to forecasts throughout the year.

In common with appropriations and financial forecasts, the financial statements are prepared using the accrual basis of accounting and in accordance with generally accepted accounting practice (GAAP). As discussed in Chapter 1, consistent application of accounting policies enhances the comparability of information.

User needs#

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The financial statements of the Government are intended to meet the needs of a range of external users. Such reports are commonly referred to as general purpose financial reports.

Although each group of users will have specific needs, users of the financial statements of the Government are frequently interested in the state of the Government’s overall financial health (referred to as financial condition) and whether this financial condition has improved or deteriorated. The financial statements of the Government can provide information on aspects of financial condition including:

• sustainability, or a government’s ability to meet existing operational commitments and the creditor requirements brought on by past borrowing, without abrupt or large increases in debt or taxes
• flexibility, or the degree to which a government can increase its financial resources to respond to rising commitments, by either expanding its revenues or increasing its debt burden, and
• vulnerability, or the degree to which the government becomes dependent, and therefore vulnerable, to sources of funding outside its control or influence (CICA, 1997).

The financial statements provide users with the basis for analysing the Government’s financial condition, at a point in time, against these criteria. However, the Government’s financial statements do not provide information on the effectiveness of government spending and revenue decisions as this requires separate evaluation of the impact of these decisions.

Use of GAAP#

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As noted in Chapter 1, the Government uses the same financial reporting standards as other reporting entities in New Zealand, including companies. In most cases this leads to the Government applying the same measurement and recognition rules as other entities and presenting the same types of financial statements.

The use of GAAP makes it easier for external users to understand the Government’s financial statements. However, the Government has some special characteristics that have an impact on the financial statements and that need to be considered when using the financial statements of the Government, for example, the power to tax. These special characteristics are noted below in the discussion of each of the main financial statements.

Contents of the financial statements#

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The annual financial statements of the Government are required to include those statements required by GAAP (section 27(2)(a)). Currently these statements are:

• a statement of financial performance (also referred to as an operating statement or an income statement)
• a statement of financial position (also referred to as a balance sheet)
• a cash flow statement
• a statement of changes in equity, and
• notes, comprising significant accounting policies and other explanatory notes including information on contingent liabilities and commitments.

In addition to the financial statements required by GAAP, the annual financial statements of the Government include additional statements that reflect the nature of the environment in which Government operates (section 27(2)(c)). Non-GAAP statements required are:

• a statement of borrowings
• a statement of unappropriated expenses and capital expenditure
• a statement of emergency expenses and capital expenditure
• a statement of trust money, and
• any additional information and explanations needed to fairly reflect the financial operations and position of the Government reporting entity.

The annual financial statements must include forecast and the previous year’s actual comparative information for the period (section 27(2)(b)). The contents of the monthly financial statements are similar to the annual financial statements (section 31A). However, some statements are prepared only annually (for example, statement of unappropriated expenses and capital expenditure, statement of emergency expenses and capital expenditure and statement of trust money). The monthly financial statements contain less detail than the annual financial statements.[9]

The monthly financial statements are required to include the following two comparatives to the actual year-to date figures:

• budgeted year to date figures, and
• actual year to date figures for the previous financial year (section 31A(2)).

Further information on the three main financial statements follows.

Statement of financial performance (or operating statement)#

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The statement of financial performance reports the Government’s income (revenue and gains) and expenses.

The Government’s main source of revenue is income tax and other taxes obtained from the use of sovereign powers. Other sources of revenue are investment income and revenue from the sale of goods and services.

A significant amount of the Government’s expenses is in respect of non-exchange transactions, such as welfare benefits. The statement of financial performance provides a breakdown of the Government’s expenses by function, for example, health, education and social security and welfare.

Because there is no direct link between the resources that the Government receives and the services it provides, the overall surplus or deficit (also referred to as the operating balance) is not a measure of financial efficiency.[10]

In addition to the level of the surplus or deficit, users are often interested in the ability of the Government to continue to provide existing services and meet the demand for new services in the medium to long-term. Financial forecasts are more useful for providing this type of information than the annual financial statements. However, the annual financial statements can provide information on the cost of current services and the current infrastructure in place for the provision of services.

The statement of financial performance helps users considering the following questions:

• Is the government operating at a sustainable level (for example, are the costs of government being met by revenue or are they being deferred to the future)?
• How has the government allocated resources to various policy areas (for example, health, education or transport)?
• What budgetary measures might be needed to achieve the government’s fiscal objectives?

In analysing revenue and expenses a number of factors, such as volatility, controllability and duration need to be considered as explained below.

• Volatility: Some revenues may be more volatile than others (for example, company tax revenues are linked to changes in corporate profitability and are likely to fluctuate more than source deductions that are linked to salaries and wages).
• Controllability: Some factors that determine the level of government expenses may be largely outside the control of the Government (for example, exchange rate movements).
• Duration: Expenses or revenue may have a one-off or a continuing effect. For example, a change in a tax rate is likely to have a continuing effect on revenue, whilst an organisational restructuring may have a one-off effect on costs.

As a general rule, trends over a period of time provide better information than information based on a single point in time. The financial statements of the Government usually contain a five-year trend analysis for major items. The disclosure of expenses by functional classification (for example, health or education) is useful for readers seeking to analyse trends in government spending.

Statement of financial position#

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The statement of financial position presents information on the Government’s assets and liabilities, recognised in accordance with GAAP. The difference between total assets and total liabilities is the Government’s net worth.

Many of the assets and liabilities reported in the financial statements of the Government are similar to the assets and liabilities reported in the financial statements of other entities. The Government also reports on some rights and obligations and transactions that are unique to governments. The Government’s statement of financial position includes:

• heritage assets such as national parks and other conservation areas
• the National Archives and National Library collections
• the Accident Compensation Corporation claims liability, and
• the liability in respect of currency issued by the Reserve Bank of New Zealand.

Not all potential assets meet the GAAP criteria for recognition. For example, the power to tax is not included in the statement of financial position because it is debatable whether the power to tax meets the definition of an asset and it’s value cannot be measured with sufficient reliability.

Similarly, not all potential obligations are recorded as liabilities. For example, amounts which the Government may pay in the future in respect of public pensions (such as New Zealand Superannuation) and social welfare benefits are not recorded as liabilities in the financial statements.

The government net worth changes each year as a result of:

• the impact of that year’s financial performance (surplus or deficit), and
• changes in the value of assets and liabilities which are not recognised as income or expenses in the statement of financial performance (for example, some asset revaluations).

The Government has the ability to influence the level of net worth and has a responsibility to monitor and manage downside risks. However, a number of factors leading to changes in net worth are outside the Government’s control.

The optimal level of government net worth is a matter of judgement and involves consideration of inter-generational equity issues. The extent to which governments should have regard to intergenerational-equity issues in determining fiscal policy is subjective.

The power to tax needs to be acknowledged when considering levels of debt and net worth – the power to tax means that a government may be solvent even if it has a negative net worth. In determining appropriate levels of debt and net worth the Government is constrained by the principles of responsible fiscal management (refer Chapter 3).

The statement of financial position helps users considering the following questions:

• Has the financial strength of the Government improved or deteriorated? For example, have net assets increased, decreased or changed in composition?
• What is the extent of public sector saving or borrowing and its impact on the economy?
• To what extent could deficits from past years impact on future generations of taxpayers? How have funds been obtained and used over time?

In analysing the statement of financial position users should bear in mind the nature of the Government’s objectives and operations and the possible impact of these factors on the Government’s decisions to hold certain assets and liabilities. For example:

• the Government’s investment in education and health assets is linked more to its social objectives than the likelihood of future cash flows from such assets, and
• the values that are ascribed to assets and liabilities in accordance with GAAP are not the only values that such assets and liabilities may have. For example, a scenic reserve or national park will also have a conservation value.

The statement of financial position helps the Government manage its finances by providing:

• details of assets and liabilities. This permits analysis of the Crown’s asset and liability portfolios by class (physical, financial, etc.), denomination (domestic versus foreign currency), and liquidity (short- versus long-term)
• assets and liabilities in order of liquidity; that is, how readily the item may be converted into cash or how soon the item needs to be settled
• restrictions on the use or sale of assets (for example, the export of material held in the National Archives) is described in the notes
• information that is useful for the management of liabilities. It provides an insight into the extent to which borrowing is matched by assets of appropriate type, maturity and value
• some indication of intergenerational transfers resulting from policy decisions. For instance, the Crown’s Government Superannuation Fund (GSF) liability is a measure of the past employment costs being passed on to future generations, and
• information about the financial impact of past decisions. For example, if the proceeds from asset sales are used to repay debt, both debt and assets are reduced.

Statement of cash flows#

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The statement of cash flows reports cash flows through the bank accounts of entities included in the consolidated financial statements of the Government. The statement can provide answers to questions such as:

• Are operating activities self-sustaining or do they require support from borrowing?
• Are operating cash flows sufficient to cover ongoing replacement of assets?
• How did cash flows impact on debt?

Cash flows are classified and presented in the following three categories:

• Cash flows from operations – These represent all cash flows other than those associated with investing and financing activities, and include taxation and operating receipts and payments.
• Cash flows from investing activities – These include the sale and purchase of physical assets and advances such as student loans and investments.
• Cash flows from financing activities – These include the raising and repayment of New Zealand-dollar and foreign-currency debt.

The balance of cash flows from operations is reconciled to the operating balance.

Notes#

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The notes to the financial statements provide more detailed information in respect of the items included in the financial statements. They include a description of the significant accounting policies used in preparing the financial statements. They also include information on items that have not been recognised in the financial statements but which may have an impact on the financial statements in future periods – for example, commitments and contingent liabilities.

Presentation and publication#

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Monthly year-to-date financial statements are required each month from September to May (section 31A(1)). Monthly statements are not required for July or August due to the limited information value to external users of variances for these first two months of the financial year. Monthly statements are not required for June as this information is provided by way of the annual audited financial statements. The monthly statements are generally required to be published within six weeks of month end (section 31A(4)).

The annual financial statements of the Government for the financial year ending on 30 June must be prepared and audited within three months of the end of the financial year (section 30). They are presented to the House of Representatives and published (section 31).

Details of publication of the statements and how to obtain a copy must be published in the Gazette (section 31B). The statements can be accessed from Treasury’s web site at http://www.treasury.govt.nz/financialstatements/.

Preparers and users#

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The Treasury#

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As the Government’s principal economic and financial adviser, one of the Treasury’s key tasks is to prepare the financial statements of the Government.

The annual financial statements must be accompanied by a statement of responsibility signed by the Minister of Finance and the Secretary to the Treasury. In this statement the Treasury acknowledges its responsibility to:

• establish and maintain a system of internal control designed to provide reasonable assurance that the transactions recorded are within statutory authority and properly record the use of all public financial resources by the Government, and
• prepare the financial statements in accordance with GAAP.

In order to prepare the financial statements of the Government the Treasury needs reliable financial information prepared using consistent accounting policies from all entities whose financial statements are consolidated in the financial statements of the Government. The Act therefore gives the Secretary to the Treasury the power to:

• request information required by the Treasury or the Minister for the preparation of the financial statements (section 29A), and
• issue Treasury Instructions regarding matters such as accounting policies, financial statement representations, and the form in which information is to be provided (section 80).

Minister of Finance#

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The Minister of Finance is responsible that the financial statements fairly reflect the financial position and operations of the Government for a given year. In the statement of responsibility the Minister of Finance acknowledges responsibility for the integrity of the financial statements and states that the financial statements fairly reflect the consolidated financial position and operations of the Government reporting entity for the reporting period.

Auditor-General#

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The Auditor-General is responsible for expressing an independent opinion on the annual financial statements and reporting that opinion to Parliament and other users of the financial statements. The independence of the Auditor-General, as an Officer of Parliament, enhances the integrity of the financial statements.

The auditor forms an opinion as to whether the financial statements:

• comply with generally accepted accounting practice in New Zealand, and
• fairly reflect the financial position of the reporting entity as at the balance date and the results of its operations and cash flows for the year ended on that date.

The auditor plans and performs the audit so as to obtain reasonable assurance that the financial statements do not have material misstatements, whether caused by fraud or error.

House of Representatives#

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Each year, as part of its financial review process, the Finance and Expenditure Committee scrutinises the financial statements of the Government and reports back to the House of Representatives on those statements. The allocation of the financial statements of individual public sector entities to select committees is made by the Finance and Expenditure Committee in accordance with the Standing Orders of the House of Representatives.

Parliament grants authority to the Government to use resources (refer Chapter 2) and to tax. It is therefore important that the Government reports to Parliament on its expenses and revenue during the period, on whether it has achieved its financial objectives, and on how assets and liabilities have been administered.

Other users: media, economists and rating agencies#

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The financial media, economists and rating agencies analyse and spread information to other users that are interested in New Zealand’s economic and fiscal performance.

The Government obtains finance from national and international capital markets by issuing financial instruments such as Government Stock and Treasury Bills. Rating agencies assess the Government’s creditworthiness for the capital markets. Rating agencies are primarily concerned with a government’s ability to service debt and to repay that debt when it falls due.

Departmental Financial Management and Reporting#

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Introduction#

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This Chapter covers departmental financial management and reporting obligations, which are found primarily in Parts 4 and 5 of the Public Finance Act. It includes discussion of:

• the chief executive’s responsibility for the financial management and reporting obligations of a department
• the nature of those obligations, including the key requirements to report publicly at the start and end of each financial year on a department’s intended and actual performance
• determining the boundaries of the departmental reporting entity, and
• how these obligations have been modified for application to Offices of Parliament, intelligence and security departments, and for entities being established, disestablished or restructured.

Responsibility for financial management and reporting#

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The Act states that the chief executive of a department is responsible for the financial management and financial performance of the department, for complying with lawful directions made by their Minister (section 34), and for ensuring that the department complies with any legislative reporting requirements (section 35).

In both cases, these responsibilities are owed to the Responsible Minister for the department. Further, the chief executive must comply with any lawful financial actions required by the Responsible Minister or the Minister of Finance (section 34). Sections 34 and 35 thus help give effect to one of the objectives of the Act, which is to establish lines of responsibility for effective and efficient management of public financial resources (section 1A(2)(b)).

The Act focuses on external reporting. Treasury Instructions also note that chief executives have a responsibility to provide regular financial and performance information to the appropriate Ministers i.e. the Responsible Minister and the Ministers responsible for Votes administered by the department. They are also required to provide this information to the Treasury (via Ministers). These reports are used to monitor performance against plans throughout the year.

Other, more specific responsibilities in relation to departmental financial management, performance and reporting are set out elsewhere in the Act, or may be imposed by instruments allowed by the Act or other Acts. These include:

• delegations by the Secretary to the Treasury under section 71AA or delegations under the State Sector Act 1988
• Treasury requests for information (under sections 19, 26Z, 29A or 79)
• Treasury Instructions (under section 80)
• Minister of Finance Instructions (under section 80A), and
• regulations (under section 81).

A variety of instruments are used to govern the operation of bank accounts. The Act establishes requirements in relation to Crown, departmental and trust money bank accounts. It states that departments may operate Departmental Bank Accounts at banks permitted by the Treasury and in accordance with any directions given by the Treasury (sections 65S and 65T). Departments require a delegation from the Secretary to the Treasury to operate a Crown Bank Account. In addition, Treasury Instructions establish requirements in respect of banking arrangements.

The following table explains the purposes for which most Treasury Instructions, Minister of Finance Instructions and regulations are be issued. Some of these powers are limited to departments, others to departments and Offices of Parliament and others apply to all entities in which the Government reporting entity has an interest.

Departmental chief executives are also expected to ensure their departments comply with financial management or reporting decisions made by or under the authority of Cabinet, which are usually set out in Cabinet minutes, Cabinet Office circulars, or Treasury circulars. For example, periodic Treasury circulars specify the information required by the Treasury to meet its reporting obligations under the Act.

Certain sensitive or significant types of transactions may require separate and specific Ministerial or Cabinet authorisation even if those expenses may be incurred under existing appropriations. Cabinet Office circulars set out authorisations and financial limits that may be exercised by departments for these types of expenses and capital expenditure.

Two examples of specific financial management responsibilities which have arisen from decisions made by Cabinet include management of risks, and more specifically, management of foreign exchange exposures. The nature of these responsibilities are set out in the table below.

Treasury Instructions and Circulars are available on the Treasury’s website at www.treasury.govt.nz/instructions and www.treasury.govt.nz/circulars/.

Cabinet Office Circulars are available on the Cabinet Office’s website at www.dpmc.govt.nz/cabinet/circulars/index.html.

The Act requires that departments produce forecast financial statements and other information about their operations prior to the start of each financial year in their reporting on future operating intentions (sections 38 and 43) and at the end of each financial year in their annual reports (section s 43 to 45).

The Act further reinforces the chief executive’s responsibility by requiring the chief executive to sign explicit statements of responsibility that must be included in external accountability documents such as the statement of intent and departmental annual report (sections 42 and 45C).

The statements of responsibility highlight a chief executive’s responsibility to:

• establish a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial reporting (section 45C(1)(b)). A system of internal control is intended to safeguard departmental assets and ensure that all financial resources are used in accordance with legislation, appropriation and financial delegations. Departmental policies and procedures in relation to items such as travel and capital expenditure should form part of the system of internal control
• ensure that the department’s forecast financial statements and operating intentions are consistent with appropriations (section 42(2)(b)), and
• ensure that the accounting system produces information on which the chief executive can rely in accepting responsibility for the information in the financial statements.

Reporting on a department’s future operating intentions#

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The Act requires that a department provide information on its future operating intentions at the start of each financial year (section 38). The Statement of Intent is the document currently used to present this information, though the form in which this information is presented may evolve over time. Agencies such as the Treasury and the State Services Commission provide regular guidance on the expected form and content of this reporting, and the processes for its completion in the context of the annual budget cycle.

Departmental Statements of Intent are presented to the House of Representatives and published on Budget day (section 39).

Purpose#

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Departmental Statements of Intent provide a way for departments to explain to a wider audience what they intend to do and why. They also provide a base against which the department’s actual performance can later be assessed. To ensure it captures all important dimensions of a department’s performance, a Statement of Intent must look at issues beyond the forthcoming financial year, and include a range of financial and non-financial performance goals and standards.

The information presented in a Statement of Intent should reflect the key decisions made by a department through its internal planning processes, taking account of the department’s functions, operating environment and all relevant Government decisions. The process of developing a Statement of Intent should involve discussions between a department, its Responsible Minister, and the other Ministers and agencies with whom the department needs to collaborate. It should lead to understanding and buy-in to the department’s plans, and ensure that the Government’s interests and priorities are appropriately incorporated into those plans. From a department’s perspective, the Statement of Intent is one of the key external outputs of the planning cycle.

Contents#

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The information required on a department’s future operating intentions falls into two broad categories:

• a longer-term set of information, covering at least three financial years into the future, that provides a succinct, strategically-oriented description and explanation of what the department is trying to achieve, how it intends to achieve this, how it will measure the progress made, the challenges it will face and the implications all this has for the capability needs of the department (section 40), and
• an annual set of information, for the first financial year only, that provides more detailed performance information in the form of forecast financial statements and statements of forecast service performance, against which the department must report and be formally audited at the end of that financial year (section 41).

The information provided by the department under section 40 of the Act should explain the thinking behind the key elements of the department’s plans for the next three years (or longer) and must include:

• the nature and scope of the department’s functions and intended operations
• the specific impacts, outcomes or objectives that the department seeks to achieve or to contribute to through its operations
• how the department intends to perform its functions and conduct its operations to achieve those impacts, outcomes or objectives
• how the department intends to effectively manage those functions and operations within a changeable operating environment, and
• the main measures and standards that the department intends to use to assess and report on matters relating to the department’s future performance, including:
  • the impacts, outcomes or objectives achieved or contributed to by the department (including possible unintended impacts or negative outcomes)
  • the cost-effectiveness of the interventions that the department delivers or administers, and
  • the department’s organisational health and capability to perform its functions and conduct its operations effectively.

The annual information for the first financial year required by section 41 of the Act includes:

• forecast financial statements prepared in accordance with generally accepted accounting practice (GAAP), together with comparatives for the previous financial year (both budget and estimated actual)
• a statement of all significant assumptions, and
• a statement of forecast service performance prepared in accordance with GAAP that describes and specifies performance measures for each class of outputs the department proposes to supply.

The information on future operating intentions must also include a statement signed by the chief executive, and countersigned by the department’s chief financial officer, that the information provided is the responsibility of the chief executive and is consistent with all existing and proposed appropriations (section 42).

To ensure the department’s plans are appropriately aligned with the Government’s expectations of the departments, the information must also be accompanied by a statement signed by the department’s Responsible Minister, stating that the information provided is consistent with the policies and performance expectations of the Government (section 39).

Annual reports#

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The Act requires a department to provide a report on its operations at the end of each financial year (section 43). The annual report must be completed and audited within three months of the end of the financial year (section 45D) and then presented to the House of Representatives and published (section 44). Agencies such as the Treasury and the State Services Commission provide regular guidance on the expected form and content of the department’s annual report.

Purpose#

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Annual reports provide a way for departments to explain to a wider audience what they have done and how well they have performed during the year. This includes information on the financial and non-financial health of the department at the end of a financial year, and on the extent to which the department has achieved its financial and non-financial goals for that year.

Annual reports are a prime source of information for parliamentary select committees when conducting financial reviews of the performance and current operations of departments, as provided for in Standing Orders of the House of Representatives. The results of these annual reviews are reported back to the House.

Contents#

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A department’s annual report must be dated and signed by the chief executive (section 45(3)) and include the following:

• general information on the department’s performance during the financial year, including an assessment of actual performance against the intentions, measures and standards set out at the start of the year (section 45(2))
• a statement of service performance prepared in accordance with GAAP (section 45A)
• annual financial statements prepared in accordance with GAAP (section 45B)
• a statement of responsibility (section 45C), and
• an audit report (section 45D).

Service performance and other non-financial reporting#

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In order to demonstrate accountability for the use of public funds, departments are required to report on the extent to which agreed service performance levels were met during the period.

Departments are responsible for reporting primarily on the delivery of outputs (service performance). However, they are increasingly being expected to provide information on the relationship between the department’s outputs and the Government’s desired outcomes.

A statement of service performance prepared at the end of the year includes:

• a description of each class of outputs supplied by the department
• information on performance delivery in relation to each class of outputs (both forecast and actual), and
• revenue and expenses for each class of outputs (both forecast and actual).

Although the Act requires that statements of service performance be prepared in accordance with GAAP there is currently no approved standard in respect of non-financial reporting[11]. This potentially limits the consistency and comparability of non-financial information provided by departments. In the absence of independent standards, the Act allows for regulations or Minister of Finance instructions to prescribe non-financial reporting standards for departments (sections 80A and 81(1)(ba)). These regulations or Minister of Finance instructions can be issued only after prior consultation with the House of Representatives (section 82).

Departmental financial statements#

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As discussed in Chapter 1, departments are required to report in accordance with generally accepted accounting practice (GAAP). Departments are therefore required to prepare the same types of financial statements as other reporting entities in New Zealand. The key financial statements are:

• a statement of financial performance (sometimes called an operating statement or an income statement)
• a statement of financial position (sometimes called a balance sheet), and
• a statement of cash flows.

In addition GAAP requires disclosure of accounting policies and additional note disclosures, including information on contingent liabilities.

Because departments apply and administer public funds, they are also required to:

• publish forecast financial statements and include a comparison of forecasts and actuals in the year end statement
• report on actual spending in relation to each appropriation and each class of outputs administered by the department, and
• report on all unappropriated expenses and capital expenditure, together with an explanation of each unappropriated expense or capital expenditure (section 45B).

As discussed in Chapter 1, the use of GAAP makes it easier for external users to understand the information in departmental financial statements.

Audit report#

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Departments are public entities, and hence the Auditor-General is their auditor. The Act requires a department to provide the Auditor-General with its annual financial statements and statement of service performance within two months of the end of the financial year. The Auditor-General must then audit those statements and provide an audit report on them within three months of the end of the financial year (section 45D). The Auditor-General has the right to appoint auditors to carry out this work.

The auditor forms an opinion as to whether the financial statements and specified supplementary schedules comply with generally accepted accounting practice in New Zealand and fairly reflect:

• the financial position of the reporting entity as at the balance date
• the results of the reporting entity’s operations and cash flows for the year ended on that date
• the reporting entity’s service performance achievements measured against the performance targets adopted for the year ended on that date, and
• any assets, liabilities etc managed by the department on behalf of the Crown.

The auditor plans and performs the audit so as to obtain reasonable assurance that the financial statements do not have material misstatements, whether caused by fraud or error.

The audit procedures generally include determining whether significant financial and management controls are working and can be relied on to produce complete and accurate data.

Parliamentary scrutiny#

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Departmental Statements of Intent and annual reports are tabled in Parliament. In accordance with Standing Orders, select committees examine the Estimates and annual reports and report back to the House with any recommendations. In reviewing these documents Parliament has the right to seek further information and explanation from a range of individuals including officials and Ministers.

The boundaries of the departmental reporting entity and obligations to report on non-departmental activities#

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A departmental chief executive is responsible for the financial management and reporting of all aspects of a department’s operations. In addition, a departmental chief executive may have financial management and reporting responsibilities that extend beyond the departmental boundary.

The department as a reporting entity#

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For the purposes of Part 4 of the Act, any activities, bodies or statutory offices that are funded by way of appropriation and that are not natural persons or separate legal entities are taken to be part of a department (section 33).

This means that a departmental chief executive is responsible for the financial management of any semi-autonomous bodies, statutory committees or independent statutory positions that operate under the umbrella of the department and for the inclusion of information on their activities in the department’s external reports. The Act gives the chief executive power to require information from these bodies or individuals to discharge these responsibilities (section 37).

The chief executive of a department is not, however, responsible for the financial performance or reporting obligations of public bodies with their own separate legal personality, such as Crown entities and State-owned enterprises, even if those bodies are monitored by, or funded in accordance with appropriations administered by, that department (section 36).

Non-departmental revenue, expenses, assets and liabilities#

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In addition to its own activities, a department may also be delegated responsibility to administer or manage specific non-departmental revenues, expenses, assets and/or liabilities on behalf of the Government. The department will not have control over these items and will not benefit from them. They represent revenues and assets that the department is not entitled to use or dispose of for its own benefit, and expenses and liabilities that the department is not expected to incur or settle at its own cost. Examples include:

• revenues from taxes, fines and excise duties
• expenses such as subsidies, grants and benefits provided to other organisations or private individuals
• liabilities relating to public debt and employee superannuation, and
• assets such as national parks, loans to other governments and investments in controlled entities.

The level of delegation and responsibility in respect of non-departmental activities is determined by Ministers and varies between activities. The decision as to whether an item is departmental or non-departmental may require professional judgment. Where there is uncertainty, the department would be expected to consult with the Treasury, and where there is a dispute, the matter may need to be resolved by Ministers.

The management or oversight activity is a departmental output but the non-departmental revenue, expenses assets and/or liabilities are not included in the department’s financial statements, and the associated cash flows are managed through separate Crown Bank Accounts established by the Treasury.

The Act does not require departments to report individually on the non-departmental activities they administer, though they may choose to do so if they wish (section 45(1)(f)). However, in order to meet its whole-of-government reporting obligations, the Treasury requires regular information from departments regarding all non-departmental revenues, expenses, assets, liabilities and cash flows, and may expect departments to disclose some of this information in the departmental annual report.

General guidance on some of the operational aspects of managing non-departmental transactions or balances is found in Treasury Instructions. In addition, where the Treasury establishes a Crown Bank Account for use by a department, the formal Notice of Delegation will specify the requirements in relation to that bank account.

Non-departmental appropriations#

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Where an expense or capital expenditure relates to non-departmental activities of the Government the related appropriation is referred to as a non-departmental appropriation. The majority of the expenses covered by non-departmental appropriations are for benefit payments to individual New Zealanders. Other significant non-departmental appropriations cover the cost to the Government of outputs to be produced by entities other than departments or Offices of Parliament.

An administering department has some responsibility for reporting on non-departmental appropriations. The department’s annual report must include a statement of actual expenses or capital expenditure incurred against each appropriation, and a statement of unappropriated expenses and capital expenditure in respect of both departmental and non-departmental activities administered by the department (section 45B(2)).

In addition the Act provides for the production and presentation of reports containing a statement of service performance or statement of results achieved for certain non-departmental appropriations (section 32A). The Government has some discretion over which appropriations are subject to the requirements of section 32A but, in practice, the Government has used criteria approved by a Parliamentary select committee to determine which appropriations will be reported on.[12] Although such reports are formally prepared and presented by the Minister, the chief executive of the administering department is likely to be given the task of collecting and providing the information and may also be responsible for the preparation of the reports.

Trust money#

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The Treasury is responsible for managing trust money on behalf of the Crown, but the Treasury may appoint a department or other agent to manage trust money (section 66). This is done by way of a Written Notice of Appointment to Manage and Invest Trust Money.

Treasury Instructions establish requirements in respect of trust money, including trust bank accounts. Refer also Chapter 6.

Unclaimed money#

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The Act requires that departments deposit unclaimed money with the Treasury (section 74). Refer also Chapter 6.

Modification of reporting requirements in special circumstances#

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The Act modifies the reporting requirements applicable to most departments for Offices of Parliament and intelligence and security departments, to reflect their particular circumstances. It also requires or allows some changes in the annual reporting requirements for entities that exist for less than the full financial year.

Offices of Parliament#

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Offices of Parliament are required to prepare and publish information on future operating intentions and annual reports in much the same way as departments. The modified reporting requirements applying to Offices of Parliament are set out in sections 45F and 45G, and generally reflect the fact that Offices of Parliament are primarily accountable to the House of Representatives, not the Government.

Intelligence and security departments#

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Like other departments, intelligence and security departments are required to provide information on their future operating intentions at budget time. This information, however, is not tabled or published (sections 38 and 45E) but goes to the Intelligence and Security Committee set up under legislation to examine the policy, administration and expenditure of each intelligence and security agency. Because of the difficulties posed for audit, a statement of service performance is not required.

Intelligence and security departments are also required to prepare and present annual reports. However, these obligations are found in the department’s own enabling legislation, and provide for the removal of sensitive information prior to public release. Reporting of expenses in aggregate is permitted and no statement of service performance is required to be published (sections 45E(1)(c)(i) and 45E(1)(d).

Entities created, restructured or disestablished during the reporting period#

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Entities that are established in the last four months of the financial year may be exempted, by the Minister of Finance, from the requirement to prepare and present an annual report for that year (section 45I).[13] However the entity is still required to report on appropriations administered during that period, and to report on its activities, from the date of establishment, in its next annual report.

Entities that are disestablished during the financial year are required to produce a final report for the period up until disestablishment, as if it were an annual report (section 45J). In general, the entity must start work on the final report as soon as it is disestablished, and not wait until the end of the financial year. To facilitate the completion of the final report, the Minister of Finance can allow responsibility for its completion to be passed to another party.[14]

Where an entity is disestablished during a financial year and some or all of its operations are transferred to another entity, the Minister of Finance can, subject to certain criteria, give approval for that other entity to include full-year information on those operations in its own annual report (section 45L).

Financial Powers#

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Introduction#

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This Chapter outlines the requirements of Parts 6 and 7 of the Act and the implications of these requirements for departments. Topics addressed include borrowing, the issuing of securities, derivative transactions, guarantees and indemnities, trust money, unclaimed money and banking.

Application of general principle of acting ultra vires#

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The principle of ultra vires refers to decisions or actions outside the lawful powers of a person or body.

Ministers’ powers arise from legislation and the common law (including the Royal prerogative[15]). Departments are not separate legal entities – therefore their powers come by way of delegation from Ministers or directly from statute. Statutes contain a number of delegation provisions. For example, the State Sector Act 1988 deals with the delegation by a Minister of all or any of the Minister’s functions and powers to a chief executive of a department (section 28). In addition, statutes can limit the powers of Ministers and departments. Actions or decisions that are ultra vires may be deemed invalid by the Courts.

Part 6 of the Act restricts departments and chief executives from exercising powers in regard to borrowing, investing and banking.

Therefore, while a decentralised approach to operational financial management is mandated elsewhere in the Act, the treasury functions of government are managed centrally. The New Zealand Debt Management Office (NZDMO), which is part of the Treasury, is responsible for managing the government’s debt, overall net cash flows, and some of its interest-bearing assets. It does this within an appropriate risk management framework consistent with international best practice so as to limit the financial risks faced by the Crown.

Borrowing powers and limits#

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Traditionally, in Westminster-based systems, the Crown may tax or spend only as authorised by Parliament. In New Zealand, the Constitution Act (section 22) expresses this principle of public finance. Part 6 of the Act continues this tradition by stipulating that the Minister of Finance is authorised to borrow debt only if it appears to the Minister to be necessary or expedient in the public interest to do so (section 47).

Departments are prohibited from borrowing – refer also Treasury Instructions. The Act states that the Crown must not borrow except under statute (section 46) and the Act provides this authority solely to the Minister of Finance (section 47 and 48). The Minister may not delegate this power in the same way that other powers are delegated under the State Sector Act (section 48).

As only the Minister of Finance has the power to borrow on behalf of the Crown, the Minister must approve all borrowing. That includes specific borrowings or programmes of borrowing. The Minister also approves the entering into of swaps or other financial arrangements on behalf of the Crown. The Minister, on behalf of the Crown, may appoint loan agents to raise loans and issue securities outside New Zealand. The prohibition on departmental borrowing extends to hire purchase agreements and finance leases – refer to the definition of “borrow money” in section 2(1). However, departments are permitted to purchase goods or services by way of a credit card, or on credit from a supplier, for a period of 90 days or less.

Issuing securities#

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The Act establishes requirements in relation to public securities including their issue, variation, terms and conditions and the making of payments in relation to securities. The issuing of securities by the Crown is tightly controlled – the Minister may issue securities for money borrowed by the Crown (sections 62 and 63).

Securities commonly issued by the New Zealand Government include:

• New Zealand Government Treasury Bills – These are denominated in New Zealand dollars and are sold at a discount to face value and carry no interest coupon. The Bills are redeemable at face value on maturity.
• New Zealand Government Bonds – Denominated in New Zealand dollars with a fixed coupon paid semi-annually in arrears. The Bonds are redeemable at face value on maturity.
• New Zealand Government Kiwi Bonds – Denominated in New Zealand dollars with a fixed interest rate paid quarterly in arrears. The Bonds are redeemable on maturity or at the option of the bondholder.

In order to give lenders assurance as to repayment, the Act provides permanent authority for the payment of principal under a public security and a permanent legislative authority for borrowing expenses, including interest, incurred under a public security (section 65D). Thus, repayment of debt is not subject to annual budget approval by Parliament.

Derivative transactions#

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Departments have no ability, in their own right, to enter into derivative transactions. However, pursuant to delegations from the Minister of Finance and the Secretary to the Treasury and subject to Treasury oversight via the Guidelines for the Management of Crown and Departmental Foreign Exchange Exposure, they are able to enter into derivatives in order to manage their foreign exchange risk. Refer also to Chapter 5.

The Act provides that the Crown must not enter into derivative transactions (section 65F) except as expressly authorised by any Act. However, the Minister, on behalf of the Crown may enter into a derivative transaction if it appears to the Minister to be necessary or expedient in the public interest to do so (section 65G). The Act also establishes a permanent legislative authority for money and expenses paid or incurred in relation to derivative transactions (section 65H).

The Minister of Finance has delegated to the NZDMO the operational aspects of managing the Crown’s borrowing, investing and derivative activities. The NZDMO is responsible for the efficient management of the Crown’s debt and associated assets within an appropriate risk management framework.

The use of derivatives by the Crown predominantly relates to the management of the Crown’s balance sheet. Derivatives are used as a tool to protect the Crown from primarily currency and interest rate risk associated with its borrowing and investment activities.

The approved derivative instruments used by the NZDMO in managing risks associated with the balance sheet in the financial statements of the Government include:

• forward foreign exchange contracts
• forward rate agreements
• currency swaps
• interest rate swaps, and
• interest rate futures.

Control and reporting#

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The derivatives used by the NZDMO are subject to administrative controls and reporting requirements. The financial statements of the Government are prepared in accordance with generally accepted accounting practice in New Zealand (GAAP) (refer Chapter 1 and the Glossary). GAAP requires all derivatives to be reported in the financial statements.

Audit oversight#

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The derivative activity of the Crown, departments and Crown entities is subject to independent audit oversight through the operation of the Public Audit Act 2001 and the Public Finance Act.

Guarantees and indemnities#

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The Act restricts the ability of the Minister and departments to give guarantees and indemnities on behalf of the Crown. Because guarantees and indemnities can result in the creation of liabilities it is essential that guarantees and indemnities are strictly controlled and monitored. Guarantees and indemnities can be found in a range of standard contracts; including computer services contracts, consulting contracts, insurance contracts and lease agreements, and are not always identified as such.

The Act:

• prohibits anyone from giving a guarantee or indemnity on behalf of or in the name of the Crown, except as expressly authorised by any Act (section 65ZC)
• permits the Minister to give guarantees or indemnities on behalf of the Crown if it appears to the Minister to be necessary or expedient in the public interest to do so (section 65ZD), and
• gives departments limited authority to enter into guarantees or indemnities on behalf of the Crown if it appears to the department to be necessary or expedient in the public interest to do so. Departments are permitted to enter into guarantees or indemnities only of a type specified in regulations and must act in accordance with the terms and conditions of those regulations (section 65ZE and s.81(1)).

Any resulting contingent liability that exceeds $10,000,000 must be publicly notified.

At the time of publication of this document, regulations were expected to be made under s.81(1)(bb) . Until then, the Minister has delegated his approval powers, via the Secretary to the Treasury, to departmental chief executives.

Managing trust money#

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The Treasury is responsible under Part 7 of the Act for the management of trust money as defined in section 66(1). Under sections 66(4) and 67(3) the Treasury can delegate responsibility for the management of trust money and establishment of trust bank accounts. Although the Treasury has the authority to delegate this function, it still has the statutory responsibility for this function and is responsible for ensuring that its agents meet certain standards.

Treasury Instructions establish general rules applying to the management of trust money. A written Notice of Appointment to Manage and Invest Trust Money will be issued by the Treasury to departments acting as trust money agents. The Notice will state exactly what type of trust money a department (or other agent) is authorised to manage and any relevant conditions. Only those departments holding such a Notice are authorised to manage and invest trust money and operate trust bank accounts.

Chief executives with delegated authority to manage trust money are responsible for:

• maintaining appropriate records in respect of the trust money
• ensuring that trust money is banked into a separate bank account for each trust
• investing trust money only in accordance with a Notice of Appointment to Manage and Invest Trust Money
• ensuring that the appropriate internal control systems are in place, and
• providing information on trust money to the Treasury to enable the Treasury to meet its reporting requirements. The financial statements of the Government reporting entity are required to include a statement of trust money administered by departments and Offices of Parliament (section 27(2)(c)).

Unclaimed money#

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The Act establishes requirements in respect of unclaimed money held by departments. Departments must deposit money that has been unclaimed for six or more years with the Treasury (section 74). The money is then treated as public money but is repaid if a person can establish a claim to it.

Banking#

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The Act establishes three types of bank accounts:

• Crown Bank Accounts to be used for all Crown revenue and Crown payments
• Departmental Bank Accounts to be used for departmental revenue and departmental payments, and
• Trust Bank Accounts to be used solely for trust money.

The Act also permits the Treasury to issue instructions for matters such as regulating the collection, control and spending of public money or trust money.

Crown Bank Accounts#

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Under the Act all Crown revenue (that is, revenue that is not departmental revenue) must be paid directly into a Crown Bank Account (section 65U(3)). Each department collecting money on behalf of the Crown is therefore required to deposit this money in a specified Crown Bank Account.

Treasury Instructions govern the payment of money from Crown Bank Accounts. Amongst other things, departments making payments on behalf of the Crown (including refunds of Crown revenue) are to make such payments from a Crown Bank Account approved by the Treasury for that purpose and comply with any Notice of Delegation Regarding Crown Bank Accounts issued by the Treasury. Departments making payments from Crown Bank Accounts are required to maintain records of all such transactions and operate systems of internal control in respect of such payments.

All Crown Bank Accounts are the responsibility of the Treasury (section 65R). Where departments have delegated authority to operate Crown Bank Accounts they are required to observe the terms and conditions of the delegation.

The Treasury transfers funds into each Crown Bank Account in accordance with the cash payment schedule for that bank account. The timing of clearing those Crown Bank Accounts that receive Crown revenue to accounts operated by the New Zealand Debt Management Office is determined on a case-by-case basis depending on the number and amount of receipts.

Departmental Bank Accounts#

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Departmental Bank Accounts are primarily the responsibility of departments. However, Departmental Bank Accounts may only be opened with the approval of the Treasury and may only be operated in accordance with terms and conditions set by the Treasury or the Minister.

The Act requires that the following money be paid into a Departmental Bank Account:

• disbursements from the Treasury – Such disbursements represent the cash component of expenses and capital expenditure authorised by Parliament, and are disbursed in accordance with the cash payment schedule negotiated with the Treasury prior to the commencement of each financial year
• receipts relating to departmental revenue, and
• receipts from the sale or disposal of assets (section 65U(2)).

Foreign Currency Bank Accounts#

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The Act does not refer to Foreign Currency Bank Accounts. However, as the Treasury is responsible for regulating the operation of bank accounts it is also responsible for granting approval to open a Foreign Currency Bank Account (departmental or Crown). Departments operating a Foreign Currency Bank Accounts must do so in accordance with any relevant notice of delegation.

Monitoring spending#

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Money may not be paid out of a Departmental Bank Account or a Crown Bank Account except in accordance with an appropriation or other authority by or under an Act (section 5 and section 65V(1)). The Treasury is responsible for monitoring and reporting on any expenses or capital expenditure incurred without appropriation or statutory authority (section 65Y). Refer to Chapter 2 for further discussion of this responsibility.

As noted in Chapter 2, the Act requires that the Treasury supply monthly statements from September of each year to the Auditor-General, to enable the Auditor-General to examine whether expenses and capital expenditure have been incurred in accordance with an appropriation or other authority such as imprest supply. The Auditor-General can also request information under the Public Audit Act 2001.

If the Auditor-General has reason to believe that expenses or capital expenditure have been incurred for a purpose that is not lawful or is not properly authorised, the Auditor-General can require that the relevant Minister report to the House of Representatives on the alleged breach. The Auditor-General also has the power to stop payments from a Crown Bank Account or a Departmental Bank Account.

Regulations and instructions#

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The Act provides for instructions (by Treasury and the Minister of Finance) and regulations to be issued in respect of specified matters (sections 80, 80A and 81). Some of these matters have been highlighted in Chapter 5 and other Chapters. For example, the Treasury may issue instructions to ensure that entities within the Government reporting entity use consistent accounting policies (section 80(1)).

Regulations and instructions are used to limit the amount of detail in the legislation and to enable a more timely response when changes are required.

Treasury Instructions can be accessed on the Treasury’s website [www.treasury.govt.nz/publications/guidance/instructions]. At the time of writing the Minister of Finance had not issued any instructions. Regulations are available online at www.legislation.govt.nz.

Budgeting and Reporting Cycle#

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Key phases in the Budget cycle#

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Budgeting and Reporting Documents in a Typical Year#

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References#

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Chapter 1 Introduction#

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Boston, J., Martin, J., Pallot, J., and Walsh, P., (1996), Public Management: The New Zealand Model, Auckland: Oxford University Press

Lienart, I., (2005), Are Laws Needed for Public Management Reforms? An International Comparison, International Monetary Fund Working paper WP/05/62

Scott, Graham C., (2001) Public Management in New Zealand: Lessons and Challenges, Wellington: New Zealand Business Roundtable

Scott, Graham, C., Ball, Ian, and Dale, Tony (1997), New Zealand’s Public Sector Management Reform: Implications for the United States, Journal of Policy Analysis and Management, Vol.16, No 3, p.357-381

The Treasury, (1987), Government Management – Brief to the Incoming Government, Wellington

Chapter 2 Appropriations#

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McGee, D. (1994), Parliamentary Practice in New Zealand, 2nd edition, GP Publications

McGee, D. (forthcoming), Parliamentary Practice in New Zealand, 3rd edition, GP Publications

Chapter 3 Fiscal Responsibility#

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Janssen, J. (2001), “New Zealand’s Fiscal Policy Framework: Experience and Evolution”, New Zealand Treasury Working Paper, 01/25

Kopits, G., and Symansky, S., (1998), “Fiscal Policy Rules,” Washington: International Monetary Fund

Scott, G.C. (1996), “Government reform in New Zealand”. International Monetary Fund Occasional Paper No.140, Washington, DC

Warren, K. and Barnes, C. (2003), “The Impact of GAAP on Fiscal Decision Making: A Review of Twelve Years’ Experience with Accrual and Output-based Budgets in New Zealand”, OECD Journal on Budgeting, Vol.3, No.4

Wells, G. (1996), “Fiscal Policy.” In B. Silverstone, A. Bollard and R. Lattimore (eds) A Study of Economic Reform: The Case of New Zealand. Elsevier Science Publishers: 215-245

Chapter 4 Whole-of-Government Financial Statements#

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Canadian Institute of Chartered Accountants (CICA), 1997, Indicators of Government Financial Condition, Toronto, Ontario

CICA, 2003, 20 Questions about Government Financial Reporting: Federal, Provincial and Territorial Governments, Toronto, Ontario

Chapter 5 Departmental Financial Management and Reporting#

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Institute of Chartered Accountants of New Zealand (2002), Technical Practice Aid No. 9: Service Performance Reporting

Chapter 6 Financial Powers#

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Office of the Controller and Auditor-General (OAG), July 2004, Advice to the Finance and Expenditure Committee on the Use of Derivatives by the Crown

Chapter 7 Budgeting and Reporting Cycle#

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The Treasury, August 1996, Putting it together – an explanatory guide to the New Zealand Public Sector Financial Management System

Web Site References#

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Treasury

www.treasury.govt.nz

www.treasury.govt.nz/budgets/

www.treasury.govt.nz/financialstatements/

The official website of the New Zealand Government

www.beehive.govt.nz

Statutes of New Zealand

[www.legislation.govt.nz]

Office of the Clerk of the House of Representatives

www.clerk.parliament.govt.nz

Standing Orders of the House of Representatives

www.clerk.parliament.govt.nz/NR/rdonlyres/636A8940-48FA-4A93-B8E6-3DD0844BB68E/0/SO2003bm.pdf [Link inactive.]

Office of the Controller and Auditor-General

www.oag.govt.nz

State Services Commission

www.ssc.govt.nz

Glossary#

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