Continuing financial management reform

1. Continuing financial management reform Moving Forward? The Public Sector Conference 2013 Sue Newberry

2. Continuing financial management reform: moving forward? New Zealand has significantly reformed governmental financial management since the late 1980s, claiming world leadership status and attracting international attention for features of those reforms. While detailed understanding of the reformed system may be beyond many people, it is possible to understand the general nature of the reformed system and to consider its strengths and weaknesses. This session outlines the constitutional importance of governmental financial management, identifies key features of the reformed system, including some of the most recent changes, and offers scope to consider the system’s operation and its capacity to achieve the information and accountability outcomes expected from it.

3. Outline • Constitutional importance of governmental financial management • Performativity • Ideas at the heart of the reformed financial system • Market model: performance budgeting • Casts Government as purchaser of services (outputs) • Financial institution model: • Casts Government as financial investment fund manager

4. Constitutional importance: parliamentary control of public finance • “The finance of the country is ultimately associated with the liberties of the country. ... If the House of Commons by any possibility lose the power of control of the grants of public money, depend upon it, your liberty will be worth very little in comparison” W.E Gladstone (1891) (UK) • Important because: Sovereign power to tax; public debt guaranteed in full (see s.55, 60, 61 PFA). • Today, in a number of OECD countries, including NZ and UK, “de facto” power is held by the executive government. • Parliament has delegated extensive financial powers to the executive government and continues to delegate more. • Treasury cast as multi-national-style corporate controller • Seems to depend on Auditor-General for accountability

5. Performativity of accounting • Ideas and words contribute to the construction of the reality they describe. The words used are both outside the reality they describe and at the same time they construct that reality by acting on it. • Accounting supposedly presents a present a picture of “what is”, and if we take that picture of “what is” for granted, then we are less likely to question how that “what is” came to be (Pallot, 1998; Hines 1988).

6. Ideas at the heart of the reformed financial system • Market model: performance budgeting • Appropriations: outputs • Performance budgeting: longstanding idea, intuitively appealing, but costly to operate and doubtful success • “Spending money on the basis of performance is such a compelling idea that neither failure nor disappointment deter reform-minded politicians and managers from pursuing it. Failure or disappointment embolden a new cadre of politicians or managers to try again” (Schick, 2013, p.5) • When budgets are under pressure, PB information not used at all (Schick, 2013, p11).

7. NZ one of the few countries to have persevered: • “The New Zealand model, which may be the boldest and most comprehensive effort to remake the national budget into a market-type instrument, has been adopted by few countries” (Schick, 2013, p.24). • Market model performance budgeting system casts government as purchaser of services. • Purchaser-provider split – artificial deconstruction • Output descriptions to match particular services - unstable • Requirements to determine full cost of outputs • Idea that government should purchase from most competitive provider - consider underlying assumptions

8. Market model in operation (2000) • Costing rules included “incentives” that produced biased (higher) numbers for full costs • eg detailed level rules – capital charge, valuation requirements etc, • VFM reviews – relying on the numbers? • Consider performativity • Transparency? Or “Constructed barriers to transparency”? (Heald, 2012). • Loss of information integrity; loss of trust in the financial data • To what extent should we rely on the accounting numbers produced? • How do you satisfy yourselves that the numbers produced are credible?

9. Performance budgeting and performance • “The unconventional truth is that a performing government depends more on the behaviour of politicians and civil servants than on the format of its budget, more on managerial skill than on dexterity in measurement, more on the professionalism of public employees than on performance bonuses and other financial incentives.” Allen Schick, 2013, p.8 • But remember that New Zealand’s market model does condition our thinking and actions

10. Contemporary performance budgeting renewal • “Contemporary PB seems more likely to strive for reallocation, to shift money from less to more productive uses, and to do so at a time when interest groups are effectively mobilised to protect their benefits...” (Schick, 2013, p.8). • The latest changes to the PFA reflect revitalisation of PB to deal with overall strategies and initiatives that affect multiple departments and allow quick change: • Multi-category appropriations for overarching strategy; • Cross departmental initiatives; use of departmental agencies operating within a department and using a department’s appropriation; reassignment of appropriations.

11. What will be the challenges of these latest changes? • Responsibility/Accountability? • Is there potential for confusion of responsibilities/accountabilitybetween departmental agencies/departments? • Who is accountable for the use of resources? • Who is accountable for the results? • Not yet resolved in legislation: still working on it at the delegated rule level. • How will you satisfy yourselves that the data/numbers produced are credible? • Information to parliament?

12. Ideas at the heart of the reformed financial system • Financial institution model: • Early financial reforms seemed likely to reinstate parliamentary controls: Public Finance Act 1977 allowed NZ’s government to “borrow unlimited amounts of money on whatever terms the Minister of Finance desired, from whomsoever he chose, for whatever period and to pledge the credit of New Zealand indefinitely, unfettered by any process or criteria at all” (Richards, 2010, p. 173, citing Geoffrey Palmer). • Initially seemed would impose US-style strong separation of powers. • Constitution Act 1986 • Requires parliamentary approval for all taxation, borrowing and expenditure. (s.22). • But set aside by PFA, • Treasury cast as a multi-national-style corporate financial controller. Establishment of Debt Management Office (1988)

13. Public Finance Act 1989: authorises the Minister [of Finance], without parliamentary appropriations: • to borrow on behalf of the Crown (s.47); • to appoint agents to conduct borrowing activities, who may in turn delegate their borrowing powers (s.50, 53) and those borrowing agents’ activities are deemed lawful (s. 52); • to determine the terms and conditions of such loans and these are to be accepted as a charge on public revenues (s54, 55); • to issue and vary securities for money borrowed by the Crown (63, 64); • to enter into derivative transactions (s65G); • to lend money to others (s65L); and • to give guarantees or indemnities up to $10 million (s65ZD). • All payments to be made in relation to these financial activities are to be paid from public money (s55); and payments in relation to securities (s65D, E), derivatives (s65H), and guarantees and indemnities (s65ZG) must be paid without requiring further authorisation. The PFA also delegates to the Treasury the power to invest public money held in a Crown or departmental bank account and authorises all associated costs which must be paid (s65 I,J).

14. Budget and financial information • Adoption of (business-style) accrual accounting and performance budgets • Expansion of financial reporting • Parliamentary Accounts Committees’ observations: greater interest in performance (ie performance budgeting) and less attention to scrutiny of financial information • Appropriations of outputs, take for granted their financing • Suggestions that output decisions drive financing decisions – eg Treasury’s long term financial statement; principles of fiscal responsibility; • IMF and World Bank (2001) suggest parliaments indirectly control the level of government debt by limiting budgets • BUT: financial institution model suggests otherwise

15. NZ government: growing financial market activities

16. Financial institution model • Initial thinking of sovereign debt management as a debt portfolio; • Extended into asset and liability portfolio; • Extended into balance sheet management (with derivatives); • Extended into investment portfolio management, (with Crown financial statements recast into an investment statement). • Consider performativity and how these developing ideas affect how we think about government and its role. • Do operational budgets drive financing? • Or does capital market development/support as a strategy in its own right drive operational budgets?

17. Two sides of the same coin: • Advice from Roger Douglas’s time as Minister of Finance (1988): “social policy is fiscal policy and vice versa” • Advice to Capital Markets Development Taskforce (2009) for a “joined up” approach across key policy areas: “policies that prima facie have nothing to do with capital market development may in fact have significant capital market impacts” (Davis, 2009). • CMDTF (2009) recommended a systemic approach coordinated across ministerial portfolios to develop “New Zealand’s capital markets as a participant and innovator, where this is consistent with better management of Crown assets and activities and where it will improve choice for investors.” • Consider current social initiatives: to what extent does a particular financial/financing approach drive those initiatives? • Eg Super-school decision in earthquake affected ChCh Eastern suburbs

18. Capital market development as a strategy • Consistent with earlier views that if governments support and develop financial markets, including via participation, then economic “growth” will follow. • More recent view suggests the opposite may occur (Arcandet al, 2012).

19. Where to for continuing financial management reform: moving forward? • Financial crisis and crisis in public finance? • “The pre-crisis bubble spawned careless risk taking, overleveraging and short term misbehaviour that provoked the crisis in some countries and aggravated it in others.” (Schick, 2012, p. 16) • “The crisis was not triggered by concern that governments cannot afford long-run financial commitments for pensions and health care that will come due 30-50 years from now. It was caused by the prospective inability of some countries to finance current obligations by floating or rolling over debt. However, the crisis has aggravated long-term fiscal gaps by lowering growth and revenue trends, and it has spurred governments to take actions that ease current budget stress and projected future payouts.” (Schick, 2012, p.11) • See also Treasury’s statement on New Zealand’s long term fiscal position “Affording our future” and Auditor General’s comments on that statement • Much “fiscal damage was done by obligations assumed by governments after economic conditions had deteriorated. That is, by financial commitments made after banks and other financial institutions had collapsed or were at risk of insolvency. These generally were implicit liabilities for which governments had no legal obligation, but were motivated to act by fear that failure to do so would trigger economic ruin” (Schick, 2012, 15).

20. Moving forward? Inevitable questions about national governments’ powers to determine their own fiscal policy and budgets • Constitutional implications • Note the new fiscal rule: “to formulate fiscal strategy with regard to its interaction with monetary policy.” • Consider which model drives, but take notice of both: • Government as financial institution? • Market model and government as purchaser from market? • Recognise performativity of accounting and don’t take for granted the picture of “what is” that is presented by these models; • It is always valid to question the picture of “what is” and to seek alternatives

21. References • Arcand, J., Berkes, E., Panizza, U. “Too much finance?” IMF Working paper WP/12/161, International Monetary Fund, 2012, http://www.imf.org/external/pubs/ft/wp/2012/wp12161.pdf • Capital Market Development Taskforce (2009), Capital markets matter: report of the Capital Market Development Taskforce, http://www.med.govt.nz/business/economic-development/pdf-docs-library/cmd-capital-markets-matter-full-report.pdf • Davis, N., ‘Role of government in capital market development’, MartinJenkins, November 2009. At http://www.med.govt.nz/templates/MultipageDocumentTOC_ _ _ _42262.aspx. • Heald, D. (2012), 'Why is transparency about public expenditure so elusive?'. International Review of Administrative Sciences, 78 (1), 30-49. • Hines, R. (1988), “Financial accounting: In communicating reality, we construct reality”, Accounting, Organizations and Society, 13(3), 251-261 • Pallot, J. (1998), “The role of accounting in the privatization of state trading enterprises in New Zealand”, Advances in public interest accounting, 7, 161-191 • Richards, R (2010), Palmer: the parliamentary years, Canterbury University Press • Schick, A. (2012), “Lessons from the crisis: will the crisis change budgeting?” presented at 33rd meeting of OECD senior budget officials, June 2012, http://search.oecd.org/officialdocuments/displaydocumentpdf/?cote=GOV/PGC/SBO%282012%292&doclanguage=en • Schick, A. (2013), “Metamorphoses of performance budgeting” presented at 34th meeting OECD senior budget officials, June 2013, http://search.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=GOV/PGC/SBO%282013%295&docLanguage=En