Besides the UK, ‘‘New Zealand is another country that has adopted a very proactive and open approach to managing its public finances.
The Public Finance Act 1989 and the Fiscal Responsibility Act 1994 provide an elaborate structure for setting and implementing fiscal policy. Rather than fixed rules, the framework allows ‘fiscal provisions’ to
evolve over time. They are determined at the start of each parliamen- tary cycle that sets, inter alia, fiscal limits for the coming period.’’ (Simes, 2003). Of the two, thePublic Finance Act 1989is considered revolutionary in New Zealand public financial management in stipulating the following:
‘‘An Act to amend the law governing the use of public financial resources and to that end to:
(a) Provide a framework for Parliamentary scrutiny of the Government’s management of the Crown’s assets and liabilities, including expenditure proposals; and
(b) Establish lines of responsibility for the use of public financial resources; and
(c) Establish financial management incentives to encourage effective and efficient use of financial resources in depart- ments and Crown entities; and
(d) Specify the minimum financial reporting obligations of the Crown, departments and Crown entities; and
(e) Safeguard public assets by providing statutory authority and control for the raising of loans, issuing of securities, giving of guarantees, operation of bank accounts, and investment of funds.’’ (New Zealand State Services Commission, 1998).
The Financial Management Act 1994, on the other hand, is seen as one of the final, major pieces of legislation in the reform movement that was passed after theState Owned Enterprises Act 1986, theState Sector Act 1988, the Public Finance Act 1989, and theFinancial Reporting Act 1993.
It forms the basis of New Zealand’s present governmental operations by
‘‘requiring the Government to:
follow a legislated set of principles of responsible fiscal manage- ment, and publicly assess their fiscal policies against these princi- ples. Governments may temporarily depart from the principles but must do so publicly, explain why they have departed, and reveal how and when they intend to conform to the principles.
publish a ‘Budget Policy Statement’ well before the annual Budget containing their strategic priorities for the upcoming Budget, their short term fiscal intentions, and long term fiscal objectives. A ‘Fiscal Strategy Report’ that compares Budget intentions and objectives with those published in the most recent Budget Policy Statement is to be published in conjunction with the Budget.
fully disclose the impact of their fiscal decisions over a three-year forecasting period in regular ‘Economic and Fiscal Updates’.
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present all financial information under Generally Agreed Accounting Practice.
require the Treasury to prepare forecasts based on its best pro- fessional judgment about the impact of policy, rather than relying on the judgment of the Government. It also requires the Minister to communicate all of the Government’s policy decisions to the Treasury so that the forecasts are comprehensive.
refer all reports required under the Act to a parliamentary select committee.’’ (NZ Treasury, 2003).
Based on the groundwork established mainly by these Acts, the Government of New Zealand was able to advance its fiscal reform agenda through the establishment of fiscal principles, accounting reform and accountability requirements. These are discussed next.
24.3.1 Fiscal Principles
The Financial Management Act 1994 advocates a number of principles that serve as general fiscal rules governing New Zealand’s financial management framework:
‘‘Reduction of total Crown debt to prudent levels – to provide a buffer against factors that may impact on the level of debt in the future.
To achieve this, Government must keep total operating expenses of the Crown in each financial year less than its total operating revenue until these are achieved.
Maintaining prudent levels of debt once these have been achieved – by ensuring that total operating expenses do not exceed total operating revenue. There is some leeway allowed for here, as the levels are expected to be maintained on average through time.
Achieving and maintaining levels of Crown net worth – so as to provide a buffer against factors that may impact adversely on the Crown’s net worth in the future.
Managing prudently the fiscal risks facing the Crown.
Pursuing consistent policies – with a reasonable degree of predict- ability about the level and stability of tax rates for future years.’’
(New Zealand State Services Commission, 1998).
The specifics of these are provided in Table 24.2.
The Government’s fiscal modus operandi has also been revised ‘‘to reflect the change to the presentation of the Crown financial statements introduced from 1 July 2002. This involved a move from the modified
Table 24.2 Long-Term Fiscal Objectives
Long-term fiscal objectives
To achieve the objectives of fiscal policy, the Government’s high level focus is on:
Operating balance
Operating surplus on average over the economic cycle sufficient to meet the requirements for contribu- tions to the New Zealand Superannuation Fund (NZS) and ensure consistency with the long term debt objective
Rising surpluses (1) during the transition and build up phase of the NZS Fund, with a focus on core Crown revenue and expenses, including:
Tax-to-GDP around current levels.
Core Crown expenses (plus the net payment/
withdrawal to the NZS Fund) averaging around 35% of GDP over the horizon used to calculate NZS Fund contributions
Revenue
Ensure sufficient revenue to meet the operating balance objective
A robust, broad-based tax system that raises revenue in a fair and efficient way
SOEs and Crown entities contributing to surpluses consistent with their enabling legislation and Government policy Expenses
Ensure expenses are
consistent with the operating balance objective
Focus on building the NZS Fund assets rather than reducing debt. Increasing net worth consistent with the operating balance objective is projected to see net worth at around 30% of GDP by 2011 Net worth
Increase net worth consistent with the operating balance objective
Consistent with the net worth objective, there will also be a focus on quality investment
SOEs will have debt structures that reflect best commercial practice. Changes in the level of debt will reflect specific circumstances Debt
Manage total debt at prudent levels. In the longer term, gross sovereign-issued debt below 30% of GDP on average over the economic cycle (2)
Net debt will be at levels that are consistent with the gross debt objective and the Government policy of holding financial assets. Net debt, including NZS Fund assets, is expected to fall below 0% of GDP by the end of the decade
Source: NZ Treasury New Zealand Economic and Financial Overview 2003.
(1) The surplus includes the net (after tax) return on the NZS Fund, which the NZS Fund will retain. Effectively the Government is targeting operating surpluses excluding the NZS Fund’s retained investment returns.
(2) Sovereign-issued debt is debt issued by the New Zealand Debt Management Office (NZDMO) and the Reserve Bank; it excludes debt issued by SOEs and Crown entities and the sovereign-guaranteed debt of SOEs and Crown entities. Gross sovereign- issued debt includes any New Zealand government stock held by the NZS Fund.
equity accounting method for accounting for the Government’s investment in state-owned enterprises (SOEs) and Crown entities to full line-by-line consolidation of the entities. There is no change to the Government’s fiscal policy approach as a result of the change to the basis of preparing Crown Financial Statements.’’ (NZ Treasury, 2003).
24.3.2 Accounting Reform
Accounting reform adopted by the New Zealand government took place in two stages. First, ‘‘an amendment was made to the Public Finance Act 1989 to provide that the financial reporting requirements of the Crown, departments and Crown entities would be established through the same processes existing under the Financial Reporting Act 1993.5 In essence, the various reports required to be prepared under both thePublic Finance Actand the Fiscal Responsibility Act must be prepared in accor- dance with generally accepted accounting practice.
The termgenerally accepted accounting practice (GAAP) means:
approved financial reporting standards (determined in accordance with the Financial Reporting Act 1993) so far as those standards apply to the Crown or the particular entity; and
in relation to matters for which no provision is made in approved financial reporting standards and which are not subject to any applicable rule of law, accounting policies that are appropriate in relation to the Crown or the relevant entity and have authoritative support within the accounting profession in New Zealand.’’
(Simpkins, 1998).
Second was the adoption of accrual accounting practices. This was gradual but the results were impressive as ‘‘legislation requiring departments to develop accrual accounting systems was passed in early July 1989. It gave departments two years to move from their existing situation to the new full accrual basis: all but three of approximately 45 departments effected the change successfully within one year. The entire government moved its financial reporting to an accrual basis in December 1991, as required by thePublic Finance Act, but it was not until 1994 that the budget was on this basis. Since 1994, the government’s entire financial-management system has been on a full accrual basis. While the whole process, from initial policy development to implementation, took seven years, one major change, moving departments onto an accrual basis, effectively took less than two years.’’ (Ball, Dale, Eggers and Sacco, 2000).
These accounting changes could be considered successful based on
‘‘a survey of government managers [which] revealed that of the many public-sector management reforms that have occurred in New Zealand, the accrual reforms received the highest grade . . . and the reforms appear to have improved the ability to identify inefficiencies in the costing and provision of public services and enhanced accountability.’’ (Ball, Dale, Eggers and Sacco, 2000).
24.3.3 Accountability Requirements
Besides the adoption of accrual accounting methods, the Government of New Zealand has adopted other measures to enhance accountability of the public service. Similar to the reformed system in the United Kingdom,
‘‘accountability revolves around the ex ante specification of both financial conditions and outputs and the ex post reporting of results. Ministers and managers must agree in advance on financial performance and the outputs to be produced, the money to be spent on the agreed outputs, and the quality and timeliness of the work to be performed. This advance specification of performance enables Ministers and managers to compare the volume, cost, and quality of the outputs actually produced to planned levels. This is the essence of managerial accountability – doing what was contracted at the agreed price and explaining any variance between planned and actual performance.’’ (New Zealand State Services Commission, 1996).
Another measure of accountability adopted by the Government is the imposition of a charge for the use of capital which is benchmarked to that used by the private sector. Specifically, ‘‘in keeping with the overriding framework of the reforms, managers are given more freedom to manage but are also held more accountable for results. On one hand, chief executives are given the authority to buy and sell assets without a specific appropriation from Parliament, enabling them to choose the right mix of capital. On the other hand, they are subject to a capital charge that forces them to prioritize asset purchases and gives them an incentive to sell surplus assets. The capital charge essentially applies an interest rate to all capital, creating an actual cost for using capital. The charge creates an incentive to balance a capital expenditure against its usefulness in achieving the agency’s goals.’’ (Ball, Dale, Eggers and Sacco, 1999).
These and other reforms ‘‘have improved [New Zealand’s] fiscal position dramatically. Surpluses have been recorded since 1994, following two decades of deficits. In 1995/96 the operating surplus was 3.7 percent of GDP; net worth turned positive, reaching 3.7 percent of GDP; and net public debt declined to 31 percent of GDP. State-owned enterprises, and the government itself, abide by the same set of rules and regulations (including
Public Finance Reform in Selected British Commonwealth Countries g 679
taxation), disclosure requirements, and accounting practices that apply to the private sector. And the results, in terms of efficiency gains and the dramatic turnaround in the country’s fiscal position, are impressive’’, according to an assessment by the International Monetary Fund (IMF).
(Cangiano, 1996).