ACPAC 2013

Continuing financial management reformMoving Forward?The Public Sector Conference 2013Sue Newberry1Continuing 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 systems operation and its capacity to achieve the information and accountability outcomes expected from it. 2OutlineConstitutional importance of governmental financial managementPerformativityIdeas at the heart of the reformed financial systemMarket model: performance budgetingCasts Government as purchaser of services (outputs)Financial institution model: Casts Government as financial investment fund manager33Constitutional importance: parliamentary control of public financeThe 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 controllerSeems to depend on Auditor-General for accountability4Performativity of accountingIdeas 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).5Ideas at the heart of the reformed financial systemMarket model: performance budgetingAppropriations: outputsPerformance budgeting: longstanding idea, intuitively appealing, but costly to operate and doubtful successSpending 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). 6NZ 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 deconstructionOutput descriptions to match particular services - unstableRequirements to determine full cost of outputsIdea that government should purchase from most competitive provider - consider underlying assumptions

7Market model in operation (2000)Costing rules included incentives that produced biased (higher) numbers for full costseg detailed level rules capital charge, valuation requirements etc, VFM reviews relying on the numbers?Consider performativityTransparency? Or Constructed barriers to transparency? (Heald, 2012).Loss of information integrity; loss of trust in the financial dataTo what extent should we rely on the accounting numbers produced?How do you satisfy yourselves that the numbers produced are credible? 8Performance budgeting and performanceThe 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.8But remember that New Zealands market model does condition our thinking and actions

9Contemporary performance budgeting renewalContemporary 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 departments appropriation; reassignment of appropriations. 10What will be the challenges of these latest changes?Responsibility/Accountability?Is there potential for confusion of responsibilities/accountability between 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?11Ideas at the heart of the reformed financial systemFinancial institution model: Early financial reforms seemed likely to reinstate parliamentary controls: Public Finance Act 1977 allowed NZs 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 1986Requires 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)12Public Finance Act 1989: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). 13authorises the Minister [of Finance], without parliamentary appropriations:Budget and financial informationAdoption of (business-style) accrual accounting and performance budgetsExpansion of financial reportingParliamentary Accounts Committees observations: greater interest in performance (ie performance budgeting) and less attention to scrutiny of financial informationAppropriations of outputs, take for granted their financingSuggestions that output decisions drive financing decisions eg Treasurys long term financial statement; principles of fiscal responsibility; IMF and World Bank (2001) suggest parliaments indirectly control the level of government debt by limiting budgetsBUT: financial institution model suggests otherwise14NZ government: growing financial market activities2004 $M% GDP

2007 (1) $M% GDP

2007 (2) $M% GDP

2012 $M% GDP

GDP140,019166,590166,590202,054Fin assets (on bal sheet)46,377

33

79,95348

73,718

44

116,17857

Fin liabs (on bal sheet)52,320

37

61,094

3753,419

32

116,595

58

Fin assets/fin liabs89%131%138%100%Derivatives (Off balance sheet)35,92726

85,95952

58,183

35

122,191

60

1515Financial institution modelInitial 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?16Two sides of the same coin: Advice from Roger Douglass time as Minister of Finance (1988): social policy is fiscal policy and vice versaAdvice 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 Zealands 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

17Capital market development as a strategyConsistent 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 (Arcand et al, 2012).

18Where 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 Treasurys statement on New Zealands long term fiscal position Affording our future and Auditor Generals 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).19Moving forward?Inevitable questions about national governments powers to determine their own fiscal policy and budgetsConstitutional implicationsNote 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 dont 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 alternatives20ReferencesArcand, 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.pdfCapital 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.pdfDavis, 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, 161-191Richards, R (2010), Palmer: the parliamentary years, Canterbury University PressSchick, 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=enSchick, 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=En21