Economy

Time to rethink how we account for government

The way a match is scored can determine its outcome. That was the message from an academic symposium at Victoria University of Wellington on Monday, which examined the forthcoming Wellbeing Budget, the Budget responsibility rules and the Public Finance Act.

By chance, at the same time just over the road in the Beehive, ministers were signing off on that first Wellbeing Budget, which will be delivered on May 30. 

But it was the Public Finance Act, which turns 30 this year, that was singled out for particular attention at the symposium. 

The legislation was drawn up in the age the age of neo-liberal reform, and it shows. The Act is essentially a rulebook for how governments should manage their finances. It’s not overly prescriptive. Clever Finance Ministers can wriggle bend it to their will without too much struggle, but it does set rigorous requirements for reporting. 

“It would be a strange and dysfunctional household whose primary focus is on the debt levels..."

Clause 26G of the Act commits governments to “reducing total debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total debt in the future”.

It also commits governments to running surpluses over the long term, noting that once sustainable levels of debt are reached each year governments must maintain those levels by "ensuring that, on average, over a reasonable period of time, total operating expenses do not exceed total operating revenues”.

Economist Brian Easton told the symposium the wording allowed governments to “avoid and ignore” the rules, but still led governments to focus on debt. While this has indeed led to low levels of public debt — New Zealand has among the lowest in the developed world — it has meant that prudent fiscal management has become synonymous with managing the level of public debt ahead of all other considerations.

While high debt had caused problems in New Zealand’s past, it could not be the sole focus of our economic policymakers, Easton said.

“It would be a strange and dysfunctional household whose primary focus is on the debt levels,” he said, adding that debt would have to be at twice the current level for him to be worried about it. 

But determining the exact quality of a government’s fiscal management was not easy

“Once we move away from thinking of the Government as a business whose activities are characterised by its accounts, we face the challenge of evaluating the Government’s accounts systematically. In simple terms: how do we judge the quality of a government’s balance sheet?”

This was important, Easton said. The way a government’s balance sheet is valued will help determine how it values itself. 

Sue Newberry, Professor of Accounting from the University of Sydney, is interested in seeing how the Government’s new wellbeing measures will affect the way it manages its finances.

She said that when rules are imposed and people have to comply with them, they have the effect of promoting behavioural changes in the Government. 

The big question ahead of the 2019 Wellbeing Budget is how the wellbeing measures will be prioritised against traditional fiscal measures. The looming question is whether these targets will be subordinate, superior, or equal to traditional fiscal measures like GDP and debt targeting. 

“We need to think, is this going to be 'just so long as it doesn’t upset the fiscal targets', or is it likely to be made stronger than the fiscal targets at some time or another?” she said. 

Geoff Bertram from the Institute for Governance and Policy Studies at Victoria University, spoke on controversies around the measurement of the size of state spending as a percentage of GDP. 

This is controversial because some regard government spending as a drag on the productive economy. The current Government’s Budget responsibility rules commit it to spending no more than 30 percent of GDP — the historic long term average. 

But Bertram argued that the accounting for this was flawed, as it included transfers, which redistribute wealth from one part of the private economy, to another. Tax revenue, for example, goes from an earner to someone who qualifies for Working For Families credits. In both instances the money is spent in the economy, the Government is merely the intermediary. 

Adopting this method of accounting core would mean Government consumption would amount to just 15 percent of GDP. 

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