The Act that revolutionised public finance
Thirty years on, Victoria University of Wellington’s Professor Ian Ball leads an assessment of the legislation he helped draft and how it might be reformed to meet the complex needs of today.
New Zealand’s pioneering public financial management system is respected around the world, but the legislation it is largely based on did not get off to the most auspicious start, remembers one of its architects, Ian Ball.
Now Professor of Practice–Public Financial Management in the School of Accounting and Commercial Law at Victoria University of Wellington, Ball was a senior Treasury official between 1987 and 1994.
To herald the upcoming 30th anniversary of the Public Finance Act (PFA) and the review of the Act now being conducted with a view to reform, he led a public panel discussion at the University that also featured Treasury Secretary Gabs Mahklouf and Neil Cherry, Deputy Chief Executive–Finance, Property and Technology at the Department of Corrections.
“In July 1989, Peter Neilson, who was the Associate Minister of Finance, stood up in Parliament to introduce the Public Finance Bill and, as you can imagine, he would have been quite well briefed on that,” said Ball.
“So for those of us officials sitting in Parliament it was a bit surprising how he started his speech. He said, ‘We all know accounting is boring; public sector accounting is boring to the power of two.’ And we thought, ‘This is not going well.’”
Neilson was soon back on track, though, the PFA was passed and a revolution in public finance took place as part of the wider reforms of the period.
As Deputy Treasury Secretary, Budget and Public Services, Struan Little said in a separate speech at Victoria University of Wellington’s School of Government, outlining the thinking behind the current PFA review, the 1980s reforms “replaced an ‘input-focused’ approach with a managerialist, output and performance-focused model. The new ‘regime’ was based on principles of devolution, accountability and transparency”.
The Treasury is not intending a wholesale overhaul of the PFA and is determined to retain the “very sound principles of fiscal responsibility, and the high levels of transparency and accountability to Parliament – clearly these are strengths of the current system”, said Little.
“I am suggesting being smarter and more flexible about how to apply these principles in different circumstances to meet the complex needs and challenges faced today. I’d put it like this: the foundations are secure – it’s the superstructure that needs some work.”
At the heart of the PFA’s foundations is the switch it instigated from cash to accrual accounting – i.e. recording revenues and expenses when they are incurred, not when cash is exchanged.
This enabled better measurement of performance, whether “chief executives’, agencies’ or for that matter the Crown’s”, said Ball.
“The Minister might not have been very excited at the time but we were very conscious this was the first time a sovereign government had really produced financial statements on an accrual basis, budgeted on an accrual basis and appropriated on an accrual basis. We are still one of the very few countries to do that.”
Ball said some of the problems the PFA sought to address remain, despite amendments to the Act in the meantime.
“We still see short-term behaviour. We still see risk avoidance. We still see relatively weak innovation. And we see weak parliamentary scrutiny.”
But other things the PFA sought to tackle have been achieved, he said. “We have much better fiscal control. We have much better information about government assets and liabilities. We put much more attention into utilising those.”
The hurdle for change should be high, said Ball.
“But that’s not an argument against change. It’s just an argument for making sure that to the extent we have benefited from the existing legislation we continue to receive those benefits.”
Changes should include incorporating wellbeing factors into the PFA and better enabling cross-organisation approaches to inter-connected issues, said Ball.
These were also highlighted by Mahklouf and in Little’s speech.
Offering an agency perspective, Cherry said that “over the 30 years the PFA has been in place financial management systems have been well embedded, but also they have matured over that time as well. So the types of financial information organisations like the Department of Corrections may be harvesting and utilising to make business decisions has probably changed quite significantly from when the first financial systems were put in place and we were all struggling to comprehend what accrual accounting actually meant”.
Although both Ball and Mahklouf raised oversight as an issue, Cherry said: “From an agency point of view, it sometimes feels like there’s a significant amount of oversight – accountability for our financial performance, whether on a monthly basis or through the select committee process”.
Financial reporting is of a high quality, he said.
“At the moment, there are a significant number of agencies across the public sector within core government, local government and the broader sector whose annual reports are recognised through Australasian reporting awards for the information and insights they are providing not only about the activities of those organisations but the outcomes to which their activities are contributing”.
While the Treasury seeks to ensure the PFA is fit for purpose for another 30 years, “I do think there’s a huge amount of it that needs to remain”, said Mahklouf.
“And you, Ian, and that generation should be incredibly proud of what you achieved.”
Victoria University of Wellington will be a hosting a conference to mark the 30th anniversary of the Public Finance Act, 26–28 July 2019.
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