Week in Review

Cullen consults on massive Budget shake up

Treasury has brought in former Finance Minister Michael Cullen to consult on government budgeting as it tries to shift the focus away from surpluses

Treasury has begun working on a new approach to managing the government’s finances, which could have a massive impact on future budgets.

Former Finance Minister Michael Cullen was one of a group of experts who has consulted on the proposals. 

Dubbed a “stewardship” approach, it aims to take a more long-term view of public finance. A paper released to Newsroom under the Official Information Act shows Treasury has already begun work on reforming the public finance beyond the 'Wellbeing Budget' which will be delivered on Thursday.

The briefing notes that the current public finance system is 30 years old and may not adequately serve the needs of today’s governments. It said that the current work on the Wellbeing Budget and the Living Standards Framework will “only take us so far”, and further work was needed to fix “underlying issues with our public finance settings”. 

Treasury says the approach is about moving from a “management” to a “system stewardship” approach to the public finance system. This could involve further changes to the Public Finance Act, a piece of legislation drawn up in 1989 that forms the cornerstone of public finance in New Zealand. 

Finance Minister Grant Robertson told Newsroom the Government was “certainly moving forward” with the ideas in the paper. 

He said more detail would be released on Thursday with the Budget. 

'Not working for everyone'

Treasury believes the public sector is “not working well for everyone”. It singles out struggles in responding to “complex needs and issues” as well as “longer-term opportunities and risks”. It lays the blame, in part, on “a range of underlying issues with our public finance settings”. 

It says the current settings encourage “silos” and a short-term focus. These settings mean it can be difficult to move funding across several years when it makes sense.

The reporting requirements placed on the Government focus on “outputs not outcomes,” and it incentivises “compliance and risk aversion,” rather than “innovation”. 

Treasury said the new approach would “support better collaboration”, and place “more emphasis on the long-term to support innovation, asset management and capacity-building”. 

One change being discussed would substantially alter how baseline funding is appropriated. Currently, bids for cost pressure funding is bid for on an annual basis, which Treasury says is “resource intensive”. This could change to a multi-year “defined period” bid, which would be more flexible.

The Government has already moved to implement multi-year capital allowances in this Budget. Robertson said that a move away from the annualised baseline funding bids would not be announced on Thursday, there was ongoing work on reform. 

Finance Minister Grant Robertson will speak to some of Treasury's reforms when the 2019 Budget is announced on Thursday. Photo: Lynn Grieveson. 

Calling on Cullen

Last September, Treasury officials met informally with a panel which included former Finance Minister Michael Cullen, former ACT candidate and ex-Treasury Secretary Graham Scott, Victoria University Professor Jonathan Boston, and former State Services Commissioner Iain Rennie.

The group urged caution before changing “what is internationally a very good public finance system”.

Speaking to Newsroom, Cullen said there was merit in looking at long-term risks so long as a balanced approach was taken.

“So long as focus on the long-term doesn’t become an excuse for doing stupid things in the short-term then there’s a great deal of sense in getting that long-term focus,” Cullen said. 

He said long-term risks like the costs of super and health care, combined with unexpected risks like earthquakes meant a prudent approach should still be taken. 

“We are a country which faces quite significant risks that will suddenly descend upon us. We don’t have the slightest clue they’re going to happen,” he said. 

Jonathan Boston told Newsroom that moving away from a narrow focus on GDP as a measure of the economy was wise. 

“GDP is a flow measure; it measures the value of goods and services but it doesn’t tell you what’s happening to income distribution and to other financial measures, more particularly it doesn’t tell you what’s happening to the stocks of capital in a society or your human capital stock,” Boston said.  

This meant that positive headline figures around the economy could belie negative underlying trends. 

“We may be running a fiscal surplus, but if we’re running a very large social deficit and we’re depleting our stocks of capital - like for example soils or species then clearly some people may be enjoying reasonable times now but in the long run things are going to be risky,” he said.

The group said Treasury should take a “systemic approach” to reform, which could involve amending key pieces of legislation including the Public Finance Act, the State Sector Act, and the Crown Entities Act. 

They said the current model was too “pro-cyclical” with a “short-term focus” that was biased towards forward fiscal surpluses instead of investment in “capability, asset maintenance, and protection resources”.

The group suggested the Budget Policy Statement and the Fiscal Strategy Report, which are published ahead of the Budget and signal the Government’s overarching goals could be changed to be “more permissive and flexible”.

It was suggested the Budget Policy Statement “could be detached for the annual process, have a medium-term focus and potentially be replaced by a ‘Strategic Policy Statement’."

Robertson has publicly stated he was looking at further potential changes to the Public Finance Act.

The status quo working, but not for everyone 

Two pieces of legislation frame New Zealand’s approach to public finance, the Public Finance Act (PFA) of 1989 and the Fiscal Responsibility Act (FRA) of 1994. 

They were developed during the 1980s and 1990s period of reform in response to poor standards of public disclosure and out-of-control spending that saw net government debt reach 52 percent of GDP in 1992. 

The Fiscal Responsibility Act, which was rolled into the PFA in 2004, developed five standards of responsible financial management, which require the government to publish a strategy for paying down debt and keeping debt at ‘sustainable levels’ once reduced. 

The Treasury paper notes New Zealand has been largely successful in this regard. Both left and right leaning governments have shown commitment to keeping debt low, leaving New Zealand with some of the lowest debt levels in the developed world.

The paper notes New Zealand’s public finances are generally “efficient” and “transparent”.

“This is in contrast to many OECD countries, which are grappling with fundamental macro-economic, fiscal and public trust challenges,” it said. 

Robertson said that the Public Finance Act had done some good things like increasing transparency, but that it needed to support the long-term approach.

"By no means would we abandon the careful fiscal management that we’ve had,” Robertson said.

“It’s more about how we enhance that and the long-term inter-generational approaches,” he said. 

A more joined-up approach

One thing we could see more of is a more “joined-up” approach in conjunction with some of the Chris Hipkins State Sector reforms.

An example of this was the announcement of $320 million in the areas of family and sexual violence. The spending involves eight agencies and while the budgeting process allowed multi-category budget appropriation, such spending still had to be defined as an individual appropriation.

Treasury told Newsroom it was continuing to work on delivering the work programme outlined in the report. 

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