Continuing financial management reform

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Nov 10, 2013 (3 years and 9 months ago)

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Continuing financial management
reform

Moving Forward?

The Public
Sector Conference
2013

Sue Newberry

Continuing 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 system’s operation
and its capacity to achieve the information and accountability outcomes expected
from it.

2

Outline

1.
Constitutional

importance of governmental financial management

2.
Performativity

3.
Ideas at the heart of the reformed financial system

a)
Market model: performance budgeting

-
Casts Government as purchaser of services (outputs)

b)
Financial

institution model:

-
Casts Government

as financial investment fund manager

3

Constitutional importance: parliamentary control of
public finance


“The 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 controller


Seems to depend on Auditor
-
General for accountability

4

Performativity

of accounting


Ideas 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).

5

Ideas at the heart of the reformed financial system


Market

model
:
performance budgeting

-
Appropriations: outputs


Performance budgeting: longstanding idea, intuitively appealing, but
costly to operate and doubtful

success


“Spending 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).

6

NZ 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
-
typ
e
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 deconstruction


Output descriptions to match particular services
-

unstable


Requirements to determine full cost of outputs


Idea that government should purchase from most competitive provider
-

consider underlying assumptions


7

Market model in operation (2000)


Costing rules included “incentives” that produced biased (higher) numbers
for full costs

-
eg

detailed level rules


capital charge, valuation requirements etc,

-
VFM reviews


relying on the numbers?

-
Consider
performativity


Transparency? Or “Constructed barriers to transparency”? (Heald, 2012).

-
Loss of information integrity; loss of trust in the financial data

-
To what extent should we rely on the accounting numbers produced?


How do you satisfy yourselves that the numbers produced are credible?

8

Performance budgeting and performance


“The 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.8


But remember that New Zealand’s
market model does condition our
thinking and actions


9

Contemporary performance budgeting renewal


“Contemporary 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 department’s appropriation; reassignment of
appropriations.

10

What 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?

11

Ideas at the heart of the reformed financial system


Financial institution model:


Early

financial reforms seemed likely to reinstate parliamentary controls:
Public Finance Act 1977 allowed NZ’s 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 1986

-
Requires 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)

12

Public 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).

13

authorises the Minister [of Finance], without parliamentary appropriations:

Budget and financial information


Adoption of (business
-
style) accrual accounting and performance budgets


Expansion of financial reporting


Parliamentary Accounts Committees’ observations: greater interest in
performance (
ie

performance budgeting) and less attention to scrutiny of
financial information


Appropriations of outputs, take for granted their financing


Suggestions that output decisions drive financing decisions


eg

Treasury’s long term financial statement; principles of fiscal responsibility;


IMF

and World Bank (2001) suggest parliaments indirectly control the level
of government debt by limiting budgets


BUT: financial institution model suggests otherwise

14

NZ government: growing financial market activities

2004
$M

%
GDP


2007 (1)
$M

%
GDP


2007 (2)
$M

%
GDP


2012
$M

%
GDP


GDP

140,019

166,590

166,590

202,054

Fin assets
(on bal
sheet)

46,377


33


79,953

48


73,718


44


116,178

57


Fin
liabs


(on bal
sheet)

52,320


37


61,094


37

53,419


32


116,595


58


Fin
assets/fin
liabs

89%

131%

138%

100%

Derivatives
(
Off
balance
sheet)

35,927

26


85,959

52


58,183


35


122,191


60


15

Financial institution model


Initial 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?

16

Two sides of the same coin:

-
Advice from Roger

Douglas’s time as Minister of Finance (1988):
“social policy is
fiscal policy and vice versa”

-
Advice 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 Zealand’s 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


17

Capital market development as a strategy


Consistent 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).


18

Where 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 Treasury’s statement on New Zealand’s long term fiscal position “Affording
our future” and Auditor General’s 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 implic
it 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).

19

Moving forward?

Inevitable

questions about national governments’ powers to determine their
own fiscal policy and budgets


Constitutional implications

-
Note 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 don’t 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
alternatives

20

References


Arcand
, 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.pdf


Capital 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.pdf


Davis, 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
-
191


Richards, R (2010),
Palmer:

the parliamentary years,
Canterbury University Press


Schick, A. (2012), “Lessons from the crisis: will the crisis change budgeting?” presented at 33
rd

meeting of
OECD senior budget officials, June

2012,
http://search.oecd.org/officialdocuments/displaydocumentpdf/?cote=GOV/PGC/SBO%282012%292&doclan
guage=en


Schick, A. (2013), “Metamorphoses

of performance budgeting” presented at 34
th

meeting OECD senior
budget officials, June 2013,
http://search.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=GOV/PGC/SBO%282013%295&
docLanguage=En

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