Part 1: Understanding public sector financial sustainability

1.1
This discussion paper summarises the research we commissioned in the area of public sector financial sustainability. This research looked at the issue of longer-term sustainability and the financial sustainability of New Zealand's public sector.

1.2
In this Part, we set out the background to this paper about the research, a definition of public sector financial sustainability, and the findings and implications of the research.

1.3
In Part 2, we summarise the research on the context for New Zealand's public sector financial sustainability. This includes discussion of the Treasury's work on New Zealand's long-term fiscal position.

1.4
In Part 3, we summarise the research about how overseas jurisdictions have developed their thinking on public sector financial sustainability. This includes discussion of an emerging trend towards national indicators.

1.5
In Part 4, we set out some suggested indicators of public sector financial sustainability and discuss how such indicators relate to national indicators. We also outline what the research indicates about engaging with the public about long-term public sector financial sustainability to inform choices and decision-making.

Background to this paper

1.6
In 2012, we commissioned Bruce Anderson¹ to prepare research to inform our 2012/13 work programme theme Our future needs – is the public sector ready? We consider that the research is interesting and helpful, and our aim in publishing this summary is to share the research to inform ongoing discussions among members of Parliament, the public, and the wider public sector.

1.7
The research included:

• a literature search of international and New Zealand research and other published material;
• seeking information from 25 of the Auditor-General's overseas counterparts about work in their jurisdictions on public sector financial sustainability (16 of the 25 were able to provide supplementary information); and
• discussions with staff at the Treasury, staff of some other government departments with an interest in key national indicators (KNIs), and other researchers.

Defining public sector financial sustainability

1.8
During the last three decades, the sustainability of public sector finances over the medium to long term has become an increasing concern worldwide. This is because pressures on public sector services, revenues, and expenditure have increased and look likely to increase further throughout the 21st century because of existing and new pressures.

1.9
The Oxford English Dictionary offers two definitions of sustainability: the ability to maintain something at a certain rate or level (for example, sustainable economic growth) and the ability to uphold or defend something (for example, sustainable professional practices). The research we commissioned suggests that public sector financial sustainability encompasses shades of both meanings, which are inextricably linked.

1.10
The research identifies the main elements of public sector financial sustainability as:

• liquidity (the ability to meet financial obligations when they fall due);
• resilience (the financial capacity to withstand shocks, whether internal or external);
• service and fiscal responsibility (maintaining service, debt, and commitments at reasonable levels relative to both national expectations and likely future income); and
• therefore maintaining public confidence (the ultimate guarantor that enough revenue can be collected to meet tomorrow's obligations).

1.11
The working definition used by the research is:

Public sector financial sustainability is the financial capacity of the public sector to meet its current obligations, to withstand shocks, and to maintain service, debt, and commitment levels at reasonable levels relative to both national expectations and likely future income, while maintaining public confidence.

1.12
In suggesting this definition, the research also identifies that:

• Financial sustainability is determined as much by public confidence as by financial capacity.
• Intergenerational equity (that is, that any generation should be fair and reasonable in its use of resources and wealth relative to subsequent generations) is part of the service and fiscal responsibility element. The challenge is determining what is reasonable relative to both national expectations and likely future income.
• Equating sustainability with maintaining existing services is unhelpful. Maintaining services at reasonable levels relative to national expectations does not mean maintaining existing services, but ensuring that services will be fit for the times.
• Government is not separate from its society, but is part of a complex set of social relationships that includes sharing and transferring resources among citizens. Societies can thrive across wide ranges of proportionality of government to the rest of the economy and net government indebtedness.

1.13
"Fiscal sustainability" is an often-used term that is synonymous with "public sector financial sustainability". In this paper, we use "public sector financial sustainability" because it is more complete and in plainer language. Where we can do so unambiguously, we shorten it to "financial sustainability".

Findings from the research

1.14
There are five main findings from the research:

• Public sector financial sustainability is not just a matter of spending less than you earn.
• To find useful and timely indicators of financial sustainability, there needs to be a better understanding of social, environmental, and economic indicators – which are related and may be lead indicators – rather than relying primarily on financial indicators (which are usually effect and lag indicators).
• A single approach or perspective is not enough to effectively address the complex and inter-related issues because such an approach usually tries to put a monetary value on the issues to make comparisons easier.² Multiple perspectives are likely to offer a more rounded view of complex issues.
• Long-term public sector financial sustainability is a complex, society-wide issue, and greater efforts should be made to engage citizens effectively in the debate.
• The current classification of government spending is not enough to support a proper understanding of financial sustainability and could be expanded to include descriptions that are more closely linked, such as redistribution, investment, and defensive spending (see paragraphs 4.31-4.34).

Some implications

1.15
Although New Zealand remains one of the most stable and safe countries in the world, our economic performance is mediocre compared with many Organisation for Economic Co-operation and Development (OECD) countries. Nevertheless, we are better placed than most to withstand major shocks or deteriorations in conditions in the 21st century.

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We also have a competent public sector, a proud history of public sector innovation, and access to world leaders on questions about measuring financial sustainability.

1.17
New Zealand's current legislative framework is an effective underpinning for considering public sector financial sustainability. It offers the transparency and flexibility required to support appropriate debate on longer-term issues. Work in a number of agencies, such as the Treasury, Statistics New Zealand, the Ministry of Social Development, and the Ministry for the Environment, has also set up a good basis for further developing our understanding of the deeper drivers of our financial sustainability.

1.18
There has been, and continues to be, significant attention given to financial sustainability in New Zealand, including the Treasury's current work on engaging with the public in the lead-up to publishing its 2013 Statement on New Zealand's Long-Term Fiscal Position (see paragraphs 2.20-2.22).

1.19
There have also been a number of recent activities related to KNI systems. These systems provide summary or headline statistics gathered from a range of sources to provide information on the state of, and trends in, a national or sub-national jurisdiction. The Treasury and other agencies are currently working on whether and how to develop a suitable "umbrella" framework – in essence, a KNI system. The Government's result areas for the public service during the next five years, announced in 2012,³ although primarily about public service targets and management, overlap with the above developments as indicators of targeted social outcomes.

1.20
Although the path the Treasury is currently taking towards wider engagement about a broader set of issues is a positive one, information about factors that influence public sector financial sustainability has not been integrated into our Public Finance Act "fiscal gap"-based assessments (see Part 3).

1.21
There is a long way to go to improve our understanding of the drivers of public sector financial sustainability. Work in New Zealand remains largely fragmented and user-specific, and it is not clear whether further maintenance, development, and use of the presently fragmented national indicator information sets is intended.

1: Bruce Anderson is a Fellow of the New Zealand Institute of Chartered Accountants, with a background in auditing, organisational review, performance measurement and reporting, and corporate management. Between 1980 and 2003, he spent 13 years working for the Audit Office in a range of roles, finishing as an Assistant Auditor-General.

2: See, for example, Waring, M (2012), "Making visible the invisible: commodification is not the answer", paper for Association for Women's Rights in Development plenary session, available at www.awid.org.

3: See the information on Better Public Services on the State Services Commission's website, www.ssc.govt.nz.