Part 4: National and public sector financial sustainability indicators in New Zealand
4.1
This Part discusses:
- recent New Zealand public sector work to develop national indicators;
- the overlaps between national indicators and the suggested indicators of public sector financial sustainability;
- suggested indicators related to public sector activity;
- suggested indicators of government spending; and
- the importance of effectively engaging with the public.
Recent public sector work
4.2
Our public sector has been focusing on improving the cost-effectiveness of its operations in response to the Global Financial Crisis, which was followed by the catastrophic Canterbury earthquakes. These events, combined with the international and New Zealand drivers discussed in Part 2, are increasing pressure on our public sector financial sustainability. Effort is being made to better understand the level of economic, social, and environmental drivers and the effect on the financial sustainability of the public sector.
4.3
In 2011, the Treasury published a working paper, Working towards higher living standards for New Zealanders, which provides 46 indicators with commentary, mainly on social and household economic indicators.
4.4
Building on the working paper, the Treasury has also developed a draft framework for policy analysis that proposes five domains as a basis for assessing contributions and trade-offs: economic growth, sustainability, equity, social infrastructure, and risk.
4.5
In 2012, the Government announced a set of 10 targets for the public service during the next five years, based on the 2011 Better Public Services Advisory Group Report.26 Although these are primarily about public service targets and management, they overlap with the concept of KNIs as indicators of targeted social outcomes.
4.6
Statistics New Zealand published Measuring New Zealand's Progress (providing 16 of 85 indicators as headliners across four areas, including indicators of economic resilience) in 2008 and updated it in 2011. In 2009, it published Statistics New Zealand's Framework for Measuring Sustainable Development (setting out design criteria for a sustainable development indicator system). Along with the Treasury and other agencies, it is currently working on whether and how to make this a suitable "umbrella" framework – in essence, a KNI system.
Towards a New Zealand indicator set
4.7
The research included reviewing the information supplied by the offices of other Auditors-General to consider what sort of categories and indicators were being used in KNI systems internationally and to develop an initial set of indicators of public sector financial sustainability for New Zealand. As discussed in Part 3 (see paragraphs 3.13-3.15), there is considerable interconnection and overlap between key national indicator and public sector financial sustainability indicator sets.
4.8
Figure 5 sets out the broad domains of sustainability (see blue boxes) and major linking activities or states (see brown boxes) that might be relevant for developing New Zealand's public sector financial sustainability indicators. The green boxes show the suggested public sector financial sustainability indicators.
Figure 5
Domains of national indicators, intermediary activities or states, and suggested indicators of public sector financial sustainability
4.9
Figures 6 to 8 list the most common KNIs and categories used by eight national jurisdictions and two "think tank" organisations (described as "systems" in Figures 6 to 8), after combining similar indicators, ranked by incidence in each of the three common KNI domains (social, environmental, and economic). After each figure, we set out the suggested indicators of public sector financial sustainability. The overlap between the list in each figure and the associated list of suggested indicators should be readily apparent.
4.10
The research concluded that most of the indicators of public sector financial sustainability would be relatively easily implemented. At least two-thirds of those identified are already measured internationally, and most of these are measured in New Zealand. However, some indicators would need developing to assess public sector financial sustainability within our national context.
Social, environmental, and economic indicators
Figure 6
Most commonly used key national indicators in the social domain
| Social domain – most commonly used indicators | No. of systems using |
|---|---|
| Health – life expectancy at birth, male and female | 8 |
| Crime – level of significant crime | 7 |
| Poverty – direct measures, and by at-risk group | 7 |
| Work – unemployment rate | 7 |
| Employment – % of men and women in employment | 5 |
| Education – Attainment in reading, maths, and science at age 15 | 5 |
| Education – % of 19-yr-olds with Level 2* qualifications | 5 |
| Education and training – % aged 25-64 years with a vocational or higher education qualification | 4 |
| Housing – state and growth | 4 |
| Culture – % of people visiting types of cultural institution | 3 |
| Education participation – numbers at primary, secondary, and tertiary levels | 3 |
| Social/environmental – Personal mobility | 3 |
| Income inequality | 3 |
*Approximates to university entrance level.
4.11
Paragraphs 4.12-4.16 set out possible social indicators of public sector financial sustainability.27
4.12
Income inequality is in the social sustainability grouping because of the increasing realisation of the corrosive effects of increasing inequality and relative poverty on social stability and economic performance, even in wealthy countries such as New Zealand (where inequality is growing fast). The indicator used is the "post-tax Gini coefficient". (The Social Report28 has provided this in recent years.)
| Clarification: It might have been more accurate to write that, in New Zealand, inequality has been (rather than “is”) growing fast. According to the OECD, income inequality flattened out in the mid- to late 2000s, after a period of rapid growth from the mid-80s. |
4.13
Household wealth. The Global Financial Crisis not only sent tens of millions of people back into absolute poverty but also stripped millions in developed countries of their equity in, or possession of, their main store of wealth, their home. Although the effects in New Zealand were less severe than average, the fact remains that the wealthier have more assets to fall back on than the poorer – so wealth and income both need to be considered in assessing relative poverty.
4.14
Life satisfaction is included because, regardless of other underlying drivers such as income inequality and (diminishing) wealth, the level and trends of life satisfaction will give insight into public confidence at the least. (The Social Report provides this.)
4.15
Civic engagement is a more direct indicator of public confidence in government. Some may argue that more engagement means less confidence ("let's do it ourselves"), but the natural indicator (voter turnout) does not suffer from this risk. High voter turnout may indicate either satisfaction or dissatisfaction with an incumbent government, but, in either case, it is a vote of confidence in our democracy as an institution. (The Social Report provides this at national level.)
4.16
Demographic changes is shown on its own in Figure 5 because it remains a critical quantitative driver of the public sector and its levels of activity, revenue, and expenditure. It is fundamental to current assessments of public sector financial sustainability. The headline indicator would be population size and trend. (Statistics New Zealand already provides this.)
Figure 7
Most commonly used key national indicators in the environmental domain
| Environmental domain – most commonly used indicators | No. of systems using |
|---|---|
| Atmosphere – net greenhouse gas emissions (million tonnes of CO2 equivalent) | 9 |
| Energy use per capita | 4 |
| Bird populations | 4 |
| Waste arising – disposed of in landfill sites (million tonnes) | 4 |
| Percentage of electricity generated by renewable sources | 3 |
4.17
Paragraphs 4.18-4.20 set out possible environmental indicators of public sector financial sustainability.29
4.18
Net greenhouse gas emissions capture the main aspects of New Zealand's contribution to climate change, which is small in absolute terms but large per capita. It acknowledges the positive effect of some of New Zealand's activities (mainly forestry) and also provides an effective umbrella for innovation in this area (as demonstrated by the work on cattle and methane). (Environment New Zealand 200730 provided this information.)
4.19
(Solid) waste production is increasingly important in countries with higher population density. Having a measure of how we compare with those countries, as well as a measure of our own progress in reducing consumption and waste, is useful. (Environment New Zealand 2007 provided this information.)
4.20
Biocapacity summarises key aspects of the overall state and change in our environmental capacity in a single measurement. Biocapacity is short for biological capacity, which is defined by the Global Footprint Network as the ability of an ecosystem to produce useful biological materials and to absorb carbon dioxide emissions. It is calculated using the factors of the area of croplands and grazing land. (The Global Footprint Network31 publishes this information.)
Figure 8
Most commonly used key national indicators in the economic domain
| Economic domain – most commonly used indicators | No. of systems using |
|---|---|
| Economic output – GDP and GDP per capita | 6 |
| Economic sustainability – fiscal gap, level of debt | 4 |
| Household economic well-being | 4 |
| Productivity – multi-factor productivity in the market sector | 4 |
| Economic sustainability – impacts on public spending | 3 |
| Growth/productivity – % of GDP spent on research and development | 3 |
| National income – real net national disposable income per capita | 3 |
4.21
Paragraphs 4.22-4.25 set out possible economic indicators of public sector financial sustainability.
4.22
Labour productivity is a key determinant of our creation of wealth. Improvements have been modest for at least the last 150 years, but this might reflect an approach that values other activities ahead of economic effort. On the other hand, New Zealand's high labour utilisation might also suggest that, even if we do value these other activities, we can no longer afford as much time for them. (Economic Development Indicators32 provided this information.)
4.23
New Zealand's private financial wealth is a key indicator of our financial stability and resilience, whether held by households or by businesses. Poor countries appear unable to afford high-quality public sectors (in many, work in the public sector is desirable for its status and reward, rather than its contribution), so a wealthier private sector is a key driver of the financial sustainability of an effective public sector. The best and most accurate indicator is probably net private saving. (Economic Development Indicators provides this information.)
4.24
Innovation (levels and trends) is another key determinant because it measures the sustainable vitality of our economic activity. (Economic Development Indicators provides this information.)
4.25
Tax capacity/leakage is essentially a measure of the quality of tax law and compliance. Private and business tax avoidance and evasion may or may not be a significant problem in New Zealand, but, because it is largely unmeasured, the extent of the problem is not known. A large black economy, and widespread tax avoidance, would not only have a direct effect on the public purse but also indicate low or decreasing levels of confidence in government, perhaps leading into downward spirals. An indicator or indicators would need to be developed for this.
Indicators related to public sector activity
4.26
The sets of suggested indicators listed above are about the external drivers of public sector financial sustainability. In paragraphs 4.27-4.30, we set out suggested public sector financial sustainability indicators related to the activities of the public sector and the financial results of these activities.
4.27
Public sector capability is about the quality and capacity of the public sector to deliver into the future. More research is needed to develop useful indicators and, from those, a useable headline indicator. Crude current options might include the level of investment in public sector productivity and improvement, trends in experience and qualifications of the public sector workforce, levels of engagement (as a measure of commitment, if not capacity), public perceptions of corruption and/or competence. Perhaps the World Bank's "Government Effectiveness Index", a composite measure quoted in Economic Development Indicators, could act as a temporary proxy for this indicator.
4.28
Fiscal governance is the application of public sector capability to the fiscal situation. The OECD, World Bank, David Walker, and the European Union have all developed indicators in this area.
4.29
Net income and public sector financial wealth get to the core indicators of public sector financial sustainability as it is currently conceived. Trends in net income (measured as the imbalance between this and a set goal for public debt) give us the fiscal gap, and trends in public wealth give us the net public debt (or, in rare cases, the net public assets). They are certainly an important pair of indicators of public sector financial sustainability, but they are, essentially, effect and lag indicators (see paragraph 1.14), which simply show what happens as a result of decisions or actions in other critical areas. There is abundant literature on desirable levels of debt, with the most convincing showing that net debt above 90% of GDP may have a negative effect on GDP growth, and that as levels go higher than this, so do the probabilities of negative outcomes such as substantial decreases in sovereign credit ratings, increased servicing costs, and, eventually, default.
4.30
Finally, buffer capacity represents an idea rather than an indicator at this stage. David Walker's "fiscal space" (see paragraph 3.10) gives part of it, by indicating the levels of debt that might be called on in distress situations, but this is measured by net public debt (see paragraph 4.29). At the other end of the spectrum, factors such as social stability along with the quality of fiscal governance create longer-term buffer capacity. Development of a more intermediate measure of buffer capacity or the country's effective ability to externalise costs (for example, insurance) would be useful.
Describing the nature of government spending
4.31
The following set of suggested public sector financial sustainability indicators are intended to show the nature of government spending in a different way than traditional accounting. They draw on the ideas of the "Genuine Progress Indicator"33 and "Adjusted Net Savings",34 to describe four categories of expenditure that go beyond the meaning of "consumption" and "capital" expenditure.
4.32
This is important because government spending, by its nature, should expand "virtuous" circles of sustainability (for example, higher spending on education should lead to better economic and social performance, higher income, and more capacity to invest in education). However, government spending cannot diminish "vicious" circles directly (for example, higher spending on education should lead to higher income, and therefore less health and justice spending; but higher spending on palliative health and on retributive justice will not reduce the requirement to spend on them, because they are "bottom of the cliff" activities, doing little to affect the downward traffic). The four suggested categories of indicators are:
- Redistribution expenditure is relatively straightforward, with the Government setting rules for who gets how much of what and then redistributing it.
- Investment expenditure includes not only conventional capital expenditure (mainly on public infrastructure) but also investment in people, primarily early childhood development, child care, and education. It also includes prevention-type expenditure, primarily public health. This type of expenditure has long-term benefits, so can be considered as an important contributor to intergenerational equity.
- Defensive expenditure captures spending on the "bads" and "regrettables". This includes most of justice, defence, and primary, secondary, and tertiary health care, and at least some aspects of regulatory activity.
- Overhead (or unclear) expenditure includes miscellaneous activities and those that do not clearly belong under one of the three categories above. This may include foreign affairs, sport, arts, culture and heritage, policy formation, and possibly some aspects of regulatory activity.
4.33
There can be fine lines between these categories, argument about which elements belong where, and cases to be made that some (or most) expenditure is of both an investment and a defensive type (for example, public health and primary health care). Despite these problems, it could be useful, when considering public sector financial sustainability, to go beyond net public debt and the major elements of public sector spending by sector.
4.34
Government makes investments whose payback is capability, and it also spends money that does nothing more than ameliorate bad situations. Our long-term preference must surely be an upward trend in the first and a downward trend in the second, or at least an upward trend in the first relative to the second. At the very least, we should be tracking the relative trends of the four suggested categories. Redistribution expenditure is already measured, but there would need to be some categorisation and development work before the other three categories could be measured.
Engaging with the public
4.35
Measurement is a complex and value-laden activity. What is measured and how critically it is measured influence the information that can be produced and the use that can be made of that information. The research has focused on the methods and matters that could be the basis for measuring public sector financial sustainability. However, measurement is only part of the discussion. Without measurement, such discussion will usually be based on misinformation or extremely partial information. Conversely, without public discussion and action, improving measurement is pointless technical activity.
4.36
Therefore, the main objective of understanding our financial sustainability is not about forecasting the future correctly. Rather, the aim is to provide information that helps with making choices about the best actions to take and directions to choose from where we stand now.
4.37
Our financial sustainability issues are large, society wide, and complex. Such issues are effectively addressed only when all the parties affected are engaged in co-designing the solutions.35 Although there is a large technical component to the questions of public sector financial sustainability, there are also large values and behavioural components (such as public and business expectations).
4.38
A recent paper36 offers research evidence that providing good information is not enough in itself. People faced with complex and difficult problems often avoid learning about the issue and exhibit increased tendencies to trust or expect the Government to solve their problems for them. However, our financial sustainability challenges will be susceptible only to solutions based on co-operation and co-design, and learning-based solutions developed over time. It will not be enough to publish information on public sector financial sustainability – prior and subsequent engagement processes are critical to their usefulness.
4.39
The Treasury's current approach in preparing its 2013 Long-Term Fiscal Statement, towards wider engagement about a broader set of issues, is a positive one.
4.40
However, for any information about public sector financial sustainability to be used and useful, much more effort will need to be made to engage effectively with the public on the major underlying social, environmental, and economic issues, as well as their consequences for public services.
26: See the information on Better Public Services on the State Services Commission's website, www.ssc.govt.nz.
27: Other potential indicators considered but not included in the set of possible social indicators included:
- Education is universally acknowledged to be one of the major drivers of quality of life, through improved income and participation. It could arguably be seen as an economic rather than a social driver. Although New Zealand has a history of good educational outcomes, this has not translated itself directly into superior productivity or innovation gains, hence the use of more direct economic drivers.
- Youth stress, as indicated by suicide rates, fertility rates, and under-employment, is a clear driver of both present cost and future risk.
28: See, for example, The Social Report 2010, available at http://socialreport.msd.govt.nz/.
29: Also considered but not included in the possible environmental indicators was Water availability as the most fundamental driver of New Zealand's economy and hence of public sector financial sustainability. New Zealand has water in abundance, albeit unevenly distributed, redistributed, and harvested, but availability is likely to be put under more pressure because of climate change.
30: Ministry for the Environment (2007), Environment New Zealand 2007, available at http://www.mfe.govt.nz/publications/ser/enz07-dec07/.
31: See: http://footprintnetwork.org/en/index.php/GFN/.
32: See: Ministry of Business, Innovation and Employment (2011), Economic Development Indicators 2011, available at http://www.med.govt.nz/about-us/publications-by-topic/economic-indicators/.
33: See Wikipedia's information about "Genuine progress indicator", at http://en.wikipedia.org/wiki/Genuine_progress_indicator.
34: See information available from the World Bank, "Adjusted Net Saving", at http://www.worldbank.org.
35: See, for example, Kahane A (2004), Solving Tough Problems: An Open Way of Talking, Listening, and Creating New Realities, Berrett-Koehler Publishers, San Francisco, USA.
36: Shepherd S and Kay AC (February 2012), "On the perpetuation of ignorance: system dependence, system justification, and the motivated avoidance of socio-political information", Journal of Personality and Social Psychology, Vol. 102, No. 2, pages 264-280.
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