Part 2: Public sector finances - solid foundations but with challenges ahead
Our public management system is seen as a world-class model
2.1 Internationally, New Zealand's public management system is seen as a world-class model. We are ranked:
- first in Transparency International's 2013 Corruption Perceptions Index;
- above the 90th percentile for all six of the 2012 World Bank's Worldwide Governance Indicators;
- second in the Stanford Centre for International Development's 2011 Sovereign Fiscal Responsibility Index; and
- second for institutional strength and 18th overall in the 2013/14 World Economic Forum Competitiveness indicators.
Public management needs to move up a gear, given the challenges ahead
2.2
In July 2013, the Treasury released Affording Our Future: Statement on New Zealand's Long-term Fiscal Position, which described the last 40 years as a time of considerable change and noted that prudent financial management has, and continues to be, important for New Zealand. The Treasury recommended that the Government draw up plans during the next decade to address some of the more certain cost pressures that our country will face. I agree and said so in my August 2013 report Commentary on Affording Our Future: Statement on New Zealand's Long-term Fiscal Position.
2.3
During the next 40 years, the extent of change is likely to be equally as dramatic as in the past 40, and the implications for how the public sector manages its financial resources will be just as important. Some of these changes, such as an ageing population, are already evident, but many will surprise us – sometimes in good ways and sometimes, as we have seen in the last few years, not.
2.4
Recent experience suggests that the financial implications of change can be material, intergenerational, sometimes unequal and, above all, difficult to control. What this means for the public sector is that managing the financial implications of change is not just about having money – it is about using that money effectively and efficiently.
2.5
The challenge we face is how to make our financial management system even more effective and the financial information that underlies it more useful and better used. External governance and leadership expectations are fundamental to achieving sustainable change, but capability, systems, processes, and data are critical to delivering strong financial management.
2.6
Looking forward, the possibility of more shocks, the ageing population, increasing diversity, inequality, and pressures on our natural resources will require careful and co-ordinated financial strategies throughout local and central government. Among other things, this will require bringing together financial and performance information through a more co-ordinated and responsive public management system.
Figure 2
Benefits and use of accrual accounting
| Accrual accounting was introduced for central government in New Zealand in 1992 to help to better manage the economy by knowing the full extent of government assets and liabilities. In doing so, New Zealand was among the first adopters of accrual-based reporting by each public entity, which is associated with high transparency and good accountability. |
| Those introducing the reforms were responding to economic pressures, including a net public debt of 55-60% of GDP, government spending at 40% of GDP, a downgrade in our credit rating, and limited financial information about the condition, quality, and usefulness of government assets. Accrual accounting was introduced to provide better information for accountability and decision-making, which was in demand from political leaders, department heads, and the Auditor-General. |
| A 2013 survey of 100 countries showed that, in the aftermath of the global financial crisis, the number of public sectors using accrual accounting is expected to increase in the next five years from 26 to 63 countries.* |
| Governments cannot hope to govern in a sustainable way unless they are made aware of the liabilities created by the decisions and choices of the past and today. Public entities are responsible for many significant long-lived infrastructure assets that are vital for providing public services and a foundation for economic growth. Accrual accounting recognises assets and liabilities and so offers the opportunity for governments to improve their management.** |
| In a 1996 paper, the International Federation of Accountants noted that the main benefit of accrual accounting was seen as improved financial transparency. Reporting of useful, relevant, and soundly based financial information could help governments to avert undesirable spending behaviour. Reporting a complete and accurate picture of a government's finances could enhance public confidence in the government's financial management ability.*** |
Notes
* PricewaterhouseCoopers (2013), Towards a new era in government accounting and reporting, http://preview.thenewsmarket.com/Previews/PWC/DocumentAssets/284413_v2.pdf.
** Public Sector Committee (1996), Perspectives on Accrual Accounting, Occasional Paper 3, International Federation of Accountants, pages 2-3.
*** Public Sector Committee (1996), Perspectives on Accrual Accounting, Occasional Paper 3, International Federation of Accountants, page 3.
2.7
In our discussion papers, Public sector financial sustainability and Commentary on Affording Our Future: Statement on New Zealand's Long-term Fiscal Position, we noted the need for a wider focus on financial sustainability.
2.8
In our June 2012 report, Reviewing financial management in central government, we noted that most public entities have sound budget management and financial controls. We also noted the need to improve governance and value from our public resources. Our annual audits support these conclusions.
2.9
Figure 3 uses two diagrams from Reviewing financial management in central government to show our assessment of the maturity of financial management in central government, based on a simple maturity model scale.
Figure 3
Reviewing financial management in central government – our maturity assessment
Changes to financial reporting standards and legislation
I hope that access to more meaningful and concise information will improve Parliament's scrutiny of public entities.
2.10
By 2016, public entities will put changes to financial reporting standards into practice. We support the strategic changes and the broad direction of the proposed financial reporting standards. In particular, we support changes that will allow many public entities to report on a basis that better reflects their size and scale than has been available under accounting standards until now.
2.11
Changes have been made to the Public Finance Act 1989 to improve financial flexibility and provide more meaningful information to Parliament about what the Government is spending and achieving. However, I fear that overly rigid rules and/or fixed mind-sets will undermine the intended flexibility. I hope that access to more meaningful and concise information will improve Parliament's scrutiny of public entities.
Simpler reporting and integrated information needed
2.12
Because of the long life of the local government asset base and the importance of assets and services such as water and waste disposal to our everyday lives, local authorities need to have long-term plans.
2.13
Local authorities have been good at budgeting for their operational expenditure, but have tended to overestimate their likely levels of capital expenditure. This indicates the challenges of delivering a diverse range of projects each year, and raises questions about the realism of local authorities' longer-term assessments of the cost of their asset renewal and expansion programmes, as forecast in the long-term plans.
2.14
Local authorities need to seek community views on the long-term plan as a whole and engage in "the right debate" about matters such as expectations about levels of service, their costs, and funding. In doing so, local authorities need to find a middle ground between high-level description of strategy and detailed management intentions.
I do not subscribe to the notion that more information is better. Information should be appropriate for the users of that information.
2.15
In my view, local authorities have scope to improve how they report because long-term plans suffer from having too much information and being complicated. I do not subscribe to the notion that more information is better. Information should be appropriate for the users of that information. Few ratepayers have the time or inclination to digest hundreds of pages of planning documents. I will continue to encourage local authorities to simplify public reporting.
2.16
In fact, all accountability reporting would benefit from being focused more on users' needs. Overall, standard-setters and public entities need to focus on relevant and appropriate reporting that is easy to understand and used to properly hold public entities to account. True accountability requires transparency about financial and operational performance, and an appropriate relationship between the two.
2.17
In my view, our public sector leaders should carefully consider the International Integrated Reporting Council's integrated reporting initiative.2 The initiative supports reporting that provides concise communication about value, focuses on strategy, is future orientated, and promotes the connectivity of information.
2: The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard-setters, the accounting profession, and non-governmental organisations. For more details, see www.theiirc.org.