Part 1: The operating environment for central government
1.1
In this Part, we describe the operating environment for central government agencies in 2016/17. The description provides some context for this report – in particular, for our audit of the financial statements of the Government of New Zealand (the Government's financial statements). We set out the situation as it was in the last full financial year of the 51st New Zealand Parliament. The policies and programmes described are those of the Government at the time, and some or all of these may change as the new Government implements its own priorities.
1.2
The Government's financial statements consolidate the many and varied organisations associated with central government.1 We audit each of these organisations each year, which informs our work on the Government's financial statements. We need to understand the operating environment for these different organisations because the Government's priorities and expectations shape how organisations plan, prioritise, operate, spend, and report funding allocated through the Budget process and approved by Parliament.
Government priorities during 2016/17
1.3
The Government changed one of its four priorities from previous years to include its response to the Kaikōura earthquake. Its fiscal strategy remained unchanged from the previous year.2 The four priorities were as follows:
- responsibly managing the Government's finances;
- building a more productive and competitive economy;
- delivering better public services within tight financial constraints; and
- rebuilding of Christchurch (from the 2010/11 earthquakes) and responding to the Kaikōura earthquake.3
1.4
Shorter term fiscal priorities were:
- maintaining rising OBEGAL4 surpluses over the forecast period so that cash surpluses are generated and net debt begins to reduce in dollar terms;
- reducing net debt to around 20% of gross domestic product (GDP) by 2020;
- if economic and fiscal conditions allow, beginning to reduce income taxes; and
- using any further "fiscal headroom" – including from unanticipated revenue – to reduce net debt faster.
Events and changes affecting financial and performance reporting
Fiscal situation
1.5
The Government continued its focus on reducing net debt, and to limiting increases in core Crown expenditure, through an annual operating allowance of $1.5 billion. Although there were a number of cost pressures in 2016/17, including the effects of the Kaikōura earthquake, the OBEGAL result for the year was an surplus of $4.069 billion.5
1.6
The Government identified external risks to the economy from overseas events, trends, and developments. The global economy is experiencing low growth, and there is uncertainty about the potential effect on New Zealand of events such as Brexit, imbalances in the Chinese economy, and other global trade developments.6
A policy environment of greater expectations and scrutiny
Better Public Services
1.7
The Government launched the Better Public Services programme (BPS) in March 2012 with the expectation that public entities would improve their service delivery and change the way they operate. As part of the BPS agenda, the Government set targets for 10 "results", which were grouped into result areas.
1.8
The Government published a report on its BPS targets and released a set of "refreshed" targets in March 2017. The report stated that four of the first set of results were expected to be reached by the target date, and four were progressing well but with changes still to be embedded. The Cabinet paper proposing changes to the targets classified six of the set of 10 results adopted in March 2017 as new, while four of the results continued (with updated descriptions, targets, and measures).
1.9
Figure 1 shows the updated BPS targets, with new results in bold.
Figure 1
Better Public Service results and targets, as updated in March 2017
| Result | Target | |
|---|---|---|
| 1 | Reduce long-term welfare dependence | By June 2018, a 25% reduction of the number of people receiving main benefits. |
| 2 | Healthy mums and babies | By 2021, 90% of pregnant women are registering with a Lead Maternity Carer in the first trimester. |
| 3 | Keeping kids healthy | By 2021, a 25% reduction in the number of hospitalisations of children for preventable conditions. (directly linked to Result 8) |
| 4 | Reduce the number of assaults on children | By 2021, a 20% reduction in the number of children experiencing a substantiated incidence of physical or sexual abuse. |
| 5 | Improve mathematics and literacy skills | By 2021, 80% of year 8 students are achieving at or above the National Standard in writing, or at Manawa Ora or Manawa Toa in Ngā Whanaketanga Rumaki Māori tuhituhi. By 2021, 80% of year 8 students are achieving at or above the National Standard in mathematics, or at Manawa Ora or Manawa Toa in Ngā Whanaketanga Rumaki Māori pāngarau. |
| 6 | Upskill the New Zealand workforce (renamed) | By 2018, 60% of 25–34 year olds will have a qualification at Level 4 or above. |
| 7 | Reduce serious crime | By 2021, reduce the number of serious crime victimisations by 10,000. |
| 8 | Better access to social housing | By 2021, a 20% reduction in the median time to house for priority A clients on the social housing register. |
| 9 | Easy and seamless services for business | By 2020, business costs from dealing with government will reduce by 25%, through a year-on-year reduction in effort required to work with agencies. |
| 10 | People have easy access to public services | By 2021, 80% of the twenty most common transactions will be completed digitally. |
Note: For a more detailed explanation of these results and targets, see the State Services Commission's website at ssc.govt.nz.
1.10
Figure 2 shows the six result areas that were replaced.
Figure 2
Results replaced in the March 2017 update of Better Public Services
| Result | Target | |
|---|---|---|
| 2 | Increase participation in early childhood education | 98% of children enrolled in early childhood education. |
| 3 | Increase infant immunisation and reduce rheumatic fever | 95% of 8-month-olds are fully vaccinated. Reduce from 4 first-episode rheumatic fever hospitalisations per 100,000 to 1.4 per 100,000 by June 2017. |
| 5 | Increase proportion of 18-year-olds with NCEA Level 2 | 85% of 18-year-olds have NCEA Level 2 by 2017. |
| 7 | Reduce rates of total crime, violent crime, and youth crime | From a June 2011 baseline: Reduce violent crime rate by 20% by June 2017. Reduce youth crime rate by 25% by June 2017. Reduce total crime rate by 20% by June 2018. |
| 8 | Reduce re-offending | From a 2011 baseline, reduce re-offending by 25% by 2017. |
| 10 | New Zealanders can complete their transactions with the Government easily in a digital environment | By 2017, 70% of most common transactions with the Government will be completed in a digital environment. |
1.11
For each of the BPS targets they are responsible for, agencies are required to publish action plans on their websites that identify the Chief Executives accountable for delivering the result, the actions planned, and the agencies involved. In March 2017, Cabinet was asked to agree to agencies reporting six-monthly on progress to Cabinet and the public. Although the Auditor-General does not audit the results as a matter of course, some results that are included in a public entity's reported performance information (for example, the infant immunisation result reported in the Ministry of Health's annual report) are part of the information subject to the annual audit.
Social investment approach
1.12
The Government further developed and embedded its social investment and "life course" approach in 2016/17. The Government defined social investment as an approach that puts the needs of people who rely on public services at the centre of decisions about planning, programmes, and resourcing. It includes setting goals, measuring effectiveness of services, and purchasing outcomes rather than inputs. The expectation is that effective interventions at early life stages can reduce the need for more expensive and less effective interventions later in life. Social investment, taking this life course approach, relies on agencies working collaboratively and taking joint responsibility for addressing major issues facing New Zealanders at each life stage.
Structural change in the social sector
1.13
There were a number of organisational changes in 2016/17 for social sector agencies, including:
- A new public service department, the Ministry for Vulnerable Children, Oranga Tamariki started its work in April 2017. This was a significant re-organisation, extracting the former Child, Youth and Family unit, along with other related functions, from the Ministry of Social Development (MSD). The establishment of the new ministry was part of a major overhaul of government functions supporting children and young people. It followed recommendations by the Expert Advisory Panel that was tasked with reviewing the care and protection system, and the establishment of the Investing in Children Programme in 2016. The establishment of the new ministry included the transfer of more than 3000 staff from MSD, which reduced the size of MSD by about one-third. The functions of the new ministry are supported by changes to the principal legislation, which was also renamed: the Oranga Tamariki Act 1989 or the Children's and Young People's Well-being Act 1989.
- The Government established the Social Investment Agency (the SIA), which began operations as a departmental agency of the State Services Commission on 1 July 2017. The SIA replaces the Social Investment Unit, which was a cross-agency unit. The SIA is responsible for supporting the social sector to take a social investment approach, provide whole-of-system advice, and test and trial new approaches. The Social Investment Board was also set up on 1 July 2017. This is made up of the Chief Executives of the Ministries of Education, Health, Justice, and Social Development, with an independent chairperson. The Social Investment Board is charged with providing strategic direction and oversight of investments for achieving joint results in the social sector.
- The decision was made to disestablish Superu (the Social Policy Evaluation and Research Unit, formerly the Families Commission). Disestablishment will require legislative changes that have yet to be worked through. Some functions are likely to be incorporated into the SIA, MSD, and other social sector entities.
Other agency changes
1.14
Another significant change under way is the implementation of the Business Transformation Programme by the Inland Revenue Department (Inland Revenue). Work on this programme began in July 2011, and it will continue through to 2021. This programme will change most aspects of the way that Inland Revenue carries out its work and how people and businesses interact with the tax system.
1.15
The programme achieved an important milestone in February 2017 with the introduction of new goods and services tax online services. Subsequent phases will include changes to the way individuals and businesses deal with Inland Revenue on income tax matters, and the integration of Inland Revenue's core tax system with the accounting software used by businesses.
Continued effect of earthquakes
1.16
The Government's efforts in rebuilding Christchurch after the 2010/11 earthquakes have been a focus for our audits in the last few years. Responsibility for the different aspects of the rebuilding effort is now distributed between several different entities since the disestablishment in April 2016 of the Canterbury Earthquake Recovery Authority (CERA).
1.17
The Kaikōura earthquake affected the North Canterbury, Marlborough, and Wellington regions in different ways. Earthquake damage to infrastructure, particularly roading and rail in the South Island, has required greater maintenance of secondary roads that are now used for a much greater volume of freight transport.
1.18
In Wellington, many government offices experienced disruption, and some government agencies needed to arrange alternative accommodation during the initial disruption and in the months that followed. At the time of writing, several government departments, including the Ministry of Transport, New Zealand Defence Force, the Ministry of Defence, and Statistics New Zealand, continue to operate in temporary premises.
1.19
The Treasury forecast that the cost of the Kaikōura earthquake would be about $2-3 billion "over time". The Earthquake Commission (EQC) has estimated claims will cost nearly $0.6 billion, and another $0.2 billion has been recognised so far (to 30 June 2017) on restoring the rail and road transport links. More spending will be needed on transport infrastructure in 2017/18. The economic impact is also expected to be significant. A modelling report prepared for the Ministry of Transport in February 2017 assessed the loss to GDP as between $465 million and $513 million over 24 months from November 2016.7
1.20
Financial reporting for damage and disruption from the Kaikōura earthquake has been a challenge for some government departments in 2016/17. The unexpected nature of earthquake events and their damage and disruption can lead to unplanned public expenditure, which can have consequent implications for financial reporting and the proper authorising of new expenditure. (We discuss this further in Part 3.)
Changes to legislation and standards affecting the audits of public entities
Key audit matters
1.21
Changes to auditing standards in 2016 mean that auditors are now required to include key audit matters in the audit report of certain entities. Key audit matters are the matters that, in the auditor's professional judgement, are of most significance in the audit of the financial statements.
1.22
At this stage, public entities covered by the requirement include mixed-ownership model companies, Auckland Council, and some port companies. The requirement extends to all "FMC reporting entities"8 considered to have a higher level of public accountability for reporting periods ending on or after 31 December 2018.
1.23
Although not required to do so by the new standard, the previous Auditor-General decided, as a matter of good practice, to include key audit matters in the audit report on the Government's financial statements. We have continued this approach for this year. We also included key audit matters in the audit report of the Reserve Bank of New Zealand.
Leadership from the centre
1.24
The State Services Commission (SSC), the Treasury, and the Department of the Prime Minister and Cabinet (DPMC) exercise leadership roles as the central agencies. The State Services Commissioner appoints public service chief executives and manages the process for certain other State sector appointments.
1.25
The SSC is responsible for overseeing the conduct of public servants and the integrity of the system. The SSC has recently investigated matters relating to CERA and the Ministry of Transport. It has also issued new standards designed to support staff on speaking up about wrongdoing that could damage the integrity of the State sector.
1.26
"Functional leadership" aims to improve the effectiveness and reduce the overall costs to government of common business functions. Functional leadership roles continued in 2016/17 for two public service Chief Executives: the Chief Executive of the Ministry of Business, Innovation and Employment continued to be responsible for Government procurement reform and the Government National Property strategy; and the Chief Executive of the Department of Internal Affairs/Chief Government Information Officer continued to be responsible for the ICT Strategy and Action plan.
1.27
In 2016/17, a new functional leadership role for Health and Safety was established. The role is currently held by the Chief Executive of the Department of Corrections.
Changes ahead
1.28
The September 2017 General Election resulted in a change of government. We expect to see the environment that public entities operate in start to change as new policies and priorities are put in place, and as agencies adapt to those new policies and priorities.
1: This includes government departments, State-owned enterprises, Crown entities (including schools, Crown research institutes, and district health boards), Crown and mixed-ownership model companies, Offices of Parliament, Fish and Game Councils, the New Zealand Superannuation Fund, and the Reserve Bank of New Zealand.
2: New Zealand Government (2016), Budget Policy Statement 2017, page 5. Available at www.treasury.govt.nz.
3: New Zealand Government (2016), Budget Policy Statement 2017, page 6. Available at www.treasury.govt.nz.
4: OBEGAL is Operating balance before gains and losses. It represents total Crown revenue less total Crown expenses.
5: The Treasury (2017), Financial Statements of the Government of New Zealand for the year ended 30 June 2017, Wellington, page 28.
6: New Zealand Government (2016), Budget Policy Statement 2017, page 3. Available at www.treasury.govt.nz.
7: m.e. environment (2017), Economic impact of the 2016 Kaikōura earthquake – A report prepared for the Ministry of Transport, Auckland, page 46. Available at www.treasury.govt.nz.
8: FMC reporting entities are those with reporting obligations under the Financial Markets Conduct Act 2013.