Part 1: The operating environment for central government

Central government: Results of the 2017/18 audits

1.1
This Part describes the operating environment for central government agencies in 2017/18. It 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).

1.2
The Government's financial statements consolidate the many and varied organisations associated with central government.2 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 directly affect how organisations plan, prioritise, operate, spend, and report funding allocated through the Budget process and approved by Parliament.

Government priorities at the start of 2017/18

1.3
When considering the operating environment for central government organisations, it is important to understand the priorities of the government of the day. Those priorities set the overall direction of the organisations, and can require them to focus their efforts on achieving particular policy objectives. In this regard, 2017/18 was a year of two halves, beginning with the priorities set by the previous government and finishing with those of the current coalition government. The government priorities set at the start of the year, as expressed through the Budget Policy Statement, were:

  • responsibly manage the Government's finances;
  • build a more productive and competitive economy;
  • deliver better public services within tight financial constraints; and
  • rebuild Christchurch and respond to the Kaikōura earthquakes.

1.4
The shorter-term fiscal priorities were:

  • maintaining rising OBEGAL3 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) in 2020;
  • if economic conditions allow, beginning to reduce income taxes, and
  • using any further financial leeway to reduce net debt faster.

Change of government during 2017/18

1.5
In October 2017, a coalition government was sworn in. It set out its immediate priorities through a 100-day plan with 18 objectives, which spanned education, housing, health, child poverty, and climate change. Some of the objectives were completed or progressed to the point that they had an immediate effect on the operations of the organisations that we audit, and had to be accounted for in the organisations' financial statements. Other work done as part of implementing the 100-day plan set in motion events that will have more of an effect in subsequent years. We describe examples of both in the rest of this Part.

1.6
The new Government also outlined its economic strategy to improve the wellbeing and living standards of New Zealanders through sustainable and inclusive growth. Underpinning the strategy, the Government set in place Budget Responsibility Rules and stated an intention to abide by them. These rules are:

  • Deliver a sustainable operating surplus across an economic cycle.
  • Reduce the level of net core Crown debt to 20% of GDP within five years of taking office.
  • Prioritise investments to address the long-term financial and sustainability challenges facing New Zealand.
  • Take a prudent approach to ensure expenditure is phased, controlled, and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to GDP ratio.
  • Ensure a progressive taxation system that is fair, balanced, and promotes the long-term sustainability and productivity of the economy.4

1.7
The objective to return core Crown debt to 20% of GDP by 2021/22 was reached, ahead of forecast, by the end of 2017/18, at which point core Crown debt was 19.9% of GDP. Budget 2018 decisions are expected to result in net debt increasing above the target before decreasing again.

Immediate priorities of the new Government

1.8
For some public organisations, the change in government meant an immediate re-focusing of their efforts as they worked to implement policy initiatives from the new Government's 100-day plan and the agreements between coalition partners. Significant policy initiatives in 2017/18 were:

  • Education: The Tertiary Education Commission implemented the policy for first-year fees-free tuition for tertiary students in about six weeks, to take effect from 1 January 2018. Our audit of the Tertiary Education Commission found no issues with the accounting treatment of the implementation.
  • Housing: As part of a policy to increase the national housing base, the KiwiBuild programme was set up in the Ministry of Business, Innovation and Employment (MBIE). The programme's aim is to build 100,000 homes for first home buyers in the next 10 years. Another change in housing that had an effect on our audits was the Government cancelling the sale of state houses, announced in December 2017.
  • Regional development: The Government has committed to providing $3 billion over three years to improve the productivity potential of the regions through the Provincial Growth Fund. The fund was launched in February 2018. It is administered through the newly established Provincial Development Unit in MBIE, with an Independent Advisory Panel to assist decision-making.
  • Pike River: A new public service department, Te Kāhui Whakamana Rua Tekau mā Iwa – Pike River Recovery Agency, started operating on 31 January 2018. Its strategic objective is to stage a safe re-entry and recovery of the Pike River mine drift (access tunnel). The intention is that the department will be disestablished once the Pike River site has been rehabilitated and returned to the Department of Conservation.

Better Public Services discontinued

1.9
The previous Government launched the Better Public Services programme (BPS) in March 2012. As part of the BPS agenda, the Government set targets for 10 "Results", which were grouped into Result Areas. Chief executives were assigned responsibility for delivering Results, often in partnership with other organisations. The State Services Commission published overall results on its website.

1.10
In January 2018, the new Government announced that it would not continue the BPS programme in the same form. The State Services Commission stopped publishing BPS results on its website. Reporting on BPS results did not stop altogether, because some Crown entities had included BPS results in their Statements of Performance Expectations (for example, infant immunisation results for district health boards). These Crown entities reported results in their 2017/18 annual reports. The Ministry of Health reported aggregated BPS results that were also national health targets in its 2017/18 annual report.

New focus for reporting on performance

From social investment to wellbeing

1.11
The previous Government emphasised a social investment approach, based on using information and technology to identify where additional early investment could improve long-term outcomes. This involved identifying people who are most at risk of poor outcomes later on in life, better understanding their needs and what works for them, and then adjusting services accordingly. As well as potentially improving outcomes for individuals, the expectation was that early investment could reduce the number of New Zealanders relying on social services and the overall costs for taxpayers.

1.12
The new Government has shifted the emphasis from social investment to wellbeing. At a strategic policy level, as part of a suite of changes to Cabinet Committees, it has replaced the Social Policy Cabinet Committee with the Social Wellbeing Cabinet Committee. The Social Wellbeing Board (formerly the Social Investment Board, which was established in July 2017) helps co-ordinate efforts by government departments and supports the delivery of related strategies.

Living Standards Framework

1.13
The Treasury has been developing its Living Standards Framework for a number of years and the new Government has emphasised this approach in its public statements. The current iteration of the framework has three elements: current wellbeing using domains based on the OECD Better Life Index, with some slight adjustment and the inclusion of cultural identity; future wellbeing based on four capitals (human, social, financial/physical, and natural); and risk and resilience. It is intended to support formation of long-term (inter-generational) views on wellbeing outcomes, and the influence of policy decisions and actions on them, by supplementing income-based measures, like per capita GDP in economic policy analysis, with indicators of current and long-term wellbeing.

1.14
Associated with this is work by Statistics New Zealand to develop a broader suite of wellbeing indicators called Indicators Aotearoa New Zealand. In the longer run, these indicators will support the data needs of the Living Standards Framework, among other internal and external reporting requirements. The Government is also proposing to embed the concept of wellbeing in the Public Finance Act 1989.

1.15
There is potential for this to have a significant effect on what public organisations measure and report on. In our work we have previously found that public organisations can struggle with outcome measurement and reporting, when compared with the more straightforward reporting on output measures. Reporting through the Living Standards Framework Dashboard and Indicators Aotearoa New Zealand could assist public organisations in their efforts to identify and measure the effect of their work in producing results and making a difference. There is also work underway to increase the focus on wellbeing in agency performance reporting.

Legislative changes in development

1.16
The new Government initiated policy work in a number of portfolios that is likely to result in significant changes in the near future. The changes will affect both the operations of government and the way it measures and reports on its financial and service performance.

State sector and public finance legislation

1.17
The State Sector and Crown Entities Reform Bill was introduced in February 2018 and was enacted as amendments to the Crown Entities Act 2004 and the State Sector Act 1988, which came into effect in October 2018. The amendments strengthen the role of the State Services Commissioner in relation to Crown entities, providing for the Commissioner to approve terms and conditions of employment for chief executives. They also strengthen the Commissioner's powers when carrying out investigations under the State Sector Act 1988.

1.18
Further changes to the way the state sector is managed are being considered, with the State Services Commissioner consulting on proposed changes to the State Sector Act 1988. The proposed changes are intended to improve the flexibility and agility of the state sector to deliver on joint outcomes, raise the capability and diversity of skill sets at the leadership level, and consolidate the agreed core values expected of public servants.

1.19
As part of a broader package of reforms to the Public Finance Act 1989, the Treasury is working on a proposal to establish an Independent Fiscal Institution (IFI). The IFI is intended to provide independent evaluation of fiscal policy performance; support parliamentary scrutiny of public finances and fiscal policy; and provide independent costings of political party policies. The Public Finance Act would need to be amended to enable the IFI to operate in the manner proposed.

Climate change

1.20
In June 2018, the Government began consulting on a proposed Zero Carbon Bill. One of the provisions in the Bill is the establishment of a new public entity, the Climate Commission.

Reducing child poverty

1.21
The Government introduced the Child Poverty Reduction Bill in January 2018. The Bill, if passed, will establish measures of child poverty, require governments to set targets against those measures to reduce child poverty, and amend the Public Finance Act to require the inclusion of a report on child poverty in the information supporting the annual Appropriations Bill. The Government Statistician would have a central role in the proposed framework under the new legislation, reporting on results and defining the terms to be used in the reports.

1.22
As reported back by the Social Services and Community Committee, the Government would be required to start reporting against targets in 2018/19, and to identify and report on child-poverty-related indicators. The Government has already set 3-year and 10-year outcome targets for reducing child poverty ahead of the Bill's passage.

1.23
Embedding outcome measures and requirements to set targets and indicators in legislation reflects a progression of the expectation that governments will be able to measure and account for progress in achieving results, not just delivering outputs.

Structural change ahead

1.24
Since 30 June 2018, the Government has announced further changes involving new public organisations. These include:

  • The Ministry of Housing and Urban Development was launched on 1 October 2018. This new public service department combines housing policy, funding, and regulatory functions from the Ministry of Business, Innovation and Employment (including the KiwiBuild programme), the Ministry of Social Development, and the Treasury.
  • The Infrastructure Minister announced in August 2018 the Government's intention to establish a new infrastructure body in 2019 to support the improvement of strategy, planning, and project delivery of New Zealand's infrastructure in the public and private sectors. The Government and the Treasury put out a paper on the proposal.
  • Given the transition to a post-Treaty of Waitangi settlement phase, the Government recently announced plans to set up a new departmental agency to oversee the Government's work with Māori, to be called the Office for Māori Crown Relations: Te Arawhiti. It will bring several existing units in different departments into one entity. These include the Crown/Māori Relations Unit, the Office of Treaty Settlements, the Marine and Coastal Area (Takutai Moana) Team, and the Settlement Commitments Unit.

Further changes on the horizon

1.25
The Government has started several programmes and reviews looking in depth at different functions. Unlike the initiatives described above, these are still in the review phase and have not yet resulted in any changes or legislative proposals. However, given the scope of the work being done, significant changes might result from the work described below.

Health

1.26
The Government established two independent reviews in the health sector. The first was the Ministerial Inquiry into Mental Health and Addictions, established in January 2018 and scheduled to report in late 2018. The Inquiry has been tasked with reporting on how New Zealand is preventing mental health and addiction challenges and responding to the needs of people with those challenges; and recommending specific changes to improve New Zealand's approach to mental health.

1.27
The second, and potentially more far-reaching exercise, is the New Zealand Health and Disability System Review that was announced in May 2018. The terms of reference and panel membership were approved in August and the final report is expected in March 2020. The reviewers have been tasked with identifying opportunities to improve the performance, structure, and sustainability of the system. The goal is to achieve equity of outcomes, and contribute to wellness for all, particularly Māori and Pacific peoples.

Education

1.28
In March 2018, the Minister of Education announced terms of reference for a review of Tomorrow's Schools, which is being led by an independent taskforce that was appointed in April 2018. The review will focus on changes that might be needed to governance, management, and administration in education for children and young people aged 5-19 years. The review's report is expected in late 2018.

1.29
A second education initiative is the ITP Roadmap 2020 project, which focuses on the future of institutes of technology and polytechnics (ITPs). The project, which is scheduled to report in December 2018, is being led by the Tertiary Education Commission. It is a response to challenges that threaten the financial viability of ITPs.

Tax

1.30
In November 2017, the Minister of Finance released terms of reference for the Tax Working Group, set up to examine improvements to the structure, fairness, and balance of the tax system. The Tax Working Group issued an interim report in September 2018 and is scheduled to issue a final report no later than February 2019.

Justice sector

1.31
In July 2018, the Minister of Justice launched Hāpaitia te Oranga Tangata: Safe and Effective Justice, which is a programme of work aimed at reforming the criminal justice system. The programme is supported by an advisory group.

2: This includes government departments, State enterprises, Crown entities (including schools, Crown research institutes, and district health boards), Crown and mixed-ownership model companies, Offices of Parliament, organisations listed in Schedules 4 and 4A of the Public Finance Act 1989, the New Zealand Superannuation Fund, and the Reserve Bank of New Zealand.

3: OBEGAL is Operating balance before gains and losses. It is the total Crown revenue minus total Crown expenses.

4: See the 2018 Budget Responsibility Rules on the budget website (www.budget.govt.nz).