Part 1: The operating environment for central government

Central government: Results of the 2018/19 audits.

This Part describes the operating environment for central government agencies in 2018/19. Government priorities and expectations direct how public organisations plan, operate, spend, and report their spending to account for the funding they have been allocated through the Budget process. Therefore, the Government's financial management objectives provide an important context for our audit of the Financial Statements of the Government of New Zealand for the year ended 30 June 2019 (the Government's financial statements).

Budget 2018 settings and the Government's priorities

The Budget allows the Government to propose the allocation of funding towards its policy objectives. This is an important step in the public management and accountability cycle. The funding approved by Parliament, based on the Government's Budget, determines how much can be spent on different functions and services. The first full year the Government could set priorities was 2018/19.

In its 2018 Budget, the Government set out how much funding would be available in 2018/19 for New Zealand's health services, employment measures, school funding, and many other items of government expenditure. Out of total proposed spending of $102 billion, social development ($24 billion), health ($18 billion), and education ($12 billion) together accounted for more than half of the total. Capital expenditure accounted for about $12 billion.

In Budget 2018, the Government allocated investment towards five high-level priorities:

  • rebuilding critical public services;
  • promoting economic development and supporting the regions;
  • taking action on child poverty, housing, and homelessness;
  • enhancing and protecting our natural resources; and
  • enriching New Zealand's culture and identity.

Most new operating spending allocated through the Budget was directed at "rebuilding critical public services".

The Government's financial statements provide an account of government spending and, as spending shifts over time between different areas, offers information about how government decisions and prioritisation translate into funding for different services or investments. For example, readers of the Government's financial statements can see that total Crown expenses for social security and welfare, health, and education all increased between 2017/18 and 2018/19, as did their share of gross domestic product (GDP).

Although not a large percentage of total spend, another example of funding shaping the operating environment was the focus on supporting the regions as part of the Government's economic strategy. An announcement was made in December 2017 of a $1 billion investment each year for three years through the Provincial Growth Fund. A Provincial Development Unit was established in 2018 in the Ministry of Business, Innovation and Employment (MBIE) to support the delivery of government funding to enhance economic development opportunities in New Zealand's regions.

New Zealanders will have an interest in knowing whether the funding was used for the regions as intended. We intend to report separately on our work looking at the Provincial Growth Fund. Spending through the Provincial Growth Fund is separately identified in the Government's financial statements (see Part 2).

Change in the central government sector

In the past 18 months, the Government initiated several in-depth reviews or institutional changes that cover wide-ranging sectors such as welfare, health, education, justice, tax, housing, and environmental areas such as water reform. The sectors under review affect significant numbers of New Zealanders, their entitlements, or the services provided to them. These sectors are also associated with a large percentage of central government spending.

For that reason, we take a close interest in how well key policy changes are implemented. Significant changes to policy and the structure of the central government sector are usually reflected in Budget allocations and subsequent reporting in the Government's financial statements.

Although some fundamental decisions have already been made, their financial implications are not yet visible in 2018/19 reporting. For example:

  • the establishment of a single New Zealand Institute of Skills and Technology from 1 April 2020, which brings together the 16 current institutes of technology and polytechnics; and
  • the Provincial Growth Fund, where funding and policy implementation crosses portfolios and financial implications stretch into out-years.

Institutional, policy, and legislative changes to the housing sector are also continuing. The Ministry of Housing and Urban Development was created on 1 October 2018. Public housing is a significant Crown asset, with housing stock valued at $30.2 billion at 30 June 2019. This is almost a third of the Government's total land and buildings assets (valued at $96.1 billion).

Other reviews are complete but still have work under way on subsequent policy changes (such as the report by the Welfare Expert Advisory Group). Some reviews might bring significant changes but are still in draft stages (health), others are being consulted on (such as the discussion document Shaping a Stronger Education System with New Zealanders), or are still under development (such as Hāpaitia te Oranga Tangata: Safe and Effective Justice).

Arguably, the most far-reaching review is the New Zealand Health and Disability System Review. Its intention was to identify opportunities to improve the performance, structure, and sustainability of the health and disability system. The Government Inquiry into Mental Health and Addictions, a more narrowly focused review, reported in late 2018.

We continue to take an interest in the financial, reporting, performance, and accountability implications of reviews such as these.

The pending transformation of the public sector – implications for reporting

In September 2018, the Government began to consult on reforms to the public sector – in particular, changes to the State Sector Act 1988 to make public services more responsive to New Zealanders. It is proposed that the State Sector Act will be repealed and replaced with a new Public Service Act.

The intention is to enshrine the purpose, values, and principles of the New Zealand public service in the new Public Service Act. Principles like political neutrality, free and frank advice, and merit-based appointments will be embedded in legislation. The new Act is intended to strengthen agencies' collective responsibility. The new Act will also set out the public service responsibility in relation to the Treaty of Waitangi (te Tiriti o Waitangi).

We will follow with interest how these changes are implemented. We have an enduring interest in the public's trust and confidence in the public sector. As part of our work, we will seek to influence and support future public sector management reforms to strengthen the accountability system, further encourage public organisations to be open and transparent, and provide reliable, meaningful, and timely information in an accessible way. This is because accountability to Parliament and the public cannot be compromised even as new ways of working are established.

New institutional arrangements have already been created to encourage a different way for sectors to work together. For example, a Joint Venture Unit for Family Violence and Sexual Violence has been set up to tackle the long-standing issue of family violence. Although the Ministry of Justice is hosting it, the arrangement is deliberately designed to link relevant agencies such as Oranga Tamariki, the Ministry for Social Development, and the New Zealand Police. These new types of institutional arrangements also require new accountability and reporting arrangements.

Related changes to how central government agencies plan and report are also already under way as part of the implementation of the Government's wellbeing approach. The idea is for the government of the day to select particular wellbeing objectives as priorities to inform its fiscal policy, spending, and other decisions. Under proposed legislation (at the time of writing), the Treasury would report annually on wellbeing indicators that track long-term trends in wellbeing throughout New Zealand. We would like to see the report gain general acceptance and credibility with readers. Appropriate standards and independent assurance processes would assist that objective.

The Treasury has advanced work on its Living Standards Framework. It released a dashboard in December 2018 that contains data measures for the main components of the Living Standards Framework that determine inter-generational wellbeing (natural, human, social, financial, and physical). The Treasury will use the Living Standards Framework to advise successive governments about the likely effects of their policy choices on New Zealanders' living standards and wellbeing over time. One example of this was the Government's 2019 Wellbeing Budget setting priorities for 2019/20 (which this report does not cover).

The Treasury also has a Public Finance System modernisation programme of work that looks to lift long-term resilience through applying a wellbeing approach to agency reporting and improvements to strategic asset management. The programme also looks for smarter regulation and value creation through reviews of budget process, appropriations structure, and accountability mechanisms.

Although the wellbeing approach and associated reviews were still forming during the 2018/19 reporting period covered by this report, we will consider how we can best account for it in our work as it evolves, including in our auditing of the Government's financial statements and the underlying financial and performance reporting of government agencies.