Controller update on Government spending on Covid-19

Key points

• Given the scale of the Covid-19 pandemic, the substantial funding available for responding to it, the pace of the Government’s emergency response, and the extraordinary conditions under which the public sector is operating, we will be giving special attention to Covid-19-related spending. In this Update, we focus on spending approved and incurred during April 2020.¹
• On 25 March 2020, Parliament passed legislation authorising the Government to spend up to $52 billion more than the $129.5 billion² already authorised for 2019/20. The extra $52 billion is mainly for the Covid-19 response.
• During April, the Government approved additional spending of $4.15 billion to respond to Covid-19. Of this, $2.7 billion topped up the Business Support Subsidy to $12 billion.
• The Ministry of Foreign Affairs and Trade (MFAT) has been providing emergency assistance to New Zealanders caught overseas during the pandemic. Providing help to New Zealanders overseas in this way has been a long-standing practice across successive governments. MFAT acted with urgency to assist New Zealanders overseas and to help them return home, while working to minimise the cost to the taxpayer. However, its actions lacked legislative backing and have resulted in unappropriated expenditure. MFAT identified the problem and has acted to rectify it. This expenditure will need to be validated by Parliament.

Our role

Our constitutional arrangements require that the Government must not spend public money unless it is approved by Parliament.

The Controller and Auditor-General is often referred to as the public “watchdog” on government spending. An important part of the watchdog role is the Controller function. In this Controller role, we provide assurance to Parliament and New Zealanders that the Government has spent public money in line with the authority it has from Parliament.

Unsurprisingly, the funding approved in the 2019/20 Budget was inadequate for the Government’s Covid-19 response. On 25 March, Parliament approved the Government to spend up to an additional $52 billion; this was mainly to enable the Government to incur expenditure on the Covid-19 measures it had announced and to cover any further measures it might consider necessary. Some of the additional funding is also needed for other activities because the Covid-19 spending that took place before 25 March reduced the amount of funding available for other Government business.

As the independent watchdog on Government expenditure, we will continue to monitor the Covid-19-related spending. We will provide a regular overview to the public and Parliament about the spending and how departments are accounting for it.

How much can the Government spend in 2019/20?

For 2019/20, Parliament has approved the Government (and Officers of Parliament) to spend up to $181.5 billion, through the Act that passed the 2019 Budget³ ($112.2 billion), and the second and third Imprest Supply Acts for the financial year ($69.3 billion).⁴

The third Imprest Supply Act ($52 billion) was passed mainly to cover spending on the response to Covid-19. The Government tightly controls how imprest supply is used, through explicit Cabinet approval or by Cabinet delegation to joint Ministers.⁵

It is important to note that the total amount of money authorised by Parliament is the maximum allowable – it does not represent how much the Government has actually spent, has planned to spend, or will eventually spend.

New spending decisions made during April

The Government continues to announce initiatives as part of its Covid-19 response package. As part of our routine Controller checks, we reviewed the Government’s April financial data on departmental spending. We paid particular attention to new approvals attributed to the Covid-19 response.

During April 2020, Cabinet approved additional spending (under imprest supply) of $5.35 billion. This brings the total amount of Cabinet’s new spending decisions as at 30 April to $25.6 billion, from the $69.3 billion available under imprest supply.

However, it is important to note that the amount of new spending decisions does not represent the increase in overall expenditure because, at the same time as making new spending decisions under imprest supply, the Government is reducing spending previously approved for other areas. For example, while approving new expenditure of $5.35 billion during April, Cabinet also made over 100 adjustments during April to reduce its budget for other areas by about $1.84 billion.⁶

How much is for the Covid-19 response?

Of the $5.35 billion new spending decisions the Government made in April, the Treasury’s records indicate that $4.15 billion is for the Covid-19 response.

Of that $4.15 billion, the most significant item was the $2.7 billion top-up to the Covid-19 Business Support (Wage) Subsidy.

Which areas have received authority for new Covid-19 spending?

Other than the $2.7 billion Business Support Subsidy top-up, about $790 million is for topping up existing appropriations⁷ and $659 million is new spending that was not already covered by appropriations.

Top-ups to existing areas of Government spending

Of the $790 million increase for existing service lines,⁸ the Government approved an extra $296 million for Vote Health. Most of this ($229 million) is allocated to public health services, $26 million is for personal healthcare and support services, and $35 million provides for extra funding to district health boards.

An extra $72 million was approved for Vote Education to support teachers, parents, and curriculum activities. A further $87 million was approved for additional student loans (in Vote Social Development) and $36 million for writing down the value of student loans (in Vote Revenue).

Cabinet also approved the injection of more capital into three departments to help fund the Covid-19 response. A total of $190 million in additional capital was approved. This was for the Ministry of Business, Innovation and Employment – $100 million, the Ministry for Primary Industries – $60 million, and the New Zealand Customs Service – $30 million. These three departments rely heavily on funding for their services at the border through fees, levies, and charges from third parties. The capital injections were to ensure they could cover costs during this period of reduced border (and other economic) activity normally reliant on third-party funding.

New areas of Government spending in response to Covid-19

Figure 1 shows the new appropriations⁹ representing new areas of spending the Government has set up specifically to respond to Covid-19. During April, the Government introduced 10 new areas of spending and approved $659 million to fund them. Figure 1 shows the month in which spending decisions were approved, the amount of spending approved by Cabinet⁵ up to 30 April, and the spending incurred up to 30 April.

Cabinet also approved an extra $2.7 billion for the Business Support Subsidy, which is on top of the $9.3 billion it approved in March, taking the total amount approved to $12 billion. By the end of April, $10.5 billion of this had been spent.

Cabinet has so far approved $14.1 billion for new areas of spending established specifically to respond to Covid-19. Figure 1 shows that $12 billion of that is allocated to the Business Support Subsidy.

Across all the new Covid-19-specific appropriations, $10.6 billion (75%) has been incurred as at 30 April from the $14.1 billion approved. About 98% of that spending is on the Business Support Subsidy.

If we subtract the Business Support Subsidy from the table, the remaining expenditure amounts to $179.3 million incurred against approvals of about $2.06 billion as at 30 April 2020.

Figure 1:
New areas of Government spending exclusively for Covid-19, as at 30 April 2020

Of the new areas introduced in April, only the Essential Workers Leave Support Scheme had incurred expenditure by 30 April. Within a month, $22.3 million of the $34.5 million approved funding (65%) had been spent.

During April, Cabinet reduced the approved expenditure on Financial Assistance to Support Worker Self-Isolation, by $31.5 million to $95 million; most of the $95 million has now been spent.

The “expenditure incurred” figures have not yet been audited. We will confirm the final amounts as part of our annual audits of government departments and of the Financial Statements of the Government for the year ending 30 June 2020.

During May, the Government made more announcements as part of the Budget 2020 package and, specifically, in the “Covid-19 Response and Recovery Fund (CRRF) Foundational Package”.¹¹ As part of our continuing Controller work, we will review the May 2020 financial information later in June.

Have the approvals for new Covid-19 spending been correctly made?

As part of our work on the April financial information, we reviewed a sample of Cabinet decisions approving new spending recorded as being for Covid-19. All of the approvals we examined were made correctly. We confirmed that the nature and purpose of the spending, as stated in the approval documents, is related to the Covid-19 response.

We also examined a sample of approvals for topping up existing appropriations to ensure that the nature of the new spending approval aligns with the legal scope of the appropriation. We have not identified any concerns about the system for approving Covid-19-related spending.

Has the expenditure incurred been approved?

It is important for the Controller to determine whether there has been any spending incurred without the necessary approval. We can report on one area in which the Government’s actions to assist New Zealanders in an emergency lacked legislative backing. The Ministry of Foreign Affairs and Trade (MFAT) identified the problem and has taken steps to find a solution.

MFAT has authority (through the 2019 Budget) to incur expenses to assist “New Zealanders in distress overseas, including in the event of a natural disaster or other large-scale emergency”.¹² Some New Zealanders who were caught overseas when the Covid-19 pandemic struck, with its consequences for travel and lockdown, requested Government assistance. MFAT responded to requests for help and, in some cases, advanced money to New Zealand citizens, under its “Consular Services” expense appropriation. MFAT has helped New Zealanders in this way in the past, with a requirement for the advance to be repaid promptly, and usually within 30 days.

The legal authority provided is for incurring “expenses”, but it doesn’t authorise MFAT to lend money, which would give rise to an asset (that is, a debtor) and be treated as “capital expenditure”. Indeed, the Crown is prohibited from lending money unless authorised under specific legislation, although the Minister of Finance may authorise loans to individuals if he considers it to be in the public interest.

MFAT had been operating under the understanding that it could advance money to New Zealanders with the requirement to repay within 90 days, with the payments treated as “expenses” under its Consular Services appropriation. However, to lawfully lend money, it needed to obtain the Minister of Finance’s express permission as well as Parliamentary authority (by way of appropriation) to incur “capital expenditure”.

Unfortunately, MFAT’s efforts to help New Zealanders have breached existing legislation and resulted in unappropriated expenditure. MFAT identified this issue after an increase in the scale of emergency assistance required by New Zealanders as a result of the Covid-19 pandemic. Our auditors will be working with MFAT to confirm the details of any loans, including the amounts involved, and this will be reported in MFAT’s annual report and in the Financial Statements of the Government for the year ending 30 June 2020. Parliament will be asked to validate this expenditure in due course.

In the meantime, MFAT is working with Ministers to regularise the basis for making emergency advances to New Zealanders overseas and allow it to lawfully provide such assistance when needed in the future.

Other Covid-19 matters

The Auditor-General’s interest in the Government’s Covid-19 response is much wider than his Controller role. We are currently finalising our 2020/21 (and the following two years) work programme, which will be tabled in Parliament in late June. For our work programme, we are considering the implications of the Covid-19 pandemic and the Government’s response as well as other areas of interest in the public sector.

1: The financial data we have examined has not been audited. We will confirm the final amounts as part of our annual audits of government departments and of the Financial Statements of the Government of New Zealand for the year ending 30 June 2020.

2: Budget 2019 ($112.2 billion) and the second Imprest Supply Act ($17.3 billion).

3: The Appropriation (2019/20 Estimates) Act 2019.

4: The first Imprest Supply Act for the year allows the Government to incur expenditure up until the time the Budget is passed into legislation. After that, the second and third Acts (Imprest Supply 2 and 3) allow the Government to incur expenditure in addition to that included in the original Budget for the year. This gives the Government room to respond to changes since the Budget was put together earlier in 2019. The second Imprest Supply Act authorised $17.3 billion and the third Act authorised $52 billion.

5: For ease of reference, we refer to both Cabinet and joint Ministers’ approval as Cabinet approval. Joint Ministers approval is by Cabinet delegation and refers to a requirement to gain the approval of both the Minister of Finance and the relevant Appropriation Minister.

6: The reductions to other areas of expenditure are not netted off against the total amount approved under imprest supply.

7: Appropriations are authorities from Parliament that specify what the Crown may incur expenditure on. Most appropriations specify limits in terms of the type of expenditure, what it can be used for, the maxiumum amount, and the time period. For the purpose of this Update, “Existing appropriations” are those that existed prior to 1 March 2020 and the Government’s Covid-19 response package.

8: That is, appropriations (specific areas of expenditure) that were in place before the Government’s Covid-19 response package.

9: The new appropriations take legal effect if and when they are included in an Appropriation Act. The next Appropriation (Supplementary Estimates) Act is due to be passed in June 2020. Until they take legal effect, Parliament provides authority to incur expenditure through the Imprest Supply Acts, and Cabinet’s prior approval is also required.

10: Expenditure approved under “Worker Redeployment Package” has been redirected to other, existing appropriations in line with its intended application. Hence any expenditure incurred by 30 April would be reported against those other appropriations. (See Beehive release "$100 million to redeploy workers")

11: https://treasury.govt.nz/publications/summary-intiatives/summary-initiatives-crrf-budget2020

12: The authority is provided by the Consular Services expense appropriation in Vote Foreign Affairs and Trade.