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 has been operating, we have given special attention to Covid-19-related spending.
• On 25 March 2020, Parliament passed legislation authorising the Government to spend up to $52 billion more than the $129.5 billion¹ already authorised for 2019/20. The extra $52 billion was mainly for the Covid-19 response. Although Parliament granted approval to spend up to $181.5 billion, we expect actual spending for 2019/20 to be closer to the Government’s estimated spending of $132.7 billion.
• Cabinet approved about $30 billion for its Covid-19 response during 2019/20, of which $26.7 billion related to new spending categories. However, actual spending has been much lower. Of the $26.7 billion that was approved for new spending categories exclusively to deal with the Covid-19 pandemic, only about 57% ($15.1 billion) of that proposed new spending had been incurred as at 30 June 2020.

Our role

New Zealand’s constitutional arrangements require that the Government must not spend public money unless it is approved by Parliament. In most cases, Parliament authorises the Government’s spending of public money through “appropriations”, ² which are passed into law through the annual Budget.

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 on the extent to which the Government has spent public money in line with the authority it has from Parliament. We also provide assurance that any “unappropriated” spending is accurately reported to Parliament and the public, in the Financial Statements of the Government and in the financial statements of individual Government departments.

Extraordinary times

The feature of 2019/20 has been the Covid-19 global pandemic and its effect on people, their health, the economy, and the Government’s fiscal situation. Unsurprisingly, the funding approved in the 2019/20 Budget (May 2019) was inadequate for the Government’s Covid-19 response. On 25 March 2020, Parliament approved Government spending 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 was also needed for other activities.

As the independent watchdog on government expenditure, we have been monitoring the Covid-19 spending as part of our monitoring of all government spending and publishing regular updates.³ In this Update, we report on the main areas of Covid-19 spending up to 30 June 2020 (that is, spending during 2019/20).

How much spending did Parliament authorise for 2019/20? 

It is usual for the Government to reprioritise spending and alter its budget during the year. When the Government wants to spend more on a particular area than was authorised in the Budget, or on a new area, it needs Parliament to approve a revised Budget. Because the revised Budget isn’t authorised until June each year,⁴ the Government obtains interim legal authority through imprest supply in the meantime.

In response to the Covid-19 pandemic, Parliament authorised a considerable sum of money through imprest supply – $52 billion – in addition to the $129.5 billion already authorised for 2019/20. Figure 1 shows how the various Acts of Parliament provided the authority to the Government to incur this much expenditure.⁵

The total amount of spending authorised by Parliament is the maximum allowable – it does not represent how much the Government had planned to spend or has actually spent. Figure 1 shows that, although Parliament authorised up to $181.5 billion in spending, the Government’s revised Budget was $151.8 billion.⁶ The Government’s earlier estimate of actual spending for 2019/20 was lower, at $132.7 billion.⁷ Until the Government’s financial statements for 2019/20 have been completed and audited, we won’t know exactly how much expenditure the Government has incurred for the year. However, according to financial data we received from the Treasury, expenditure against appropriations  appears to be tracking close to the published estimate of $132.7 billion.

Figure 1
Spending authorised by Parliament and budgeted by Government for 2019/20 in $ billions

The amount of extra authority provided through Imprest Supply 3 ($52 billion) indicates the level of uncertainty in March 2020 about how much government expenditure would be incurred to respond to Covid-19. The Government ensured it would obtain sufficient spending authority from Parliament to deal with the pandemic, and overall expenditure has remained within the legal spending limits.

How much spending did the Government approve for Covid-19? And how much has been spent?

As part of our Controller work, we examined the Treasury’s financial information to identify Cabinet⁸ spending approvals directly relating to the Covid-19 response.

We estimate that, for the 2019/20 year, Cabinet approved:

• $3.3 billion for existing spending areas to respond to Covid-19;⁹ and
• $26.7 billion for new, Covid-only initiatives (with around $15.1 billion spent by 30 June 2020 - see Figure 2 in the Appendix).¹⁰

The dollar figures below are based on our calculations from data provided by the Treasury. They are unaudited and could change before our audits are finalised.

Existing spending areas

The largest top-ups approved for existing spending areas were in Tertiary Education ($1.2 billion), Health ($872 million), and Social Development ($489 million). Together, they accounted for 78% of the $3.3 billion. Other portfolios that received top-ups of more than $100 million were Business, Science and Innovation; Police; and Education.

Almost all of the $1.2 billion for Tertiary Education was to give funding certainty to tertiary education institutions in 2019/20.

Around $872 million of extra funding was approved to top-up existing health appropriations. About 78% of that (around $680 million) was allocated to “Public health service purchasing”. This covered initiatives such as contact tracing, personal protective equipment (PPE), the cost of additional specialist medical equipment for treating Covid-19 patients, the cost of laboratory testing to detect Covid-19 virus, funding health providers to maintain and/or increase levels of service during the pandemic, providing managed isolation or quarantine facilities, and costs related to the "Unite against Covid-19" campaign.

Cabinet approved nearly $489 million in top-ups to Social Development spending in response to Covid-19 in 2019/20. Around 39% of that (nearly $189 million) increased funding available for the “Winter Energy Payment”, almost $87 million extra was provided for student loans, and the “Jobseeker Support and Emergency Benefit” was topped up by just over $80 million.

The big items under Business, Science and Innovation were:

• a capital injection of $100 million approved to compensate the Ministry of Business, Innovation and Employment (MBIE) for the loss of revenue from third-party fees and levies (particularly from issuing visas); and
• for “Services to Support the Growth and Development of New Zealand Businesses” ($25 million), to increase government support for business consultancy services for small and medium-sized enterprises during the Covid-19 crisis.

The New Zealand Police received $125 million in top-ups, mainly to fund response costs, including the procurement of PPE and the cancellation of annual leave.

Most of the approximately $108 million top-up for (non-tertiary) education went to “Support and resources for teachers” (to support distance learning), “Support for parents” (funding childcare for essential workers) , and “Primary education” (income support for workers unable to work, or restricted in their ability to work, due to Covid-19 or Public Health Guidelines at Alert Level 3).

Note that these figures for the existing spending areas are the amounts approved by Cabinet; they don’t represent the amount actually spent.  Although (through our audits) we will be able to confirm the amount of total spending under these appropriations, the amounts spent that relate specifically to the Covid-19 response are not easily identifiable. This is because these categories combine Covid-related spending with non-Covid related spending.

Covid-only initiatives

As well as topping up existing areas of spending (about $3.3 billion), the Government introduced many new spending categories that were set up exclusively to deal with the Covid-19 pandemic and its effects (we refer to these as Covid-only initiatives). These are “new areas” of spending, approved through new appropriations.

The dollar amounts for the Covid-only spending categories are presented in Figure 2 (in the Appendix). The expenditure incurred data in Figure 2 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 ended 30 June 2020.

For the year ended 30 June 2020, $26.7 billion of public money was approved for Covid-only initiatives.¹¹ As at 30 June, about 57% of authorised spending ($15.1 billion) had been incurred. This gap highlights the uncertainty about how much spending authority would be used for the Covid-19 response. This is particularly so for the Small Business Cashflow (Loan) Scheme, for which the uptake at 30 June represents just 27.5% of the amount set aside for the loans up to that point. And some circumstances have changed since initial spending approvals were sought.

The top 10 areas of Covid-only initiatives by spending¹² to 30 June 2020 were:

1. Business Support (Wage) Subsidy Scheme - $12.2 billion
2. Small Business Cashflow (Loan) Scheme - $1.4 billion
3. Initial Fair Value Write-down of the Small Business Cashflow Loans - $943.1 million
4. National Land Transport Fund Borrowing Facility - $125.0 million
5. Capital Injection to New Zealand Post Limited - $80.0 million
6. Capital Injection to Airways New Zealand - $70.0 million
7. Financial Assistance to Support Worker Self-Isolation - $53.4 million
8. Crown Research Institutes - Covid-19 Response and Recovery - $45.1 million
9. Maintaining Airfreight Capacity - $38.6 million; and
10. Meeting Fees, Charges and Levies on behalf of Airlines - $32.6 million.

The largest area of Covid-only spending was on the Business Support (Wage) Subsidy. A sum of $15.2 billion was approved to cover the period to 30 June 2020, with around $12.2 billion paid out. The other large area of spending was on the Small Business Cashflow (Loan) Scheme, for which $5.2 billion was approved for 2019/20, with a little over $1.4 billion in loans made by 30 June. Another $943.1 million was incurred in writing down the loans to their “fair value”. (We provided an explanation of the Loan Scheme, including the fair value write-down of the loans, in our previous Controller update on Government spending on Covid-19.)

Together, the Covid-19 Business Support (Wage) Subsidy and Small Business Cashflow (Loan) Scheme make up over 96% of the $15.1 billion incurred on Covid-only initiatives to 30 June 2020.

The National Land Transport Fund Borrowing Facility is to help Waka Kotahi New Zealand Transport Agency (NZTA) to manage revenue shocks from the effect of Covid-19 on the National Land Transport Fund. The Fund is heavily dependent on fuel excise duty, and the Government’s financial statements at 31 May 2020 show revenue from petroleum fuels excise tracking at $55 million below forecast.¹³ Parliament approved a multi-year appropriation for up to $425 million until 30 June 2022, of which $125 million was drawn down as at 30 June 2020.

New Zealand Post Limited drew on the first tranche ($80 million) of available capital injections in June 2020, with another $70 million available until 30 June 2021 if needed. These injections are to help mitigate the adverse effects of Covid-19 on the company’s revenue from the decline in mail and parcel volumes.

Airways New Zealand¹⁴ is the State-Owned Enterprise responsible for New Zealand’s air navigation service and air traffic management. Its revenue from commercial charges was affected by the Covid-19 pandemic. The Government injected $70 million in funding to cover the revenue lost from the downturn in air traffic.

The “Financial Assistance to Support Worker Self-Isolation” initiative was set up for people who were unable to work because they were sick, self-isolating, or caring for dependants. This initiative was folded into the Business Support (Wage) Subsidy Scheme on 27 March.¹⁵

Crown Research Institutes received the full amount of Covid-19 response and recovery funding approved for them: $45.1 million. This funding is to cover shortfalls in commercial revenue due to Covid-19 and support the Covid-19 recovery.

Although $330 million had been approved for “Maintaining Airfreight Capacity”, $38.6 million had been incurred by 30 June 2020. This funding was to support airlines and other aviation carriers to maintain airfreight capacity. Another $74 million had been approved for “Meeting Fees, Charges, and Levies on behalf of Airlines”, with $32.6 million incurred by 30 June 2020. Airlines have experienced a significant decline in passenger numbers and passenger-derived revenue, and this funding was to cover all passenger-based fees, charges, and levies and all Airways fees and charges that are normally required to be paid by airlines.  Parliament has approved multi-year appropriations for both of these spending areas, which expire on 30 June 2021.

The bigger picture

Public spending in response to the Covid-19 pandemic is continuing into 2020/21, as reflected in the Government’s Budget 2020 information¹⁶ and Covid-19 Response and Recovery Fund (CRRF).¹⁷

The May 2020 Budget covering the 2020/21 year allocated just over $130.0 billion over all areas of public spending,¹⁸ with an extra $56.5 billion authorised through the latest Imprest Supply Act.¹⁹

As well as the demands on the public purse from Covid-19 related spending is the effect on Crown revenue (mainly taxes) from decreased economic activity. Also, some Government measures implemented to help taxpayers during Covid-19 are also expected to decrease or defer the tax take to some extent. Such measures include:

• increasing the residual income tax threshold for being required to pay provisional tax;
• increasing the low-value asset write-off threshold;
• bringing forward the application date of new refundability rules for research and development spending;
• allowing Inland Revenue to waive interest on a late payment (use of money interest) if the late payment was caused by Covid-19;
• removing the hours test from the in-work tax credit;
• a temporary loss carry-back regime, which enables a business to carry back and offset a loss in a particular year against its taxable income for the 2018/19 or 2019/20 income years and receive a refund of any tax paid;
• allowing Inland Revenue to change due dates, timeframes, or other procedural requirements for tax returns for taxpayers affected by Covid-19; and
• increasing the threshold amount of individual income tax assessments automatically written off.

The combination of higher public spending and lower Crown revenue will affect the Government’s financial position in the future. The unaudited financial statements issued as part of the PREFU²⁰ shows borrowings of $152.7 billion as at 30 June 2020  (30 June 2019: $110.2 billion).

We are currently auditing the Financial Statements of the Government for the year to 30 June 2020, after which we will issue our opinion on the Government’s financial position and performance for the 2019/20 year.

Appendix

Figure 2
Areas of Government spending exclusively for Covid-19 by expenditure incurred during 2019/20

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

2: Appropriations are authorities from Parliament that specify what the Crown may incur expenditure on (specific areas of expenditure). Most appropriations specify limits in terms of the type of expenditure, what it can be used for, the maxiumum amount, and the time period.

3: https://oag.parliament.nz/reports/covid-19

4: Through the Appropriation (Supplementary Estimates) Act.

5: For 2019/20, Parliament approved the Government (and Officers of Parliament) to spend up to $181.5 billion: $112.2 billion through the Act that passed the 2019 Budget (The Appropriation (2019-20 Estimates) Act 2019), $17.3 billion through the Imprest Supply (Second for 2019-20) Act 2019, and $52 billion through the Imprest Supply (Third for 2019-20) Act 2020.

The first Imprest Supply Act for the year allowed the Government to incur expenditure up until the time the Budget was passed into legislation. After that, the second and third Acts (Imprest Supply 2 and 3) allowed the Government to incur expenditure in addition to that included in the original Budget for the year. This gave the Government room to respond to changes since the Budget was put together earlier in 2019. The second Imprest Supply Act for the year is customarily passed at the same time as the Budget Act; however a third Imprest Supply Act is unusual.

6: As per the Addition to the Supplementary Estimates of Appropriations 2019/20, published on 16 June 2020, https://www.budget.govt.nz/budget/2020/estimates/summary-tables/suppestimates-vol2.htm

7: As per the Estimates of Appropriations 2020/21, published on Budget Day 14 May 2020, https://www.budget.govt.nz/budget/2020/estimates/summary-tables/estimates.htm

8: 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.

9: That is, through appropriations that existed pre-Covid.

10: These required new appropriations to be established.

11: Cabinet initially approved the new expenditure under the Imprest Supply Acts. Parliament has subsequently authorised the increases through the Appropriation (2019-20 Supplementary Estimates) Act 2020.

12: Unaudited figures.

13: See treasury.govt.nz/system/files/2020-07/fsgnz-11mths-may20.pdf, page 22.

14: Legal name: Airways Corporation of New Zealand.

15: See www.beehive.govt.nz/release/covid-19-further-steps-protect-new-zealanders%E2%80%99-jobs

16: https://treasury.govt.nz/publications/budgets/budget-2020

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

18: That includes Covid and non-Covid related spending across operating expenses, capital expenditure, benefits and related expenses, and other spending categories.

19: Imprest Supply (Second for 2020-21) Act 2020.

20: The Treasury, Pre-election Economic and Fiscal Update 2020, 16 September 2020, page 144; https://www.treasury.govt.nz/publications/efu/pre-election-economic-and-fiscal-update-2020

21: Expenditure approved under “Worker Redeployment Package” has been redirected to other, existing appropriations in line with its intended application. Hence the amount budgeted against this category has reduced over time. (See Beehive release "$100 million to redeploy workers")