Part 1: The operating environment for central government

Observations from our central government audits: 2020/21.

In this Part, we discuss:

Taken together, the pressure on the public sector from delivery of business-as-usual services, responding to Covid-19 and implementing various reforms has been significant and sustained.

An operating environment under significant pressure

A key feature of the central government operating environment in 2020/21 was the pressure that public organisations and their staff were under.

Responding to Covid-19 has placed significant demands on public servants. For many, this pressure has been relentless since Covid-19 emerged. Despite this pressure, the public sector has demonstrated its resilience and ability to adapt and deliver services.

However, there are consequences from this high-pressure environment. Some agencies report high staff turnover, significant vacancies in key areas, and staff leave balances are increasing. Opening borders might not immediately resolve workforce shortages. The reforms have also increased uncertainty for staff in some organisations. Agencies report staff salary pressures as organisations seek to recruit and/or retain key roles from a limited resource pool.

Capability and capacity gaps, other constraints caused by Covid-19, and the Government's reform agenda pose risks to probity and value for money of public spending. We have already seen instances where the pressure to deliver has resulted in poor processes being followed and high-trust policies not having the level of post-payment verification we would have expected.

There are risks not just in immediate service delivery but also in the medium to long-term capability and capacity of organisations to implement complex reforms, progress and deliver benefits from new investments and implement continuous improvements to their core activities.

Careful prioritisation and planning of activity, ensuring that key controls continue to operate, and maintaining staff well-being are critical for ongoing success.

Responding to Covid-19

In general, the public sector has responded well to the challenges of Covid-19 while continuing to deliver essential services to New Zealanders.

However, there are challenges ahead in ensuring that the significant new investments made to support the response to, and recovery from, Covid-19 deliver value for money. As well as continuing to respond to the immediate impacts of Covid-19, public organisations will also need to prepare and plan for the medium to longer term implications of the pandemic.

There have been significant changes to the revenue some agencies relied on to deliver services – for example, transport infrastructure funded through the national land transport fund and border services funded through cost-recovery. The effect of Covid-19 on areas such as tourism and international students has affected public and private organisations.

There are also emerging issues that might become longer-term trends, such as lower school attendance rates or less public transport patronage as people work from home. And there might also be longer-term issues, such as continuing to respond to new Covid-19 variants and the impact on demand for mental health services.

In March 2020, the Government established a $12.1 billion initial package that funded key initiatives such as the Wage Subsidy Scheme and business tax changes. In Budget 2020, the Government signalled increased funding of up to $50 billion for New Zealand's Covid-19 response and recovery through the Covid-19 Response and Recovery Fund, making a total of $62.1 billion available. As at 30 June 2021, the Government had allocated most of the Fund, with just $4.7 billion unallocated.

In June 2021, responding to calls for more visibility over the Covid-19 expenditure, the Treasury began to report periodically on this expenditure.1 This includes expenditure incurred on initiatives announced in March 2020 and subsequent initiatives that have been funded through the Covid-19 Response and Recovery Fund. As at 30 June 2021, expenditure incurred against appropriations created as a result of the response to Covid-19 totalled $22.1 billion. The Wage Subsidy Scheme was the Government's largest area of spending in response to Covid-19 (more than $13 billion as at 30 June 2021).

In the first iteration of the Wage Subsidy Scheme, the Government used a "high-trust" approach so it could make payments to employers quickly. This was to help employees retain their connections to their employers during lockdown and maintain a level of income. However, a high-trust approach has greater risks of fraud and error. In our 2021 report on the Wage Subsidy Scheme, we made several recommendations. One recommendation was that, when using a high-trust approach, public organisations put in place a robust verification process for after payments are made.

When large amounts of public money are spent quickly, it is essential to have good-quality decision-making, strong processes, and effective assurance, monitoring, and reporting practices to prevent the risks of poor public spending. The Government and the public sector need to provide transparency to Parliament and the public on what has been spent and whether this has delivered what was expected.

The Government's reform agenda

The Government's reform agenda in 2020/21 was significant and further reforms have been signalled. The Government is introducing major reforms, including to the health sector, the tertiary education sector, water management, and resource management. The Government is also increasing its response to climate change, including requiring the public sector to be carbon neutral by 2025.

The health sector reform announced in April 2021 will disestablish all 20 district health boards and a new Crown entity, Health New Zealand, will be established. A new Māori Health Authority will work alongside Health New Zealand, with the aim of achieving equitable health outcomes for Māori. A new Public Health Agency will also be set up in the Ministry of Health. These reforms build on earlier changes in the health system including the establishment of the Mental Health and Wellbeing Commission in February 2021.

There are also proposed changes to the traditional roles and functions of local government. As well as the Three Waters Reform Programme, there are reforms of the resource management system and the Future for Local Government review is currently under way.

One of the most common themes to emerge from the initial work on the Future for Local Government review has been that the relationship between local and central government needs to improve. Some issues, such as addressing the impacts of climate change, require a collective response from all parts of government. There is an opportunity through the reforms and reviews under way to reset the relationship between central and local government.

To implement the Government's reform agenda, there is much to do in a short time frame. This presents increased risks to the delivery of services, the quality of the transition to new arrangements, and the effective use of public funds. The loss of capability and capacity, including institutional knowledge, is also a risk that needs to be managed.

The various reforms under way present a rare opportunity to improve the accountability of the public sector, to both Parliament and the public.

Public organisations of the scale of Health New Zealand and Te Pūkenga will provide critical services and use significant public resources. Ensuring that accountability arrangements for these organisations and others in the Government's reforms are fit for the 21st century will be an area of interest for my Office and, I hope, a key focus for Parliament as it passes legislation to enable the reforms.

1: Some initiatives represented an extension of existing government activities and fell within existing appropriations. Expenditure incurred under pre-existing appropriations is not included in this data release.