Appendix: How appropriations work

Observations from our central government work in 2022/23.

Who approves the spending of public money and how?

Each year, the Government puts forward its expenditure proposals for the coming financial year in the Budget (usually in May). It formally presents its proposed Budget to Parliament in the Appropriation (Estimates) Bill, along with various explanatory documents. This is the first appropriation Bill for the financial year.

The Bill sets out estimates of what will be spent under each ministerial portfolio. In general, every ministerial portfolio associated with a department has a corresponding "Vote" in the Budget (for example, Vote Health sets out all the expenditure in the health portfolio). Each Vote is made up of several specific appropriations. Each appropriation sets out:

  • the maximum amount of expenditure being approved;
  • the scope (that is, what the money can be used for); and
  • the date on which the appropriation lapses (most appropriations last for one year).

Once Parliament has considered and passed the Bill, it becomes law as an Act. In general, any expenditure outside what has been approved in this Act of Parliament will be unlawful.

The Budget generally does not become law until several weeks into the financial year.

If the Appropriation (Estimates) Bill is not passed before the financial year begins, how can the Government spend money lawfully in the meantime?

The Appropriation (Estimates) Bill needs to be passed within four months of Budget Day. From 1 July until the Bill becomes law, the Government must continue to operate and spend public money. To cover this period, interim authority is provided through an Imprest Supply Act, which is enacted before the financial year begins. The first annual Imprest Supply Act therefore allows the Government to incur expenditure before the Budget for that year is enacted in legislation. The expenditure authority under this Imprest Supply Act is repealed when the Appropriation (Estimates) Act comes into force.

There are usually at least two Imprest Supply Acts in each financial year.

What happens if things change during the year?

The changing nature of government activities and unexpected demands means that it is rarely possible to foresee all future expenses and capital expenditure. The system recognises the need for some flexibility to respond to changing events.

A second Imprest Supply Act for the year is enacted, usually at the same time as the Appropriation (Estimates) Act. This provides authority for expenditure that might not have been envisaged when the Budget estimates were finalised. It remains in force until the end of the financial year to provide authority for unexpected expenditure.

Cabinet requires that any use of imprest supply must be authorised by a specific Cabinet decision (or, in some instances, by approval of joint ministers under delegation from Cabinet). But Imprest Supply Acts provide only "interim" authority. To remain lawful, all expenditure incurred under an Imprest Supply Act must be approved by Parliament under an Appropriation Act passed before the end of the financial year.

Expenditure under the second Imprest Supply Act is typically appropriated through a second appropriation Act, the Appropriation (Supplementary Estimates) Act, which is usually enacted in June. This allows the Government to update the initial estimates in the Budget and get legislative approval for those changes (which include expenditure already incurred under imprest supply).

If expenditure under the authority of an Imprest Supply Act is incurred too late in the financial year to be authorised through the Appropriation (Supplementary Estimates) Act, then as at 30 June it becomes "unappropriated expenditure". It must be validated by Parliament through a third appropriation Act, the Appropriation (Confirmation and Validation) Act, in the next financial year.21

The Public Finance Act includes several other mechanisms for approving minor changes to the expenditure authorities approved by Parliament. For example, there is limited scope for the Governor-General to approve, by Order in Council, transfers between appropriations in a Vote.22

To provide further flexibility during the final three months of the year, the Public Finance Act authorises the Minister of Finance to approve a limited amount of extra expenditure within the scope of an existing appropriation.23 Flexibility under these mechanisms is subject to confirmation by Parliament through the Appropriation (Confirmation and Validation) Bill.

Sections 25 and 25A of the Public Finance Act also authorise the Government to spend public money outside appropriations in emergency situations, subject to confirmation by Parliament through the Appropriation (Confirmation and Validation) Bill.

Does that mean any expenditure outside the revised Budget (Supplementary Estimates) is unlawful?

Such expenditure can be unlawful, but not always. It could still be lawful if it is covered by some other authority, for example, a relevant section in the Public Finance Act or by another Act of Parliament. However, expenditure incurred under Cabinet authority to use imprest supply, but not included in an Appropriation Act at the end of the financial year, becomes unappropriated and remains unlawful until it is validated by Parliament.

Does the Auditor-General have a role in the Budget process?

No. The Government prepares the Budget. The Minister of Finance and the Treasury co-ordinate the work of the various government departments and individual Ministers to put together a set of expenditure proposals for the Government as a whole. The Auditor-General is not part of the Government nor are they answerable to Ministers, and so they have no role in this process.24 The Auditor-General does not audit the Budget.

Once the Government has presented its proposed Budget to Parliament, individual select committees consider the proposals in the various Votes. The Auditor-General's staff provide advice to the select committees to assist their scrutiny of the expenditure proposals in the Budget estimates.

Parliament then votes on whether to pass the Appropriation (Estimates) Bill. Votes on Budget and expenditure matters are automatically regarded as confidence matters. That means that, if a Government cannot persuade a majority of Parliament to support its expenditure plans, then it does not have enough support to continue as the Government.

Who spends the money and how?

All public money must be held in a Crown or departmental bank account. The Treasury is responsible for managing Crown bank accounts unless it delegates responsibility to a department to operate as an agent of the Crown. Government departments are responsible for managing departmental bank accounts.

Each department forecasts its cash requirements based on its budget and agrees cash payment schedules with the Treasury. The Treasury is responsible for disbursing cash to government departments during the year in keeping with those schedules. Responsibility for how that cash is applied rests with the government departments' chief executives.

The government departments are responsible for paying non-departmental providers (for example, Crown entities funded from their Votes) and for their own departmental expenditure.

The public financial management system operates on an "accrual" rather than a cash basis of accounting. This means that expenditure is accounted for when it is incurred (that is, when there is an obligation to pay), as opposed to when the payment is made. To keep within Budget limits, government departments need to manage expenditure on an "accrual" basis.

Who is responsible for ensuring that public money is spent correctly?

Departmental chief executives are responsible under the Public Finance Act for the financial management and performance of their department. This includes ensuring that they have both the funding authority and the necessary legal mandate before incurring expenses or capital expenditure.25

Government departments are required to report regularly to the Treasury on the expenses and capital expenditure incurred by the department against the appropriation or other statutory authority provided. The first report for the financial year is provided in October (covering the previous July to September period) and then monthly after that. This and other financial information is used to compile the monthly financial statements of the Government.

The Treasury is also required to report to the Controller all expenditure incurred compared with the appropriation (or other authority) and all expenditure incurred without authority or in excess of the authority given. This is carried out monthly, beginning in October each year, in co-ordination with the requirements in the paragraph above.

Who checks whether government departments are spending money lawfully within authority?

This is where the role of the Controller comes in. To check and verify the expenditure, the Auditor-General's Controller team:

  • reviews the Treasury's monthly reports;
  • carries out tests on the financial information (provided by the Treasury from the Crown Financial Information System);
  • checks that Cabinet's authority for changes to budgets are correctly applied;
  • reports back to the Treasury highlighting any issues (including unappropriated expenditure), comments on actions needed to confirm or validate any unappropriated expenditure, and advises on any further action that the Treasury or the department needs to take to resolve outstanding issues; and
  • confers with the relevant auditors about issues affecting the government departments they audit.

As well as auditing government departments' financial statements, the Auditor-General is responsible for auditing the appropriations administered by each department (the appropriation audit).

Through the appropriation audit of each department, our auditors look at systems and some transactions to check that public money was spent as Parliament intended. If an appointed auditor detects expenditure outside authority through the appropriation audit work, then the auditor will discuss the matter with the government department, advise the department about reporting the matter and taking corrective action, and inform the Controller. The appointed auditor will also check whether the department properly reports the matter in its financial statements.

Expenditure above or beyond the appropriation limits

The public finance system provides some flexibility to how public expenditure is authorised. This is necessary to:

  • allow the Government to incur expenditure not covered at the time by Appropriation Acts, including to allow for unanticipated expenditure during the year as circumstances change (through imprest supply);
  • allow for immediate expenditure in declared emergencies (sections 25 and 25A of the Public Finance Act); and
  • provide for the approval of relatively small amounts of expenditure in excess of appropriation without needing approval from Parliament (sections 26A and 26B of the Public Finance Act).

However, in general, when government departments do not get approval for expenditure before it is incurred, it is unlawful. Expenditure approved by Cabinet under imprest supply will also be unlawful if Parliament has not appropriated it before the end of the financial year.

We have urged government departments to seek early approval as soon as they have identified the need for previously unanticipated expenditure, so that any expenditure over and above that authorised in the Appropriation (Estimates) Act can be authorised by Cabinet before the event and subsequently authorised by Parliament in the Appropriation (Supplementary Estimates) Act.

Ministers need to report unappropriated expenditure to Parliament and, for that expenditure to be lawful, must seek Parliament's retrospective approval of unappropriated expenditure through an Appropriation (Confirmation and Validation) Bill.

How does the Controller deal with expenditure incurred outside appropriation limits?

When government departments become aware of potentially unappropriated expenditure, they are expected to immediately tell their appointed auditor, the Treasury, and their Minister (who will need to seek additional authority for the expenditure). The department should provide the Treasury with an explanation of the issue as well as an explanation of actions taken to resolve it, for example, to gain additional authority in advance to avoid unappropriated expenditure or to seek validation of any already unappropriated expenditure through an Appropriation (Confirmation and Validation) Act.

Auditors might detect potentially unappropriated expenditure through their audit process, as might the Treasury through its financial management and budgeting work. After collating information from government departments each month, the Treasury provides its monthly report to the Controller highlighting actual, expected, and potentially unappropriated expenditure. The Controller then carries out the work we described in Part 4.

The Controller monitors all matters that come to their attention until they are resolved and will often, through their auditors, advise government departments on any corrective action required. For expenditure that is confirmed as being unappropriated, corrective action includes disclosing the facts in the affected departments' annual financial statements (and the Government's financial statements). After the end of the financial year, the Auditor-General audits the departments' and the Government's financial statements to ensure that all unappropriated expenditure is correctly disclosed.

If a government department does not take the action required to prevent continuing unauthorised expenditure, then the Controller can write to the department's chief executive or the relevant Minister directing that no further expenditure can be incurred under the affected appropriation until approval has been obtained.

If the government department still fails to obtain the correct approval, then the Controller can direct the Minister, the Treasury, and the department to stop payments from the relevant bank account and direct the Minister to report to the House of Representatives. This would be an unusual sanction and used only in exceptional circumstances.26

21: Section 26C of the Public Finance Act 1989. The Appropriation (Confirmation and Validation) Bill, which is introduced after the end of the financial year, allows Parliament to retrospectively confirm or validate all unappropriated expenditure incurred during the year.

22: Section 26A of the Public Finance Act 1989.

23: Section 26B of the Public Finance Act 1989.

24: There is a special process for working out the budget for Officers of Parliament (such as the Auditor-General) to ensure that the funding decisions are made by Parliament and not the Government. The Auditor-General is involved in this process in their capacity as the chief executive of their own Office.

25: Section 34(1)(a) of the Public Finance Act 1989.

26: Sections 65Z and 65ZA of the Public Finance Act 1989.