Controller update: July to December 2019
We have a strong interest in New Zealanders’ trust and confidence in the public sector. A key element in that is our role in helping to ensure that all government spending is properly authorised and within the law. This update covers the first six months of 2019/20.
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.
The Controller and Auditor-General carries out his Controller role throughout the year and reports more fully to Parliament after the end of the financial year to 30 June.
What have we found so far in 2019/20?
Most government spending for the first six months of 2019/20 has been properly authorised and is within the law. However, we have confirmed three instances that were not properly authorised.
Two instances of spending before authority was given
We’ve confirmed two instances in which departments incurred expenditure before it had been authorised. In both, the departments anticipated additional spending authority based on funding being transferred from the previous year. But the departments incurred the expenditure before the transfers were confirmed.
In June 2019, the Ministry of Business, Innovation and Employment (MBIE) requested that $1.3 million be transferred from 2018/19 to 2019/20. The request was approved in principle. The funding was to cover policy advice about building and construction.
Ministers confirmed and authorised the expense transfer on 19 November 2019 but, by that time, MBIE had already incurred more than $1.3 million under this policy advice appropriation.1 Up to that point, MBIE had authority for only $823,000 (through the main Appropriation Act). The difference of about $560,000 will need to be disclosed in MBIE’s next annual report as unappropriated expenditure.
The Department of Corrections also relied on an in-principle transfer to cover expenses that it incurred before the transfer was authorised. Neither Corrections nor the Treasury identified the need for this authorisation before the expenditure was incurred.
Corrections had planned to transfer Auckland Prison wastewater assets to Watercare Services Limited2 during 2018/19, and Vote Corrections included $9.1 million to cover the related expenses. However, the asset transfer didn’t happen in 2018/19, so Cabinet approved an in-principle expense transfer to 2019/20.
The asset transfer took place in the 2019/20 financial year, before 19 November, when Ministers confirmed and authorised the expense transfer. Because Corrections didn’t have authority in place at the time the asset transfer happened, the related expenses (almost $9.1 million) must now be reported as unappropriated expenditure.
One instance of a capital injection made before authority was given
The New Zealand Customs Service received a “capital injection”3 before it had been authorised.
In circumstances similar to those described above, Customs had authority for a $2.74 million capital injection for 2018/19. However, by 30 June 2019 it hadn’t called on the capital injection. It received the capital injection soon after, in July 2019, before receiving approval to transfer it to 2019/20.
Customs had authority for a capital injection of $2.6 million for 2019/20, but this wasn’t enough to cover the $2.74 million capital injection made in July. The difference ($139,000) will need to be disclosed in Customs’ next annual report as an unauthorised capital injection.
Customs has since gained approval for the $2.74 million to be transferred to 2019/20.
Departments must manage expense transfers more carefully
Ministers may agree “in principle” to the expense transfers from one year to the following year if departments have under spent because of delays to specific projects. Known as “in-principle expense and capital transfers”, they are exactly that – in principle. An in-principle decision still needs to be confirmed and authorised, and departments shouldn’t spend before they get confirmation.
Departments usually have to wait until their accounts have been audited before receiving confirmation about transfers between years. Confirmations usually take place in October or November, but confirmation can be given earlier if need be.
Departments that rely on inter-period expense transfers for funding current year operations need to obtain the necessary approval, under imprest supply, before incurring that expenditure.
What else have we found?
Why the Government can spend money before the Budget is passed
Parliament didn’t authorise the appropriations laid out in the 2019 Budget until 24 September 2019, when the Appropriation (Estimates) Act 2019 came into force. Because of the timing of this Act, the Government needed interim authority from Parliament to spend public money from 1 July until 23 September. That interim authority was provided by the Imprest Supply (First for 2019/20) Act 2019, which was passed in June.
The Imprest Supply Act allowed the Government to spend up to $29,700 million during this period so that it could continue to operate before the Appropriation Act became law. This is normal and happens every year. We checked the amount of spending authorised during this period and found that it was within the Imprest Supply Act’s financial limits (at just below $20,582 million).
Why the Government can spend money that wasn’t in the Budget
When the Budget became law on 24 September, the first Imprest Supply Act was repealed and a second annual Imprest Supply Act4 was passed.
This Act provides flexibility to the Government by authorising up to $17,300 million of expenditure not included in the Budget. This gives the Government room to respond to changes since the Budget was put together earlier in 2019. However, there are strict rules about using this Act to spend money that wasn’t initially budgeted for, including the need for prior Cabinet or Ministerial approval.
We checked how much expenditure the Government had authorised up until 31 December, under imprest supply, and found that it was also within the limits set by Parliament.
Our more detailed reports on spending against appropriations
In December of every year, the Auditor-General tables in Parliament a report on our audits of public organisations that are part of central government.
In our report for 2018/19, we provided an explanation and observations about the extent of public money spent without appropriation during 2018/19, why that happened, and how that compares with previous years. The report is available on our website.
Changes to how some Budget information is presented
For the forthcoming Budget in May 2020, Ministers will be able to merge some appropriations (specific spending authorities) that were previously separate. For smaller departments that have several “departmental output expense appropriations” within a Vote, those appropriations could be merged into a single appropriation. And within any Vote, all expense appropriations of less than $10 million could be combined into one larger appropriation.
Merging appropriations means asking Parliament to authorise spending based on larger “buckets”. As a consequence, it will often result in specifying the Budget in less detail. Combining expenditure into larger buckets will provide more flexibility for departments, creating more efficiencies, and should result in fewer instances of unappropriated expenditure.
Although we agree in principle to creating efficiencies in the public finance system, we are mindful that reducing restrictions on public spending risks reducing the level of Parliament’s control over the public purse. It might also affect how well departments report on what they have achieved with the money they have had appropriated.
We’ll be watching developments closely and will want to be satisfied that any changes to the Budget ensure that Parliament receives sufficient information:
- to maintain adequate control over government expenditure, and
- to hold the Government to account for what it has achieved with public money.
Proposed law changes
We are also watching closely the progress of the Public Service Legislation Bill, which is currently before the House of Representatives. The Bill proposes new organisational forms in the public service that will be able to administer appropriations. In our submission on the Bill, we noted the potential for complex structures in the public service to create confusion about where planning, reporting, and accountability obligations lie. We recommended that these obligations be clearly laid out at the time any new organisation is created.
1: Appropriations are authorities from Parliament that allow the Crown (effectively Ministers and their departments) as well as Officers of Parliament to incur expenditure. The Budget divides the Government’s spending plans into a large number of appropriations, which are grouped into Votes. In each Budget, the Government asks Parliament to authorise government spending within the bounds of each appropriation.
2: A council-controlled organisation (CCO) of Auckland Council.
3 A capital injection is when the Crown increases the net assets and equity in a government department, usually through a cash injection.
4: The Imprest Supply (Second for 2019/20) Act 2019.