New Zealand: Scenery, and 30 Years of Strong PFM
Ian Ball, Professor of Public Financial Management, Victoria University of Wellington |
New Zealand has, over the past three decades, been visited by many people not interested in the scenery—or at least not only interested in the scenery. Perhaps improbably, many are keen to learn about our Public Finance Act 1989. Thirty years after its passage visitors still come to learn about our public finance journey—and more will join us in July to celebrate the 30th anniversary conference in Wellington.
There are several reasons visitors want to understand the way New Zealand’s public financial management (PFM) system operates.
New Zealand was the first sovereign government to produce a full set of accrual-based financial statements. Those statements receive an unqualified audit opinion. They are published approximately three months after financial-year end. Even more surprising to some, the Government also produces monthly financial statements, which are published 4-6 weeks after month-end.
Over the last 30 years, many other governments have moved to report on an accrual basis—though several leading countries’ statements only receive a qualified audit opinion (or a disclaimer) and/or are produced a more than a year after year-end.
The PFM system introduced in New Zealand by the Act did a lot more than introduce accrual-based reporting. And some of those other features have not been introduced by other countries. Most significantly, New Zealand has accrual numbers at the heart of its PFM system – the budget is accrual numbers, as are the appropriations. The government’s fiscal objectives are expressed in accrual terms, and the Act’s fiscal responsibility principles reflect the accrual basis, with revenues, expenses, debt, and net worth all accrual numbers.
New Zealand’s fiscal decisions are also made largely on the basis of accrual numbers. The Organisation for Economic Co-operation and Development reports that many of the countries that have adopted accrual reporting find it useful for transparency and accountability, but not for decision making. In New Zealand, the whole point of the financial management reforms and the move to accrual numbers was to improve decision making. The system was designed to embed accrual numbers in budget and decision-making processes.
And it has worked. During the two decades prior to the Act the Government incurred a deficit almost every year. Since the system was fully introduced in 1994, the Government has run a surplus and improved our net worth virtually every year (the exception being the four years immediately following the global financial crisis and the two major earthquakes in Canterbury).
When the accrual basis was first introduced, the Government had negative net worth. Over the period since, our net worth has grown to a point where it is now 45% of GDP. The resilience resulting from this strong balance sheet was demonstrated by the fact that net worth declined for only four years from the onset of the financial crisis, whereas most comparable countries—like Australia, Canada, the US, and the UK—have both significant negative net worth and continuing decline in their fiscal positions.
In a wider economic context, visitors might also be interested in how the New Zealand economy has achieved good growth without deficit spending, while at the same time being ranked very highly on global indices of social progress.
While the Act has evolved in a number of ways over 30 years, our financial basics have remained unchanged. Even as the current Government looks to amend the Act and reform the budget system, to capture the wider notion of “wellbeing” in decision making, there is no discussion of moving away from the high-quality information base provided by a system based on accrual numbers.
Our experience in New Zealand demonstrates the value to governments of fully employing the professional skills of accountants, rather than only using them to construct financial statements which reflect, but do not impact, key financial decisions.