Ian Ball Public Financial Management and Reforms to the State Sector Act Abstract This article addresses changes to the Public Finance Act that have been proposed in the Public Finance (Wellbeing) Amendment Bill or are being considered for future legislative or administrative action. It discusses these changes in the context of the State Sector Act. The interrelationship between the two pieces of legislation is described, as are the implications of proposed changes to the Public Finance Act. These changes include requirements for the specification of objectives for wellbeing (outcomes) in the budget process and reporting of wellbeing by the Treasury at least every four years. Changes also include, potentially, greater flexibility in the nature of appropriations and the selection of the services that will be provided within an appropriation, as well as legislative support for the public service to operate in a more ‘joined-up’, innovative and collaborative way. The article identifies as a strength of the proposed changes to the Public Finance Act and the State Sector Act that they maintain consistency between the two acts, but also identifies the risk of replacing one one-size-fits-all system with a different one-size-fits-all system, and considers a ‘two-track’ public management system as an alternative. Keywords Public Finance Act, State Sector Act, wellbeing, outcomes, outputs, appropriations, budget Ian Ball is Professor of Public Financial Management at Victoria University of Wellington. Page 14 – Policy Quarterly – Volume 15, Issue 4 – November 2019 his issue of Policy Quarterly is through an appropriation. The act also for the appropriations.2 Outputs are the focused on the reforms proposed establishes the powers of the government ‘goods or services that are supplied by a Tby the current government to the in relation to borrowing, securities, department’ or other organisation (s2). State Sector Act. It is important also to derivatives, investment, banking and Outcomes were, until 2013, defined in the address proposed and potential changes guarantees. act as ‘a state or condition of society, the to the Public Finance Act, given the The Public Finance Act establishes the economy, or the environment; and (b) interrelationship between these two pieces legislative arrangements for the includes a change in that state or condition’ of legislation. government’s management of its overall (ibid.). The requirement to specify There is a common theme to the fiscal position, including the specification appropriations in output terms was a statements of the minister of finance and of the principles of responsible fiscal fundamental change mandated by the the minister of state services on why reform management and requirements for Public Finance Act, and one that has a to the two acts is needed. The theme is that documents that provide transparency for number of challenges in its while both have had positive benefits, in budget decisions. It establishes the ex post implementation.3 terms both of the government’s fiscal reporting and audit requirements for the The public financial management performance and of the performance of government. system can be seen as having two key roles the government in meeting the needs of in relation to the performance of the citizens, the acts are now over 30 years old, government:4 fiscal performance, relating the world has changed and become ever to the government’s aggregate fiscal more complex and interrelated, and both New Zealand’s position; and outcome achievement, acts need to be changed to be fit for purpose. public service encompassing the effectiveness and In the words of the minister of finance: ‘It efficiency of the government’s activities. is time, 30 years on, to bring the Public performs well In relation to fiscal performance, there Finance Act into the 21st century and put is little debate over the effectiveness of the wellbeing and collaborative government at by international Public Finance Act. The fiscal performance the centre of our approach’ (Robertson, standards in and position of the New Zealand 2019). government are very strong relative to the This article will introduce the role of responsiveness decades (of deficits) before the introduction the Public Finance Act and describe the of the legislation. They are also very strong manner in which the State Sector Act and to government, relative to comparable countries such as the Public Finance Act were designed to effectiveness for Australia, Canada, the United Kingdom and operate as ‘twins’. It will address a major set the United States (Ball, 2019). And there is of changes made to the Public Finance Act New Zealanders, international recognition of the level of since it was passed and the rationale for transparency associated with the fiscal those changes. It will describe and assess and integrity. management system in New Zealand.5 On key changes currently being proposed for this dimension of performance, the present the public financial management system, government seems satisfied with the considering also the relationship to the functioning of the act. changes concurrently being proposed for As was noted by the minister of finance the State Sector Act. In establishing the nature and types of and other speakers at the PFA30 conference, The article draws on some of the appropriation, the act determines key New Zealand also ranks very highly in contributions to the ‘New Zealand’s Public aspects of the functioning of the public international indices of standard of living Finance Act at 30: lessons, achievements financial management system at the and social progress, and also in the quality and future directions’ (PFA30) conference departmental or Crown entity level, of the public service. Or, as the minister of held at the end of July 2019 at Victoria including the requirement to have an state services noted in his overview of the University of Wellington. accrual-based accounting system that can proposals for reform of the State Sector Act: record expenses or capital expenditure Role of the Public Finance Act against an appropriation.1 The act also New Zealand’s public service performs The Public Finance Act 1989 establishes specifies the reporting requirements of well by international standards in the architecture for the public financial departments (and departmental agencies) responsiveness to government, management system. This system serves a and Crown entities, which mirror and effectiveness for New Zealanders, and number of purposes. It establishes certain reinforce the nature of the appropriations. integrity. The proposals in these papers key components of the relationship One of the most significant features of are not about fixing a system that is between Parliament and the government, the act, in relation to how it influenced the fundamentally broken. Rather, they are including the conditions under which the behaviour of both departments and about improving from a high base; government can consume resources, when ministers, is that it was outputs, rather than ensuring the public service is making Parliament has authorised that action outcomes, which were specified as the basis the biggest possible difference to the Policy Quarterly – Volume 15, Issue 4 – November 2019 – Page 15 Public Financial Management and Reforms to the State Sector Act Figure 1 basis as the budgeting system to avoid Reporting Requirements of the Public Finance Act - a history the possibility of conflicting objectives. The Original Act “Set out the link between the classes of outputs to be purchased by An accrual budgeting system is one the Crown and the Government’s desired outcomes which is expressed in terms of costs to be incurred rather than in funds to be 1992 Amendment “The performance targets and other measures by which the obligated or spent. (ibid., pp.83–4) performance of the Crown entity or group may be judged in relation to its objectives This recognition of the need to have 1994 Amendment “A Statement of objectives specifying the performance for each class coherence within the accounting, budgeting of outputs forecast to be achieved as agreed with the Minister and appropriations systems was fully reflected in the Public Finance Act.6 2004 Amendment “Future operating intentions .. explaining ... nature and scope of the The aim of having consistent and department’s functions and intended operations, the specific impacts, mutually reinforcing elements could also outcomes, or objectives that the department seeks to achieve or to contribute to ... be seen in the way ‘performance’ was defined, specified and measured for 2013 Amendment “A concise explanation of how performance against the appropriation purposes of both acts. Specifically, the will be assessed ... concept of ‘performance’ envisaged clear Information on the department’s strategic intentions that ... set out distinctions between: ‘ownership the strategic objectives that the department intends to achieve or performance’ and ‘purchase performance’;7 contribute to inputs, outputs and outcomes;8 and Crown and department.9 These distinctions were embedded in the nature wellbeing of New Zealanders, delivering employment and financial management of appropriations as well as in the services that are easy to access and arrangements were subsystems within a performance management documentation joined up around their needs, and broader public management system; and under the State Sector Act. For example, serving an ever more diverse and that management systems work better ‘outputs’