Bringing Wellbeing into the Public Finance Act

Nau mai, haere mai.

Tēnā koutou, tēnā koutou, tēnā koutou katoa.  Good afternoon.

It’s great to see you all here, marking 30 years since the Public Finance Act came into law. 

If you’ll step into the Tardis with me for a brief moment, I’d like to take us back to 1989, to set the scene, and remind us all how far we’ve come. 

The fourth Labour Government was in power. It was the year that Dennis Conner walked out on the interview on the Holmes show, Sunday trading came into effect in time for the Christmas rush, TV3 began broadcasting, and the crew of the Rose-Noelle were found alive after 119 days missing at sea. 

Supermarkets started selling wine – but not beer.  (That didn’t happen until ten years later, in 1999.)   And I was in my final year at high school.

We were listening – and dancing – to Moana Jackson, When the Cat’s Away, the Warratahs, the Straitjacket Fits, the Front Lawn and Upper Hutt Posse. 

Shane van Gisbergen – one of our fastest New Zealanders on four wheels – was born in 1989, as was the Student Army’s Sam Johnson, and our population was less than three and a half million (3.37 million people, to be more precise).

But amidst all this, it was a time when the government and the public service were struggling with entrenched issues related to fiscal sustainability – high levels of debt, poor transparency, and poor responsiveness to Ministers.  It was a time of focussing on inputs, not outcomes, and – it sounds incredible today – it was all based on a cash accounting system.

It was difficult to measure agencies’ performance and to get an accurate and up-to-date picture of what was being spent, and where wastage was happening.

In July 1989 though, something happened that began to change all of that.

Peter Neilson, who was the Associate Minister of Finance, introduced the Public Finance Bill to Parliament.  I was amused to read in Professor Ian Ball’s recollection of Peter’s speech, that Peter started off by saying that “We all know accounting is boring; public sector accounting is boring to the power of two”, before going on to introduce what – with the hindsight of today – became a revolution in New Zealand’s public finance system.

Since the PFA took effect in 1989, our public finance system has taken control of its fiscal position, has high levels of transparency and accountability; and is renowned internationally. 

It did that by putting a model in place that focussed on management, outputs and performance, and was based on decentralisation, accountability and much greater transparency.  The Fiscal Responsibility Act, which followed on the heels of the PFA and was later incorporated into it, created a framework for robust fiscal management.

We can easily point to some enduring and positive outcomes from our public finance legislation.  Now: -

  • Our public finances are strong.  New Zealand’s public debt is relatively low compared to our international peers, and the government is running operating surpluses which are forecast to increase further
  • New Zealand ranks relatively close to the top of many international transparency, corruption and wellbeing indicators, and we have a high level of trust in government
  • We are consistently ranked no.1 in global surveys of ease of doing business and starting a business.
  • In contrast, many OECD countries are still grappling with fundamental macro, fiscal, and public trust challenges.

And maybe we can see that public sector accounting isn’t “boring to the power of two” any longer – that increased transparency has also brought about an increased – and welcome – level of scrutiny of public sector spending, and the outcomes it achieves; and increased public interest in what the government is delivering using the revenues that it collects.

The foundations laid down in the Public Finance Act 30 years ago still provide a platform for us to think about the range of outcomes that matter to the wellbeing of New Zealanders, and how these inform what the public sector does and how it operates. 

Our strong fiscal position provides the space for us to be ambitious about what we can do to improve people's living standards. 

But the PFA and the public finance system has limitations that undermine the Government’s pursuit of wellbeing objectives, and I hope the architects here today will take this in the right spirit.  The system doesn’t always give us the support we need to fulfil our vision for New Zealand.  We need to maintain the strengths of the current system, while recognising that there are significant improvements we can make.  

The system struggles to deal with complex issues and longer-term opportunities and risks.  And while the original intent of the reforms may well have been to bring about greater flexibility, the way they have been operationalised has sometimes had the effect of putting an “electric fence” around parts of the fiscal management system. 

This can hinder co-operation and innovation, create silos, and make it harder to help people who have needs or problems that fall across agencies.

Let me expand on that a little more:

  • The annual budget cycle based around fixed nominal baselines and annual allowances can encourage short-term thinking, and defer longer-term planning and capability building. It also means that most analytical effort is concentrated on the marginal increase in funding, rather than the effectiveness of total government spending
  • The settings around annual appropriations can be rigid and too tightly controlled, making it unnecessarily difficult to adapt to changing circumstances
  • The performance accountability conventions we have for estimates, annual reporting and many of our strategic planning requirements have driven a focus on compliance and an aversion to risk – becoming a barrier to innovation.

While – in principle – we have a high level of transparency, the overall story can be harder to see, being buried in detail that is difficult to absorb. 

We can achieve much more.

My objective is a public finance system that enables the public service to positively assist and improve the intergenerational wellbeing of New Zealanders.

We need a system where our time and effort is focussed more on ‘strategic’ management of public finances – with a clear ‘line of sight’ to the strategic value of public spending.  We believe that the public finance system can be shifted to improve intergenerational wellbeing on a number of fronts.

These include:

  • Supporting the parts of the system to work better together
  • Smarter regulation of the system
  • Lifting performance
  • Building capability
  • Strengthening long-term resilience.

With these improvements in mind, the Government is taking steps to reform the public finance system to reduce risk aversion, promote innovation, and support a more rapid response from the public sector to issues and challenges.

Our modernisation of the public finance system, addressing its current limitations, is a key element of aligning the public sector to a wellbeing approach.

The work programme includes three important themes – they are:

  • Firstly, changing the overarching framework for measuring success and identifying the priorities, through amendments to embed wellbeing in the Public Finance Act, as well as the government's broader commitment to sustainable development goals
  • Secondly, changing the financial management framework, to increase flexibility, encourage collaboration and support and enable a more strategic focus.  This includes changes to the appropriation system and a different approach to planning and reporting
  • And thirdly, rethinking the approach to the Budget, so that we look at existing as well as new spending, and create more space to focus on the challenges and trade-offs needed to improve wellbeing for all New Zealanders.

The wellbeing of our citizens is at the heart of everything we do, both now and for the future.  We need new thinking to achieve this vision. 

Rather than measuring progress in purely economic terms, this Government is committed to using a broader framing to measure New Zealand’s progress, to develop and assess policy and support decision-making.   This includes fiscal policy, where we want to consider the wellbeing of our environment, people and communities, alongside existing macroeconomic and fiscal indicators.

As you will know, this year we produced our first Wellbeing Budget. This is built around Treasury’s Living Standards Framework. We used evidence from the LSF and other expert advice to decide our budget priorities, and we are using the framework to measure our success against a range of indicators of wellbeing.

We are also developing a broader set of measures that go beyond measuring progress in purely economic terms. Statistics New Zealand has developed and released a new set of metrics – Indicators Aotearoa New Zealand (IANZ) as a source of measures for New Zealand’s wellbeing. IANZ will support the government as it meets the new wellbeing requirements under the Public Finance Act, as well as monitoring and reporting against the SDGs.

With that in mind, to ensure that every Government considers the wellbeing of New Zealanders when creating future Budgets, I will soon introduce legislation to amend the Public Finance Act so it includes two key changes:

  • The Government will be required to set out how its wellbeing and fiscal objectives will guide its Budget
  • The Treasury will be required to report on the state of current and future wellbeing in New Zealand, at least every four years.

These changes recognise that we expect wellbeing monitoring to evolve over time as theory, evidence and data availability develop and improve.

I believe that these amendments will strike the right balance between requiring an enduring focus on wellbeing, but at the same time retaining sufficient flexibility for improvements and changes over time.

We have already amended the PFA to require the Minister of Finance to report at each Budget on child wellbeing and child poverty reduction. This legislation, passed by a margin of 119-1 in Parliament, means that at Budget time the Minister of Finance must discuss progress made to reduce child poverty in line with the targets in the Child Poverty Reduction Act, and what measures in the Budget will affect child poverty. The first report of this type was presented in this year’s Budget.

The government is introducing changes to the financial management framework. 

I emphasise that this doesn’t mean abandoning the foundational principles of transparency and accountability to Parliament.  But it does mean being smarter and more flexible about how we apply those principles, and thinking differently about planning and reporting.

Our current system has a very high degree of regulation, which means we spend far too much time and resource on authorising, managing and keeping track of a large number of small funding pools, rather than focusing on the strategic issues and value of spending – the areas where we can make a difference.

And this is what we need to change:

  • There are currently about 840 appropriations, and more than a thousand if you can the components of multi-category appropriations, which are reported on
  • More than half – 50 per cent – of the money is in just two per cent of the appropriations 
  • 45 per cent of appropriations – again, almost half – have less than $5m in each appropriation (less than one per cent of the money). 

Although the system does give some flexibility to shift funding across pools, and to move it from programmes that aren’t working to those that are, this can be difficult and have high transaction costs.

The questions we are asking as part of this work are:

  • How can we use appropriations to ensure decisions direct investment towards high priority wellbeing outcomes?
  • What structure of appropriations will encourage the public sector to work together, respond quickly to the needs of New Zealanders and be accountable to Parliament for the difference we are making to wellbeing?

In this year’s Budget we founded a joint venture of eight government agencies who work on reducing and eliminating domestic violence. This is ground-breaking collaboration. But if you go looking for it in one place in our accounts you won’t find it. We need appropriation structures that allow this kind of work to be considered and accounted for together.

Another important aspect of our reform work involves improving agencies’ strategic planning and reporting. Too many strategic plans involve significant time and effort, but end up sitting on the shelf gathering dust.  I want us to make plans that are meaningful, proportionate, and keep long-term objectives in view.

I still expect all agencies to have a current medium- to long-term strategic plan, and expect them to focus on fulfilling those plans.  But during the last 12 months, the Treasury has worked with nearly 200 officials on a better approach to strategic planning and reporting.  

Between them, they identified challenges with:

  • The authorising environment
  • The requirements on agencies to write strategic plans
  • Insufficient strategic capability.

It’s clear that it’s time to try something different.

I will soon go to Cabinet with a proposal to improve strategic planning and reporting, testing a fundamentally different approach with one or two pilots.  I won’t go into detail now, because we are still in the very early stages, but our proposal is that each pilot will put a spotlight on a specific long-term issue.

Agency leaders will be asked to:

  • Invite peers and partners into their work, to strengthen the range and quality of thinking
  • Present scenarios and choices
  • Create a multi-year pathway underpinned by milestones and indicators
  • Continue engaging with partners and focusing over a couple of years, to demonstrate progress.

What this means is that we are stepping away from a prescriptive approach to one with much more flexibility.  As with any innovation, it may or may not work, but we have to be bold, and be prepared to try.

We are also looking at wider changes to financial management.  This could include more meaningful funding allocation through appropriations, along with innovative models to foster collaboration. 

As a small first step, we will consider bringing in:

  • Single departmental output appropriations for small departments and consolidating small appropriations to provide more flexibility to move funding between programmes and output classes (work that will be phased over two years)

Looking further ahead, we will consider

  • Aggregating non-departmental appropriations aligned to high-level outcome areas
  • Introducing multi-department, multi-Minister appropriations, allowing multiple departments to be responsible – collaboratively – for what they achieve.

We also want to look at integrating the various planning and reporting requirements that have been introduced in an ad hoc way over the years, so that they are more clearly connected to each other and enable a clearer ‘line of sight’ of how public financing is supporting the government's overall objectives, and the wellbeing of New Zealanders.

I am also keen to see better fiscal management. 

My experience of the past two Budgets is that they involved quite high transaction costs focussed on a relatively small proportion of government spending.  Ministers also had little visibility of what was being funded through baselines and where there were opportunities to stop some things to fund other new initiatives.

One of my objectives for Budget 2020 is to sharpen the focus on the key strategic decisions which the Government needs to make. 

There are a number of choices which I am still considering, including how Ministers and agencies work together, and how we focus on the big choices which will improve wellbeing.

I intend firming up on the changes for 2020 after consulting my Cabinet colleagues. 

One thing we are already doing to improve the Budget process is making greater use of baseline reviews to assess the effectiveness of current spending and help Ministers decide where any new spending will be most effective. 

About 98 per cent of government expenditure – or $89 billion – sits outside the annual Budget process, and yet – as I’ve already mentioned – we spend most of our time assessing how to allocate the next two per cent or so located at the margin though each Budget.  This means having to be reactive through the Budget process, when it is already too late to make the big strategic moves.

So, how can we deepen our understanding of how well our baseline expenditure is working for us, and ask the hard questions about productivity, effectiveness, alignment with government priorities and risk accumulation?

How can we improve our fiscal management approach, so it supports strategic, long-term decision-making about the key things that the Government needs to do, and how it will pay for them? 

The answer is that it means looking at baselines and marginal expenditure together to better prioritise what will improve wellbeing for New Zealanders, and ensure sustainable resourcing to deliver it.

We have begun work on this already. 

Earlier this year, our baseline review of MSD highlighted that years of under-investment in case management meant that services had become run down, meaning fewer people getting into work, and driving up costs to the taxpayer.  We were able to deal with this immediately through the Wellbeing Budget. 

The baseline review also highlighted how reactive approaches to IT investment had left MSD stuck, running expensive, inefficient and risky legacy systems.  This will take years to address, but we now have the information we need to ensure that future investment is strategically aligned with the model that we want for the future of the welfare system.

Expanding and embedding this work will lead to changes in how we set our fiscal strategy, how we operate the budget and get into baselines. 

Ultimately, we could transition to a system where 80 per cent of baselines are covered by a review every few years.  Instead of just reacting to costs that materialise in the Budget process, governments could be much more proactive about directing investment to where it will make the biggest difference to New Zealanders’ wellbeing. 

We have already initiated our next baseline review, looking at the Defence sector, and I am intending to scale up this work as soon as possible – so larger agencies can start looking forward to their baseline review soon.

Expanding and embedding this work will require better data stewardship, as well as working smarter and faster.  Most of all, this will require a shift in the public sector toward being more open and transparent. 

As a Government, we can’t ensure a joined-up, long-term approach to enhancing wellbeing, if we don’t actively look at what agencies are doing, and how it creates public value. 

The PFA started a kind of revolution in the public service. 

It supported government agencies being more transparent, accountable, and responsive to Ministers and the needs of the public.  

It helped to break down some barriers, and shone a light on what government was spending money on, and how it was accounting for it – increasing the public’s expectations that government is here to serve its citizens, rather than the other way around.  It was ahead of its time, in many ways.

It was a milestone, and enabled New Zealanders’ government to function better and more effectively.

But now it’s 2019. 

And we recognise that while it’s important to keep those principles of transparency, accountability, and responsibility to the forefront, it’s also important to now start looking more broadly, at how we can put New Zealanders’ wellbeing front and centre of everything that we propose, plan and deliver; and to deliver benefits that are sustainable and look to the long-term, for the next generations. 

It’s important for us to make it easier for agencies to plan, deliver and account for their work programmes, and to do it collaboratively, and cost-efficiently, with a minimum of waste. 

And it’s important for Ministers to have better, more accessible plans and progress information from agencies that lead to better decision-making and ultimately, better outcomes for New Zealanders’ wellbeing.

I am not sure the creators of the act would approve of all the changes that I am proposing, but I hope they would admire the reforming spirit that I am approaching them with. It is time, 30 years on, to bring the PFA into the 21st century and put wellbeing and collaborative government at the centre of our approach.

Thank you.