How crises changed the Government
By Richard Harman (author)
A host of politicians (present and past) and officials from New Zealand and overseas spent the weekend at a conference in Wellington to mark the groundbreaking 1989 legislation which brought an end to the “Glide Time” era of the New Zealand public service.
At the same time, various speakers warned of the challenges that Finance Minister Grant Robertson now faces as he attempts to change that legislation, the Public Finance Act to take account of "wellbeing".
The most radical thing the Act did was to move the public service from cash to accrual accounting; from an era of immovable budget categories to a more flexible conventional accounting system which required balance sheets and therefore an acknowledgement of assets and liabilities.
But in making the change, as in so much else during the 1980s, New Zealand was making a radical change.
As a consequence, in 1992, Ruth Richardson was the first Finance Minister in the world to present the government accounts using accrual accounting; that is, recording revenues and expenses when they are incurred, not when cash is exchanged.
Before that various speakers talked about how departments could hide expenditure or have no idea what they owned or in the case of the old Department of Trade and Industry, have the money but no official budget to buy a computer. So they didn't.
Though the Ministers who introduced the Act were David Caygill and then Ruth Richardson, its real father was Sir Robert Muldoon and the eccentric controls he placed on the economy and his massive "Think Big" Petrochemical and energy schemes.
There was nowhere in the Government’s accounts that showed how out of control the “Think Big” schemes were.
The Treasury Secretary who was responsible for the Act, Graham Scott, said he was asked by Sir Roger Douglas, for his first Budget, to add up all the possible losses from the projects.
"And we did add them up," he said.
“There were contingent liabilities sitting in that collection of Think Big investments that amounted to six per cent of the gross domestic product at that time, and they were not measured anywhere.
“We discovered there was something like thirteen billion dollars worth of unfunded liabilities in the government pension scheme. (this has been changed from an earlier incorrect transcription of $30 billion)
"It was very short term focus and essentially we were running this enormous enterprise of Government with a cash book.
“It was a system of accounts that even the local dairy would go broke if they tried to use it to run their business.”
The Act has been amended a number of times since 1989 and now incorporates the Fiscal Responsibility Act, but Robertson is proposing its most radical overhaul.
Speaking to the conference on Friday afternoon he said he planned to shortly introduce two amendments to the Act which will incorporate the wellbeing objectives such as those announced in this year's Budget.
“Government will be required to set out how its wellbeing and fiscal objectives will guide its budget,” he said.
"And the Treasury will be required to report on the state of current and future wellbeing in New Zealand at least every four years."
But Graham Scott, said this could put Treasury in some constitutional danger.
"If what you're doing is saying the Treasury's view of its living standards framework today and the indicators selected from the OECD and the United Nations sustainable development goals are put by the Government into law, I think that's too specific, and it wouldn't be sustainable," he said.
“Another government will come along and say look that's not the way would we think.
“I'm also particularly concerned about the idea of the Treasury being required by law to do a statutory report on whether governments are achieving their wellbeing changes or not.
“it wouldn't have been very comfortable for them to have done one recently on let's say housing policy or maybe down the track, regional development subsidies and so on.
"The report sounds kind of politically neutral at a high level, but the reality is when you get into the detail, the Treasury will be making judgments on whether governments have succeeded or failed.
“I think that gets their foot on the wrong side of the constitutional line.
"And If they recede back into just giving you a compendium of statistics without much evaluative comment about the economy, well you wonder why that Stats department wasn't doing it."
Though Ruth Richardson was the first Finance Minister actually to use the Act, she wanted to go further.
“Better public finance architecture was not enough – it was necessary but not sufficient,” she said.
"We had a debt and deficit habit that was ingrained, and I knew it would be hard to both break the habit and then sustain the gains over time
Richardson said she then conceived the idea of legislation similar to the Reserve Bank Act (which had also bee introduced din 1989) which would impose legislative limits on Government’s fiscal behaviour.
She talked this over with Scott.
“Graham said the fiscal policy domain was very different,” she said.
“Holding politicians feet to the fire of fiscal responsibility is a very different proposition to the prudent and independent conduct of monetary policy which by then (1993) was really proving its worth.
“Graham saw fiscal policy as an essentially and quintessentially political equation.
“He was right.
“You take away fiscal policy, and the politicians have no toys."
But Richardson was determined; she had presided over some of the toughest budgets in New Zealand history as she brought the country back to fiscal sanity after she had inherited an undisclosed $5.2 billion deficit and had to bail out the state-owned BNZ which was more or less bankrupt.
“I did not want the period of stupendous effort using up all of my political capital for this fiscal effort just to be a one-off transformation of the public finances only to see successive Ministers of Finance revert to spend and tax type.
“Think Bill Birch!”
And thus, she created what is now the other part of the Public Finance Act, the Fiscal Responsibility Act.
What was clear from many of the speakers at the conference was that these fundamental reforms had their origins in crisis.
“To understand the economic changes of which the Public Finance Act was a part you need to understand the sense of crisis that the country felt it was under,” said the former Labour Finance Minister, David Caygill.
“I think that rules like the Public Finance Act, hard binding radical leaps, come out of crisis.
“And because the thinking had been done over a number of years by Treasury and others it was ready to be taken up.”
But Caygill is not convinced a similar environment which could nurture radical reform exists now.
“Do I think now is there a sense of crisis in this nation.
“No, I’m afraid I don’t.”
There would be many who would regard the conference as simply a reunion of the neo-liberals from the 1980s and 90s and though Robertson wants to add to the Public Finance Act, no government since 1993 has dared changed any of the fundamentals of the Act or its “mates” (as Ruth Richardson calls them), the Reserve Bank Act and the Fiscal Responsibility Act.