Public Finance Act has proved its worth in good times and bad
When New Zealand's Public Finance Act was passed in 1989, it represented a set of changes that was both radical and untested, writes Professor of Practice in Public Finance Management Ian Ball.
When New Zealand's Public Finance Act was passed in 1989, it represented a set of changes that was both radical and untested. Partway through its implementation, in 1992, the Economist published an article describing the changes in a generally positive way, but withholding judgment and concluding: "Time will tell."
With the act's 30th anniversary on July 26, it seems the right moment to consider what time has to say, and whether New Zealanders should, at last, break open the bubbly.
The Economist noted that when the act was passed New Zealand's government had been incurring deficits for the previous two decades. The act required the government to produce a proper balance sheet, the first sovereign government to do so, and this showed liabilities exceeded assets by over $14 billion in 1991 dollars.
Since then, the situation has steadily improved, with the government running surpluses, and improving its net worth (assets less liabilities), virtually every year except the four years following the global financial crisis and the Canterbury earthquakes.
Net worth now stands at over $134b, equivalent to about 45 per cent of gross domestic product (GDP).
The fact assets exceed liabilities is itself a source of security. The comparison with other countries is striking – the governments of Australia, Canada, the United States and the United Kingdom all have significantly negative net worth, and in the case of the UK and US the negative net worth is roughly the size of their respective GDPs.
The principles of fiscal responsibility imported into the Public Finance Act from the Fiscal Responsibility Act see positive net worth as a "buffer" to economic and other shocks. So it has turned out.
While net worth declined for only four years after the financial crisis, in the four countries cited above government net worth remains, a decade later, on a downward track. A strong balance sheet apparently allows a much quicker recovery.
But has the history of running surpluses resulted in slower economic growth than in the comparable countries that have been incurring consistent deficits?
Apparently not. The latest World Bank numbers (for 2017) show that the five countries have growth rates between 1.8 and 3.0 per cent, with New Zealand second at 2.8 per cent.
Perhaps, then, the impressive fiscal and economic results have been at the expense of the social fabric? By no means are things perfect in New Zealand.
The Wellbeing Budget in May focuses on problems of child poverty and mental health, among many other issues that require government attention and resources. Yet these issues are still able to be addressed while budgeting to maintain a surplus.
And if a comparison is made with other countries, it again appears New Zealand stacks up very well, scoring near the top in a number of international rankings of social progress, living standards and even happiness (where we are eighth, ahead of the other four countries).
But do New Zealanders benefit from their government having a strong balance sheet?
It is very like having a strong personal balance sheet. There is a greater ability to absorb shocks or surprises without being forced into taking drastic remedial steps – you can fix the car without having to cut the food budget. This was demonstrated in the way the government bounced back, financially, from the financial crisis and the earthquakes.
As part of managing a shock, a strong balance sheet also enables easier access to emergency debt financing. Coupled with this is the benefit of being able to borrow more easily and more cheaply in normal times, if it is necessary or desirable to do so. This might be useful, for example, if there is a need to invest in infrastructure.
At the time the Public Finance Bill was going through Parliament, the auditor-general said the reforms "will give effect to the most fundamental changes to financial management practices seen in New Zealand's history. These reforms are enormous, ambitious, and, in large part, unprecedented anywhere in the world".
Thirty years on, the act has been amended several times, but the most ambitious elements remain firmly in place. Notwithstanding the apparent success of these reforms, a number of key elements have been attempted by few, if any, other countries.
The Government is currently considering further changes to the act. In the meantime Victoria University of Wellington is running a conference to recognise the anniversary.
In October 2018, the Economist weighed in again, saying: "Only in one country, New Zealand, is public-sector accounting up to scratch. It updates its public-sector balance-sheet every month, allowing for a timely assessment of public-sector net worth."
Perhaps, ahead of any further changes, this might be an opportunity to raise a glass to celebrate an ambitious and successful act.
Read the original article on Stuff.