Weaknesses in New Zealand's Fiscal Institutions

Full text

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Weaknesses in New Zealand’s Fiscal
Institutions
Ian Ball, Tim Irwin, Graham Scott and John Zohrab

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Dedicated to the memory of
John Zohrab
A colleague whose career-long commitment to better fiscal policy and public financial
management here, in Central Asia and the Caucasus inspired and drove this report.

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Preface
Earlier drafts of this report were prepared to support an initiative, begun in 2021
and led by John Zohrab, to make the case for a privately funded fiscal council. The
writers were concerned about various fiscal developments at that time and saw
evidence that the quality of New Zealand’s fiscal processes, rules and conventions
was eroding. At the time the prospects for a publicly funded fiscal council were dim.
Besides which, international opinion on the effectiveness of publicly funded councils
emphasised the crucial importance of independence. The writers were investigating
the possibilities for private funding for a fiscal council when John died in December
2022.
Circumstances have changed since the project began and since John died. The
deteriorating fiscal outlook had become a concern for the outgoing government and
is front and centre for the incoming government. The Minister of Finance has
announced her intention to make changes to the Public Finance Act.
As result of these changed circumstances Ian, Tim and Graham recast the material
in the paper away from a proposal for a non-government organisation, which would
push for an agenda of changes across the institutions of fiscal policy, towards a
broader framing of the issues and possible improvements. If the Government is to
lead a regeneration of fiscal institutions, then this broader framing of the agenda is
more appropriate to the current circumstances.
We are very grateful to Lesley Adcock, John’s wife, for discussions with us about
how John might have judged the situation. While he never saw the changes in the
circumstances and the drafting changes to the report, we believe he would have
agreed with these changes. Better fiscal policy was his professional passion, and he
would have welcomed the opportunity to offer his views, which infuse this report, to
a government seeking to address the current weaknesses in fiscal policy and take
advantage of new perspectives and methods.
We acknowledge with thanks Ken Warren’s comments on earlier drafts and, on the
penultimate draft, those of Alan Bollard, Bevan Wallace, Bryce Wilkinson, Kerry
McDonald, Ruth Richardson, Graeme Wheeler and Jim Brumby. We also appreciate
the extensive comments provided by the Treasury and the Office of the Auditor
General. Responsibility for the content remains with the authors.

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Overview
The purpose of this report is to draw attention to weaknesses in the laws, processes,
incentives, behaviours and conventions that are the foundation of government
decisions to raise revenues and allocate expenditure, including those that determine
how the government is held to account. These are described here as “fiscal
institutions” and their importance to effective government and democratic processes
and accountability is discussed.
The report briefly discusses weaknesses in seven facets of the overall framework of
fiscal institutions and concludes that renovations and improvements are required to
keep the fiscal framework in shape to provide better assurance of long-term fiscal
sustainability and better governance.
Whereas the main participants in the fiscal framework have some capability to
bootstrap these improvements piece by piece, the commitment and or the
opportunity to do so has been absent in places. A broader initiative across the
system is justified. The multi-faceted system of fiscal institutions and the interplay
between them is complex. Tuning up the elements one by one is necessary but not
necessarily sufficient to ensure the system produces superior results. How the
system is operated, taking into account skills, resources, experience, culture and
leadership is what counts.
Put simply, the fiscal institutions created in the late 1980s and early 1990s
addressed the circumstances of the time and embedded enduring principles of fiscal
policy that have served satisfactorily for the most part since. However, they have
eroded and have been circumvented and adapted in response to changing agendas
and fiscal challenges, shifting theoretical perspectives on fiscal policy and especially
the short term and organisational incentives on the participants. Today we face a
structural fiscal deficit bearing unfortunate similarities to the situation in the 1980s
that sparked those early reforms. A broad initiative to review and upgrade the fiscal
institutions was needed anyway and is now timely.
The authors intend to follow up this report with others addressing further topics in
depth and within the context of a broad review of fiscal institutions. They intend to
provide detailed reports on a Parliamentary Budget Office, long term fiscal
sustainability and Parliament’s role in control of expenditure with attention to the
process of appropriations.
Introduction
Fiscal institutions are the laws, rules, practices and conventions that shape
the way fiscal decisions are made. Thus, fiscal institutions create the pattern of
rights and obligations to make and place controls on fiscal decisions, implement the
decisions, report the results and establish accountability for those results. Fiscal
institutions include the processes of strategy development, budgeting and
appropriations, budget execution and monitoring, financial reporting and auditing.

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New Zealand’s fiscal institutions in this sense do not consist only of entities such as
the Treasury, the government, Parliament and the Audit Office.i
Ideally, these institutions should embed the rights to make fiscal decisions,
and the information and the incentives for these decisions, so as to
maintain economic and financial stability. Fiscal institutions should promote the
effectiveness and value for money of state sector functions while reconciling the
public’s demands for public services and their willingness to pay for them.
There are many elements of New Zealand’s core fiscal institutions that are
sound, and there are grounds for optimism that they will be regenerated.
But regeneration begins with recognition that some of the institutions have eroded
over time and need strengthening to improve the allocation of public resources,
resolve long-standing and emerging fiscal challenges and make governments more
accountable to Parliament and the public for their effectiveness in the use of public
money. This paper illustrates various weaknesses by reference to fiscal metrics,
fiscal responsibility, long-term fiscal sustainability, the appropriations system, the
living standards framework, expenditure control and management of large
infrastructure projects.
These illustrations show the depth and complexity of the fiscal situation
and provide insights about improvements that can be made. Ultimately the
elected representatives of the citizens must be free to make the decisions they were
elected to implement. However, the support they are provided with in making their
expenditure and revenue decisions, through our fiscal institutions, can bring better
outcomes over time and fewer own goals. And the pervasive transparency that must
underlie these institutions is crucial for Parliament to perform its democratic
functions and to keep the citizens informed.
New Zealand’s Fiscal Institutions in a Nutshell
New Zealand’s current fiscal institutions have three layers: (i)
constitutional requirements and conventions; (ii) other laws that govern
fiscal management; and (iii) regulations, instructions and management
processes that give effect to (i) and (ii). The Public Finance Act 1989, including
its subsequent revisions, is the centrepiece of New Zealand’s fiscal institutions. One
important revision was its incorporation of the Fiscal Responsibility Act 1994. There
are also significant fiscal provisions in the Constitution Act 1986, the State-Owned
Enterprises Act 1986, the Public Audit Act 2001 and the Crown Entities Act 2004.
These are summarized, along with their supporting regulations, instructions and
management processes, in the Annex. There are also important regulations and
practices such as those in Parliament’s Standing Orders and in Treasury Instructions.
The key constitutional principle is that Parliament has ultimate authority
over public finances, including for raising revenue, incurring expenses and
borrowing. This principle is expressed primarily through the Public Finance Act,
which inter alia requires Parliament to authorise the expenditure of public money
through appropriations.

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The Public Finance Act also specifies the reporting required to establish
what was achieved through the expenditure authorised by appropriations.
Reporting by the executive (i.e., the government and other central public agencies)
enables Parliament to hold it to account, typically through the process of scrutiny.
While the Act mandates the necessary reporting, effective parliamentary control
requires both high quality reporting and effective scrutiny by the relevant
parliamentary committees.
Key principles of New Zealand’s fiscal rules are set out in section 26G of the
Act. This requires the government to, among other things:
a. Maintain total debt at prudent levels;
b. Ensure that on average, over a reasonable period of time, total operating
expenses do not exceed total operating revenue; and
c. Maintain levels of total net worth that provide a buffer against future shocks.
The Act also includes an escape clause. To help deal with crises, section 26G(2)
allows the government to breach the fiscal responsibility principles so long as the
breach is temporary and transparent. In particular, the Minister of Finance must
state (i) the reasons for the departure from the principles; (ii) the approach the
government intends to take to return to the principles; and (iii) the time that the
government expects to take to return to compliance with the principles.
The Public Finance Act’s fiscal responsibility provisions constrain the
management of fiscal aggregates, such as net worth, total debt, the
operating balance, total expenditure and total revenue. Most of these
provisions are what are known internationally as procedural fiscal rules; they set out
principles and processes that the government must follow in determining fiscal policy
as it applies to fiscal aggregates. In contrast, so-called numerical fiscal rules codify
specific values of fiscal aggregates in legislation; the operating balance rule set out
in paragraph 5b above is a numerical fiscal rule, though the reference to a
“reasonable period of time” makes it somewhat vague.
Other requirements in the Act mandate transparency and accountability.
Other parts of Section 26 require the government to specify its fiscal objectives and
to explain how they have changed, if they have. This section also requires that both
forecast and actual financial statements are prepared in accordance with generally
accepted accounting practice in New Zealand, which for the public sector is now
closely aligned with International Public Sector Accounting Standards.ii This ensures
that governments prepare a consistent, comprehensive and integrated set of ex ante
and ex post financial information according to objective standards that they do not
themselves determine. The Act requires the Treasury to prepare various reports,
including a statement of the long-term fiscal position, at least every four years.
The Act defines how Parliament authorises expenditure and accountability
for results. It establishes how public money is to be appropriated by Parliament,
such as for output expenses, benefit payments or capital expenditure, and the
information that the Minister of Finance must present to Parliament in the Budget on

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the proposed appropriations. Prior to 2013, information in support of an
appropriation had to supply “a concise explanation of each appropriation (including
the intended impacts, outcomes or objectives of the appropriation); and the
performance measures and forecast standards to be achieved for each class of
outputs”. But subsequently this requirement was changed to “a concise explanation
of what the appropriation is intended to achieve” and “how performance against the
appropriation will be assessed”. The Act gives considerable freedom to ministers and
managers to decide how to produce the outputs within the scope of an appropriation
and, in the case of a multi-category appropriation, even what services to provide.
Why Fiscal Institutions Matter
Fiscal institutions matter because if well designed they can create
incentives – and information – for Parliament, the government and its
agencies to maximise the quality of the decisions they make. They can
thereby be more effective and efficient in achieving the goals of their fiscal policies.
They become encouraged to focus on the results they are achieving rather than only
on how much they are spending and how much revenue they are raising, thereby
giving more value to the public in the form of expenditure while taking less from the
public in the form of taxation. They are also thereby encouraged to pay due regard
to the long-term as well as the short-term consequences of their decisions and to
minimise the risk of fiscal crises. Such crises are easy to get into and hard to get out
of; they can escalate quickly and interact with other forces to cause widespread
stress.
Fiscal institutions are crucial also because the government is such a large
part of the economy. In the 2020–21 financial year, for example, the New Zealand
government and its agencies and businesses spent $134 billion, which was
equivalent to 39 per cent of the country’s Gross Domestic Product. The extent to
which the spending is well directed and efficiently undertaken is therefore highly
significant for the living standards of New Zealanders. Moreover, the government
must raise revenue to fund its spending, so that the efficiency and fairness with
which this is done is also significant.
Good fiscal institutions promote better democratic governance. The laws
referred to above have deep historical roots going back as far as the Magna Carta in
1215. The fundamental principle of the right of Parliament to control spending and
taxes was established in the Petition of Right 1627 and the Bill of Rights 1688, the
relevant sections of which are part of New Zealand law. The tension between the
executive and those who hold it to account in any democracy is permanent. The
fiscal institutions channel the resolution of that tension, where it emerges in contests
over policies for revenue raising and expenditure. Over time, better fiscal institutions
contribute to the resolution of these contests with a better alignment of fiscal policy
to the revealed needs and preferences of the citizens and with greater stability and
less cost. This is achieved when fiscal institutions bias decisions towards longer term
stability and sustainability of debt and net worth, rising standards of living and
avoidance of unexamined low-quality spending.

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The quality of fiscal institutions can be assessed with reference to multiple
criteria. These include trends in fiscal aggregates and their stability, the allocation
of spending to evolving government priorities, the balance between short-term and
long-term priorities, the effectiveness of spending programmes and the importance
of effective democratic accountability. These all contribute to the ultimate test of
fiscal institutions, which is their effects on living standards and democratic freedoms.
While superior fiscal institutions promote better decisions over time, they
do not assure this. Fiscal decisions are always political decisions ultimately, so
sound rules supported by tidy processes cannot, and should not, supplant the
political will of elected governments to spend and tax in ways that might not be seen
as promoting sound fiscal principles over time.
The last comprehensive reform of New Zealand’s fiscal institutions was
associated with substantial improvements in aggregate fiscal performance.
Whereas governments systematically ran deficits in the two decades leading up to
the implementation of the Public Finance Act 1989 and the Fiscal Responsibility Act
in 1994, they ran surpluses in the following years until the global financial crisis.
Public debt, which had been increasing steeply as a percentage of GDP before 1994,
generally fell thereafter, as shown in Figure 1.iii Net worth changed from being
negative and large to being positive. The renewed strength of public finances gave
governments the ability to spend more and accept a temporary drop in the tax take
during and after the Asian financial crisis, global financial crisis, Christchurch
earthquakes and pandemic.
Figure 1: Core Crown Net Debt as a Per Cent of GDP, 1972–2022
Source: New Zealand Treasury, https://www.treasury.govt.nz/publications/information-
release/data-fiscal-time-series-historical-fiscal-indicators.The measure of Core Crown net debt
shown is the one labelled former in the time series.

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Facing up to the Structural Fiscal Deficit
If one were forced to choose a single indicator of weak fiscal institutions it
would be a structural fiscal deficit. A structural fiscal deficit is one that persists
even when the economy is operating at its full capacity. By contrast, a fiscal deficit
that is not structural fades away as the economy moves from recession towards its
full-employment capacity because of “automatic stabilisers”, like the reduction in
unemployment and other benefits as the unemployment rate falls and higher tax
revenues from profits and consumer spending.
New Zealand now has a structural deficit according to the estimates of the
Treasury and the IMF. The IMF has written:iv
Current fiscal policy is more expansionary than in most other advanced
economies. The government is running a structural fiscal deficit with its
spending-to-GDP ratio higher in FY23/24 following Budget 2023’s
sizable operating and capital allowances in responses to rising costs
and one-off outlays related to the North Island weather events.
This situation comes on top of the legacy of the response to the COVID shock to the
economy. The fiscal framework of that government was abandoned not only in
response to the COVID crisis, but beyond. The deficit outlook today is driven by very
large increases in ongoing expenditure commitments relative to the prospective tax
receipts.
Structural deficits should be avoided in almost all circumstances. Removing
them is typically disruptive to the economy and to public services and made harder
when, as now, they are accompanied by a recession. If they are accompanied by
rising interest rates and negative views in financial markets about debt
sustainability, then attending to the situation becomes more urgent and difficult.
The current structural fiscal deficit is occurring against a background of
Treasury and other forecasts of future structural deficits. These forecasts go
back many yearsv and are driven mainly by an aging population that requires
increasing spending on pensions, health and public services but works less and pays
less tax. This situation has been foreseen since the 1990s and will persist in the
absence of very difficult political decisions to remove this threat to the sustainability
of the government finances.
No set of fiscal institutions can guarantee fiscal sustainability. Unanticipated
large fiscal shocks are inevitable, and ministers have extensive freedoms to
circumvent desirable practices and rules if they choose to – particularly if they

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change the relevant laws. But in the context of this report, the current situation
poses two central questions.
a. Have our fiscal institutions done as much as could have been expected to
avoid this situation?
b. What changes in these institutions would promote the correction of the
situation, reduce the probability of a repeat and attend to the long-term
outlook for an unsustainable fiscal deficit?
Fiscal Metrics
The selection of metrics to measure aggregate fiscal performance and
position is a critical element of the operations of fiscal institutions. There are
several kinds of relevant metrics:
a. Metrics which inform analysis of the impact of the government’s financial
activities on the macro-economy, such as deficits/surpluses (cash and
accrual), net debt and net worth.
b. Metrics which report the financial performance and position of public
entities in carrying out their governmental functions, such as producing
goods and services in market and non-market settings. These metrics
report on governmental performance and position in a way that is partially
analogous to financial statements report for corporates, but also account
for the public purposes and non-commercial activities of these entities.
c. Metrics that record the resource usage, key business indicators and results
by public entities in administration of functions such as transfers and
regulations.
d. These metrics are for individual entities, such as departments, non-
commercial entities (e.g., Crown Entities) and commercial entities (e.g.,
State-Owned Enterprises), as well as for the consolidated whole-of-
government entity.
There are two kinds of international standards used to define such metrics:
(i) accounting standards; and (ii) statistical standards. New Zealand’s
accounting standards for the public sector are closely aligned with the International
Public Sector Accounting Standards issued by the International Public Sector
Accounting Standards Board. These standards underpin financial reporting by the
government, including budget documents and financial statements that are required
by the Act to conform to generally accepted accounting practice. Statistical
standards for public finance are codified in, among other places, the International
Monetary Fund’s Government Finance Statistics Manual 2014; New Zealand regularly
reports its statistics to the International Monetary Fund according to these
standardsvi and they are also published by Statistics New Zealand.
Although there is now a substantial degree of alignment between
international accounting and statistical standards, there remain significant
differences between them. Both standards can be used in reporting of the metrics

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identified above. New Zealand and an increasing number of other countries produce
credibly audited financial statements, and while statistical reports are not audited, if
their underlying data are derived from accounting records, reliability concerns are
lessened. The independence of statical agencies such as Statistics New Zealand also
enhances the reliability of the statistical reports.
There is an important distinction between fiscal indicators and those
indicators that are used as fiscal targets or fiscal limits. Fiscal targets and
fiscal limits can change periodically because of changes in either economic
conditions or the fiscal framework. However, fiscal indicators should change only
rarely. This is because the assessment of fiscal performance and position requires
the analysis of trends in fiscal indicators through time, which is problematic if there
are breaks in the time series. Notably, the Treasury time series on net debt still
includes current data using definitions that were replaced in 2009.
The assessment of central government aggregate fiscal performance and
position is enhanced by fiscal indicators that can be compared with those of
central governments in other countries. Such assessment requires the
international standardization of the metrics used (whether according to accounting
or statistical standards, or both). However, many governments adopt standards they
determine for themselves, and New Zealand has some. In principle, individual
governments are free to adopt the measures that suit their conditions. But, even so,
it is essential for making valid comparisons of fiscal performance with international
benchmarks that the chosen indicators can be tracked back to the underlying
sources of information, from which the internationally comparable metrics are
derived.
New Zealand’s fiscal indicators include both economic and accounting
perspectives. More than in most other jurisdictions they offer a balance sheet view
of fiscal performance and position – measuring revenues and expenses on an accrual
basis and placing emphasis on net worth as a summary metric for fiscal position.
Several features of the indicators are worth highlighting:
a. The core Crown entity and the entities applicable to gross sovereign-issued
debt and net core Crown debt (including the Reserve Bank Funding for
Lending Programvii) do not correspond to the entities of international
standards;
b. The OBEGAL (operating balance before valuation gains and losses) does not
correspond to any of the metrics of international standards; and
]
c. Net debt does not correspond to the definition of net debt in international
standards.viii However the change in budget 2023 to bring in the National
Super Fund has brought the more recent measure closer to the definition in
the Global Financial Statements. Even so, issues remain with the net debt
indicator in resolving its definition and reconciliation with international
conventions.

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Some of New Zealand’s fiscal indicators have not been stable through time.
In the long-term fiscal statements shown in table 2 below, the five statements
between 2006 and 2021 have disclosed the baseline projections in terms of six fiscal
indicators in total, but only one of these indicators (Total Revenue) appears in all the
statements and the other five indicators (Gross Core Crown Debt, Net Core Crown
Debt, Net Debt less New Zealand Superannuation Fund Assets, Net Worth, Tax
Revenue) have been dropped from at least one of the statements. That said,
important indicators consistent with international public sector accounting standards,
in particular Net Worth and Operating Balance, have been stable over time.
The practice of using a set of aggregate fiscal indicators that is stable over
time and either in conformity with international standards, or easily
reconciled with them, is an important fiscal institution. It underpins consistent
aggregate fiscal management by the government and the transparency and
accountability necessary for eternal scrutiny and debate.
Fiscal Responsibility
New Zealand’s compliance with its fiscal rules before Covid was reasonably
good. Governments reported their budgetary plans in quantitative terms that made
it relatively easy for Parliament and the public to hold them account; they ran
operating surpluses much of the time; and debt declined to levels that were
generally thought to be prudent.
Even before Covid, however, there were some problems. Until 2019, there
was no definition of the prudent level of debt that provided a reasonable degree of
transparency and objectivity, and efforts to develop the definition of the prudent
level of debt in 2019 and 2022 were incomplete. In addition, the Budget
Responsibility Rules adopted in 2017, including their subsequent modifications,
overlooked the principle relating to the net worth buffer. Moreover, after the shock
associated with the global financial crisis in 2008, the Government stated that
“projected increases in debt and declines in the Crown’s net worth are outside of the
range that the Government considers prudent,”ix but the Government only partly
met the requirements of the escape clause. It met the requirement to set out the
approach it intended to return to compliance with the prudent debt principle, as it
did in relation to the net worth buffer. However, it did not meet the requirement to
set out the period of time that it expected the debt level and net worth buffer to
return to compliance; it envisaged a departure from the debt and net worth
principles for over a decade and perhaps much longer. This was both non-specific as
to the period, and in any event arguably too long to be consistent with the idea of a
temporary departure.x Also, it did not refer explicitly to the relevant clause in the
Act, which was a lack of transparency.
Further weakening of fiscal institutions surfaced in the government’s
abandonment in 2020 of the long-standing practice of stating quantitative
fiscal objectives. Since the Fiscal Responsibility Act 1994, successive governments
have set fiscal objectives in quantitative terms in a way that made their plans more
transparent and encouraged accountability. The Budget Policy Statement published

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in December 2019 said, for example, that the government “will maintain net debt
within a range between 15 and 25 per cent of GDP”. But the 2020 Budget published
in May 2020 stated only that the government would “maintain total debt at prudent
levels”, which, without specification of the government’s interpretation of prudent,
had little meaning. Covid made the fiscal outlook exceptionally unclear, and initially
even doing the analysis may have difficult. Yet the non-quantified approach was
continued in the Budget Policy Statement published in December 2021 and was
reversed only in Budget 2022 published in May 2022, perhaps in response to
international commentary.xi
The Government stated during the pandemic that it was not complying with
the principle requiring the operating budget to be balanced on average over
time.xii It noted the government could depart from the principles on a temporary
basis, but it did not follow the escape clause’s requirements to explain the approach
it was taking to return to compliance or state how long that would take. Since then,
the forecast return to operating surpluses has been repeatedly delayed.
Although debt rose above levels that were previously considered prudent,
between 2020 and 2022 the Minister of Finance simply asserted that the
level of debt was prudent, without any supporting technical assessment.
Eventually, the Treasury’s 2022 redefinition of the prudent level of debt provided
this assessment. In relation to net worth, the 2021 Budget acknowledged that the
buffer had been used to fight the Covid pandemic, while the 2022 Budget simply
stated the long-term objective that the government will use the Crown’s net worth
to maintain a productive, sustainable and inclusive economy, consistent with the
debt and operating balance objectives. No quantitative assessment was provided,
but nevertheless the thinking was that the debt forecast was prudent, with
apparently an expectation that the situation would be rectified when the COVID
fiscal support tailed off. The track record of governments since 1994 provided some
comfort for the view that the Government would soon return to more clearly prudent
fiscal approach. However, each annual update of the fiscal outlook moved the timing
of declining debt further into the future. Temporary was coming to mean ‘as long as
it takes’. This has provoked a warning from the Fitch rating agency in August 2023,
which noted that New Zealand had one of the largest fiscal responses to the
pandemic in the world and that forecasted returns to surplus had not been met in
recent years. The agency pointed to the importance of the new government’s plan to
return to surplus in 2027. Referring to the long-standing commitment to prudent
fiscal policies across the political spectrum the agency warned that a risk to the
rating is “Failure to put general government debt/GDP on a sustained downward
path over the medium term, for instance, from insufficient fiscal consolidation”xiii.
Other fiscal institutions have not been used fully to enforce compliance with
the fiscal responsibility provisions of the Act. Parliament, in particular its
Finance and Expenditure Committee, has not meaningfully challenged the
government’s implementation of these provisions. Although the Controller and
Auditor-General has published commentaries on the Treasury’s long-term fiscal
position statements,xiv these have not included formal assessments of compliance
with the fiscal responsibility provisions.

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Some authoritiesxv argue for the abandonment or rethinking of fiscal rules.
Some of these make the obvious point that debt can expand provided that its
growth rate is no more than growth of the income from which the debt will be
repaid. But this rule of thumb can be difficult to follow, for example because of the
volatility of interest rates. The reality of fiscal decision-making, both technically and
politically, is far more complicated than being driven by rigid quantitative targets.
Trade-offs between stabilisation and fiscal sustainability are made. Monetary policy
responses to fiscal consolidation are weak when interest rates are very low. Models
of fiscal sustainability display strong effects from small changes in the assumptions.
There are political constraints on the acceptable size of current surpluses that might
be technically required to meet debt service costs. Some would argue that all this
complexity makes quantitative fiscal rules problematic.
The fiscal responsibility provisions in the Public Finance Act are not hard
rules, but principles, precisely because the promoters of the original Fiscal
Responsibility Act saw the problems strict rules would create. But they were
convinced that rules would make a difference, because they take into account the
asymmetric information and incentives surrounding fiscal decisions and which create
a bias toward levels and instances of spending that are not in the longer-term public
interest. For example, the decision to borrow creates an immediate and certain
addition to future repayment, whereas the future capacity to repay is uncertain and
estimates are often subject to optimistic bias. The political reality is that increasing
expenditure is always easy whereas restraining or cutting it spends political capital.
Fiscal rules are the way prudent governments address these asymmetries
in information and incentives. But rules can take many forms. A crucial feature of
New Zealand’s arrangements is that the rules are benchmarks, which provide an
anchor to projected spending trends, but can be missed transparently and with
undertakings about how to get back on track. As described above the way these
provisions have been treated has been unsatisfactory. Treasury acknowledged the
need to return to surpluses and to target a declining debt to GDP ratio in 2022,
which the writers welcome.
Long-Term Fiscal Sustainability
Pursuant to the Public Finance Act, the Treasury has published statements
of long-term fiscal projections covering 40 years into the future. These
statements have been published in 2006, 2009, 2013, 2016 and 2021. Table 2 sets
out summaries of the baseline projections of the five statements.
Table 2. Selected Fiscal Indicators in Per Cent of GDP in the Last Year of the
Baseline Projection in Treasury’s Statements of Long-Term Fiscal Position

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Year of statement
2006
2009
2013
2016
2021
Gross core Crown debt
104
..
..
..
..
Net core Crown debt .. 223 198 206 197
Net debt excluding
Superannuation Fund
62 .. .. 17
4 ..
Net worth
.
.
−145 .. −146 −137
Tax revenue
32 30 29 29 ..
Total revenue
36 32 33 31 30
Source: New Zealand Treasury’s Statements of the Long-Term Fiscal Position, available at
https://www.treasury.govt.nz/publications/strategies-and-plans/long-term-fiscal-position.
Notes: (1) In some statements the baseline projection is described as the historical spending.
scenario. (2) In the statements published in 2006 and 2009 the last year of the projection is 2050.
In those of 2013 and 2016 it is 2060. In that of 2021 it is 2061. (3) .. means not reported.
All these statements have shown, in the baseline scenarios, that the long-
term fiscal position is unsustainable. The statements that projected Net Core
Crown Debt reported it at or around 200 per cent of GDP at their projection
horizons, and the statements that projected Net Worth reported it to be at or around
negative 140 per cent of GDP at their projection horizons.
All the statements have presented scenarios in which the long-term fiscal
position could become more sustainable by identified policy changes that
increase revenues or reduce expenditures. However, notwithstanding that the
baseline scenarios showed fiscal unsustainability in all the statements, in the 15
years between 2006 and 2022, no government has made policy changes sufficient to
achieve long-term fiscal sustainability. The most significant policy change in this
regard has been the establishment of the Superannuation Fund, but its impact on
long-term fiscal sustainability will, according to the projections, be limited. These
insufficient policy changes point to weakness in New Zealand’s fiscal institutions. The
demographic change driving some of the unsustainability is coming closer, so the
time to impose solutions is shortening, meaning the adjustments to sustainability
will be more abrupt, when they can no longer be avoided.
The Investment Statement is developing into an important and insightful
source of information into the sustainability of fiscal policies. New Zealand
was first to prepare a government balance sheet in the early 1990s and remains
unique in the way it prepares and presents this information. The Minister of Finance
in 2013 saw this as an underused asset and initiated the requirement to prepare a
report every four years known as the Investment Statement. Its purpose is “to
describe and state the value of the Crown’s portfolio of significant assets and
liabilities, how this has changed from the past, and how it is expected to change in
future.” It is a foundational document for thinking about how to restore and retain
fiscal sustainability, which provides various metrics, descriptions and insights about
the fiscal problem the country faces, but it has not been as influential on decisions
as it should have been. More work is needed on how best to interpret this

16
information by better integrating accounting and public policy perspectives.
Information about long term fiscal outlooks and policy responses to these would be
strengthened by giving this information a more prominent position within the annual
decision-making processes and reports.
Appropriations
While the transparent management of fiscal responsibility and long-term
fiscal sustainability is decades-old, appropriations are centuries-old. New
Zealand inherited them from the United Kingdom, where they emerged as one of the
compromises between the executive and the legislature in their struggle for control
that spanned much of the 17th century, via two civil wars and the execution of one
monarch. It has been a long story of slow progress in building fiscal institutions that
give contemporary form to the fundamental principle of democracy that the
representatives of the people in the legislature raise taxes and approve expenditure,
not the King, President, Chancellor or Prime Minister. Appropriations are critical for
expenditure control, as they authorise the executive to incur expenditure for which it
is legally and publicly accountable, both as to the amounts spent and the objects of
expenditure. The detail matters. A legislature is not doing its job if it is just handing
over buckets of money to the executive to do what it likes.
Objects of expenditure for appropriations can, in principle, vary
significantly; they can relate to categories of input, the production of
services (outputs) or the pursuit of specific outcomes. Each of these can be
specified with greater or lesser precision, and appropriations can apply to a single
financial year, multiple years or can be permanent. The last comprehensive reform
of fiscal institutions in New Zealand gave public sector managers widespread
freedom to choose the inputs they used to produce outputs (mainly services). But
the reforms preserved, indeed enhanced, parliamentary control over spending by
limiting appropriations to carefully specified, homogeneous classes of outputs.
There is a consensus that accountability and expenditure control should still
be grounded in:
a. Credible annual budgets informed by accompanying medium-term
forecasts and aggregate limits, but not detailed medium-term
appropriations;xvi
b. Appropriations based on departments rather than crossing departmental
boundaries;xvii and
c. Appropriations with clearly specified objects.
However, in recent times appropriations have become less clearly specified
and less tightly time bound, with greater use of multi-category and multi-
year appropriations. Different classes of outputs have been collapsed into single
appropriations, and in some cases appropriations now cover a variety of outputs
produced in pursuit of a single overarching purpose by more than one agency. The
case made for these changes was that managers and ministers could reduce

17
administrative costs and have greater freedom as to how to meet their objectives.
But this has come at a high cost in terms of transparency and accountability and,
perhaps as a consequence, no apparent overall improvement in performance.
As a fiscal institution critical to representative democracy, the importance
of appropriations for New Zealand cannot be overstated. Its weakening in
recent years is therefore a major concern. Tighter rules around the use of annual,
multi-year and multi-category appropriations are needed. The conventions and
provisions for “supply” might also be reviewed in the context of reviewing
appropriations.
Wellbeing and Fiscal Institutions
Treasury has worked to develop its Living Standards Framework (LSF)xviii
from as far back as 1999xix. Inspired by the Organisation for Economic Co-
operation and Development’s Better Life Initiative,xx the framework includes many
indicators of wellbeing aggregated into a few broad concepts of wealth and
resilience, which have evolved over time. After several phases of development, the
LSF currently entails a selection of indicators shown in a dashboard, which
aggregates the indicators into three “levels”:
a. Individual and collective wellbeing
b. Institutions and governance
c. Wealth including human capability and the natural environment and public
benefit.
There are twenty-two “domains” under these, which capture one hundred and three
indicators.
The Treasury has produced a Māori wellbeing framework He Ara Waioraxxi
alongside the Living Standards Framework. The Treasury explains:
The Treasury applies both the Living Standards Framework and He Ara
Waiora to explore wellbeing from different cultural perspectives, values and
knowledge systems. We are increasingly using both frameworks to support
our advice to Ministers and to support the Government’s wellbeing
approach.xxii
Originally produced for the Tax Working Group in 2018, He Ara Waiora is described
thus by the Treasury:
He Ara Waiora presents a holistic, intergenerational approach to wellbeing.
While its principles are derived from mātauranga Māori, many of its elements
are relevant to lifting the intergenerational wellbeing of all New Zealanders.
Although mostly treated in a bi-cultural context, some of the promoters of
He Ara Waiora see it as opening the way for greater cultural responsiveness
in public policy across other cultures within New Zealand. The Treasury offers
as examples its use in a large-scale project for urban regeneration in Porirua and an

18
assessment of the wellbeing impacts of COVID.xxiii While the two frameworks overlap
there are differences reflecting Māori and non-Māori perspectives on wellbeing.
The Public Finance (Wellbeing) Amendment Act requires Treasury to
publish a report on the state of wellbeing in New Zealand at least every four
years. Te Tai Waiora is the first of these reportsxxiv and is described this way:
Aspects of wellbeing such as health have been covered in far greater detail in
reports by other government agencies and relevant experts. Our hope is that
Te Tai Waiora will add to this growing body of knowledge by providing a
macro perspective that compares, contrasts and draws links across as many
facets of wellbeing as possible.
The report states that “we are healthier, better educated, have higher
incomes and are less affected by crime than previous generations” but
“Younger people fare worse than older people in three priority areas: mental
health, educational achievement and housing quality and affordability.” So
that “For the first time in recent history, there is a possibility that the next
generation won’t be better off.”
The LSF is represented as central to the work of Treasury, as shown in the
following quates from several secretaries over time
(the LSF) Does seek to establish a broader intellectual basis for our work –
one that provides a guide for how we should be thinking about the complex
and multidimensional nature of living standards. xxv
The framework will therefore mean a shift in how Treasury formulates its
advice.
The Framework is intended to help Treasury consistently provide Ministers
robust, theoretically grounded and evidenced-based advice that aims to
improve the lives of all New Zealanders.xxvi
the Living Standards Framework is simply part and parcel of our role in
advising Government. Democratic governments have always had broader
objectives than just growth, productivity, and fiscal discipline. What we are
trying to do is help to bring rigour to the way we provide advice on how well
public spending meets these wider objectives in a consistent wayxxvii.
We see it as robust economics to draw on a broad range of data and evidence
in our definition of progress and in our policy advice.xxviii
The last government strongly endorsed the framework, intended that it
endure changes in governments and based its so-called wellbeing budgets
on it.

19
Analysis of the indicators from the LSF Dashboard was also used, alongside
other wellbeing evidence, to inform development of the five priorities of the
Government’s 2019 Wellbeing Budgetxxix.
Treasury does not however conflate the LSF with the last government’s wellbeing
budgets.
With quarter of a century in its episodic development and with the repeated
intention that it frame and analyse fiscal issues, the LSF is a very prominent
fiscal institution and should be reviewed for its effectiveness. Essentially all
the material available on the LSF elaborates the framework and how it has evolved.
It awaits a deeper appraisal of its contribution to better economic and fiscal policy
analogous to the periodic reviews of forecasting for example. The following
paragraphs elaborate some comments and questions about the LSF and its impacts
on policy.
Scope complexity and value judgements
Few would argue against wellbeing as the appropriate goal for
public policy, but the scope of the LSF is huge. Within the economics
profession wellbeing or welfare has been central to its development for at least two
hundred years, as has been pointed out in presentations by Arthur Grimes, who is
New Zealand’s leading researcher in the field. Wellbeing analysis is the latest
development in a long tradition of welfare economics using new data sources, cheap
data processing and some new technical methods including surveys of self-reported
wellbeing. However, there is a theme through the major announcements over the
years and quoted above, that the LSF is multidisciplinary, covers a huge territory
and tries to encompass the different perspectives on wellbeing and the frameworks
and agendas of relevant professions and agencies. This expansive view was driven
partly by the last government. For example, Treasury stated during the last
government’s term in officexxx:
The current Government has clearly signalled that it wants to embed a
wellbeing approach across the public sector. This involves moving to broader
measures of progress, consideration of longer-term impacts, and a whole-of-
government approach. The Government has asked the Treasury to use the
LSF and He Ara Waiora to support this objective.
There is a lot more in this than contemporary developments in welfare economics.
But where are the boundaries of this huge territory? What, if anything, about human
wellbeing is out of scope for the LSF? Perhaps the awkward attempt to incorporate
cultural capital in a way that is analytically tractable signalled a boundary to the
attempt to bring everything relevant to better public policy into an integrated
intellectual structure. A theory of everything is an impossibility and a compendium of
everything that appears to matter isn’t a theory. Economy in public policy methods
and resources is a virtue. We can be overwhelmed by complexity we will never
understand and should seek out the opportunities for making improvements in the
things we do understand. After years of expansion of the approach it would timely
for Treasury to consider a more focused approach centred on a smaller suite of

20
issues New Zealanders really care about, which would change over time and be set
by ministers. Singapore has taken this approach.
The scope and complexity of the LSF requires a lot of value judgements to
be made. Professionally competent policy analysts are careful to distinguish
between advice based in the expertise they are employed for and advice based on
value judgements they hold personally, or the group they relate to holds. The
distinction between the two can be fuzzy, because the choice of analytical methods
and the way issues are framed are not entirely value-free. The LSF internalises a lot
of value judgements about what matters, how to respond to messages in the data
on the dashboards, what analysis to draw upon and what issues to emphasis in
giving advice. This follows from the broad scope of the framework and the intention
to draw on multiple disciplines to analyse it in an integrated way.
Treasury is aware of the risk of inserting value judgements into its
professional advice:
Treasury uses an empirically-based approach to advise Ministers how a policy
change will affect individuals and groups, and how to best achieve the
government’s distributional objectives. To maintain an apolitical position,
Treasury avoids making value judgments on what represents a ‘fair’
distribution of living standards.xxxi
However, the expansive multi-dimensional nature of the LSF will often pose trade-
offs between wellbeing objectives that empirical analysis will not resolve and that
senior policy advisers cannot avoid. Treasury’s response that it gives the advice and
ministers make the decisions is not very insightful when probing the institutional
influence of the LSF. A review of the LSF could cover the practical experience of the
how conflicts between wellbeing indicators are framed and how they are resolved.
Cost benefit analysis has been adapted to the LSF. Treasury has stated that:
The Treasury’s own cost-benefit analysis tool, CBA(x), is a very good example
of an attempt to value non-market goods and servicesxxxii.
CBA is the traditional way used in finance ministries around the world to evaluate
the net value of a proposal in monetary terms. In its simple form it is focused on the
greatest good for the greatest number and does not account for the fine-grained
segmentation of the population within the LSF. Distributional objectives and
allowance for costs and benefits by way of externalities that are not captured in the
basic numbers are pasted onto to the analysis ad hoc. It is not uncommon for the
unpriced externalities to be so large in relation to the variables that are priced that
the decision is driven by non-quantified judgements about the externalities. In its
favour, CBA operates at the margin by assessing what effects on wellbeing would
follow from making a proposed change. The LSF is more oriented to setting
overarching broad objectives for lifting living standards in multiple dimensions, while
generating and assessing proposals that might move reality towards these broad
goals. By design it gives centrality to distributional issues, which is often an
addendum to CBA.

21
We are certainly mindful of distributional outcomes, and it is our intention to
use this living standards framework to advise Ministers on themxxxiii.
Cost benefit analysis and the LSF
Treasury has invested in expanding the measurability of wellbeing by
adapting cost-benefit analysis to include wellbeing outcomes through
monetisation of common variables used across domains to assess the value
of proposals. The approach is known as CBAxxxxiv and bears similarity to the United
Kingdom Treasury’s guidance on cost-benefit analysis. Treasury has produced
monetary values for 277 wellbeing indicators, including for example $5.7m for loss
of life and $31 per year per person for avoiding extinction of up to 3 native species.
Such estimates are inevitably controversial. How widely this method is used is
unclear, although it is a requirement at Treasury’s discretion, which changes across
budget years. A review of CBAx in 2018xxxv concluded that it was bringing an
improvement in the quality of advice but not sufficient to provide confidence in the
returns on investment that agencies report to the Treasury. There is more work to
be done with CBAx while a clearer explanation of the concepts and experience from
integrating CBAx and the LSF would aid in external understanding.
Methods to provide deeper insight into causation are developing. One such is
the incorporation of wellbeing data from surveys into analysis grounded in traditional
welfare economics as seen both in the work of Grimes and his collaborators in New
Zealand and in international literature and practice.xxxvi This has the advantage of
assessing people’s wellbeing by reference to what they report, rather than remote
analysts deciding for them. But the method has a long way to go if it is to be used
comprehensively.
Policies for economic management in the LSF
Has the LSF underweighted the economy? As the wellbeing report states:
… our ability to provide health, education and welfare services, fund
institutions, invest in housing and preserve the natural environment all
depend on the economy performing well. Compared with other developed
countries in the OECD, our productivity rates are poor. Lifting our productivity
is essential to improving services and protecting our environment.
While its architects understand the interactions between LSF target variables,
untrained users of the LSF may fail to realize that a well-performing economy is
essential to the achievement of so many of its actual and implied goals. The rhetoric
surrounding the living standard project internationally commonly attacks an
imaginary government that cares only about GDP and highlights other non-monetary
dimensions of wellbeing. Treasury secretaries have rebutted this:
Democratic governments have always had broader objectives than just
growth, productivity, and fiscal disciplinexxxvii.

22
Every administration under which I have served – and that covers 10 Prime
Ministers – have had a central concern for the outcomes for those with the
lowest standards of livingxxxviii.
For most of the period of the development of the LSF, Treasury has
regarded the economy as performing reasonably well, including fiscally. But
what was the LSF’s influence on advice while the structural fiscal deficit was being
created and now while the government works to remove it? The LSF does not give a
high profile to macroeconomic stability and economic growth, yet the current fiscal
and economic situation and outlook threaten most if not all the dimensions of
wellbeing. Publicity around the wellbeing budgets suggests it influenced spending
decisions during the recent huge fiscal expansion but there is no sign it is being used
to target expenditure cuts. Across the board savings targets are surely as alien to
the intellectual and ethical foundations of the LSF as across the board expenditure
increases would be. Stronger mapping of the connections between the economy and
the LSF should be drawn across the economic cycle and in relation to structural
economic issues.
Budgeting, financial management and the LSF
Some of the Framework’s indicators could be aligned with actual or
plausible outcome indicators of the budgetary process. Examples include
housing affordability, overcrowding and quality, and educational attendance,
qualifications and scores. On the other hand, some of the living standards indicators
cannot in any obvious way be aligned with budget outcome indicators, e.g., ability to
express identity, sense of belonging to New Zealand, loneliness and feeling loved. In
the absence of a full alignment between budget outcome indicators and the
Framework’s wellbeing indicators, either budget outcome information or the
Framework, or both, could lose relevance.
Integration of the Framework with the budget system seems undeveloped.
The proponents of the Framework claim it will provide the basis for stronger
orientation of public policy towards better wellbeing, in which case it would be
evident in the planning within ministries and by governments over time, but there is
scant evidence for this. This is in part due to weak strategic planning. Besides if the
LSF is to impact seriously on budgeting then it would inform not only incremental
expenditures but proposals for cutting expenditures and reallocation. There is little
evidence of this in the expenditure control programs of the current government.
Expertise in what works from expert and front-line people should be
incorporated into the budget machinery and processes. This was done in
2016, so that experience should be evaluated and updated as part of a review of the
PFA. Treasury has stewardship of the LSF and the budget but cannot hope to be a
subject matter expert on all the spending proposals it has to respond to. In doing its
basic job of casting a critical eye over spending proposals from other agencies and
ministers it needs access to sector expertise and cannot rely solely on the
justifications coming from the proposers.

23
Financial management information is poorly aligned with the LSF. For
example, in a recent report,xxxix the Parliamentary Commissioner for the
Environment emphasises the enormous challenges of budgeting for wellbeing:
But if wellbeing is to be the lodestar of public expenditure, and environmental
outlays are to be justified in relation to this goal, then the links between the
state of the environment and wellbeing need to be understood. As the body of
this review explains, these links are only tenuously developed if at all. While it
is not hard to make the connection between the immediate benefit of safe
drinking water or access to parks for recreation, trying to think about the
impact of an evolving biophysical environment we understand very
incompletely on unborn generations becomes vertiginously challenging. These
are not the sorts of questions that are easily accommodated by something
like the budget cycle.
The Commissioner thus recognises the importance of members of parliament and
others being able to pose practical questions about what money was spent on and
what was achieved. Wellbeing frameworks emphasise the environment but to date
have been no help in meeting the information needs illustrated by the Parliamentary
Commissioner for the Environment. The budget allocations and the wellbeing
indicators do not generally link together. Recent developments in data architecture
and processing permit much more granular financial information to be available,
which can be tagged and rolled up into multiple reporting schema. The use of AI is
making the production of such reports feasible at low cost.
Review of the LSF
After twenty-five years of development and promotion of the LSF, a
thoughtful review of its content and practical impact would be timely. While
enhancing wellbeing is the ultimate goal of public policy, how best to account for it
in government decision-making remains just a work in progress
Expenditure Control
Aggregate fiscal performance in New Zealand has often been assessed as
having been superior to allocative and productive efficiency. This was said by
some fiscal experts in 2019 at a conference marking the 30th anniversary of the
Public Finance Act. To be sure, there has been improved allocative and productive
efficiency in State-Owned Enterprises and there have at times been efficiency gains
in the budget sector, notably as a result of the use of fixed baselines for
discretionary spending. But various authoritative reports in recent years show a lack
of attention to effective management of resources in pursuit of better outcomes in
numerous areas of public expenditure. For example, some of the reports based on
the Performance Improvement Frameworkxl in ministries and crown agencies, the
review of spending on policy analysisxli and some reports by the Auditor-General
have concluded that there is inadequate strategic and operational management of
resources and a lack of external scrutiny.xlii
Aside from simple case studies, linking items of public expenditure to
outcomes is rarely easy. The Public Finance Act 1989 required funds spent on

24
outputs to be supported by reference to outcomes and, while there were promising
examples reviewed in the Pathfinder initiative,xliii many government agencies
struggled to invest in the policy research and implementation necessary to meet this
requirement. The revision to the Act in 2004 demoted the requirement for outcome-
based justifications for expenditures as it was not being implemented usefully and
many agencies found it too difficult. The Treasury however persisted in promoting a
method for expenditure review that was oriented to improved outcome
performance.xliv
Aligning budget systems with strategic priorities expressed in high-level
aspirational terms is challenging. Budgets today are built around a small number
of over-arching priorities. Spending proposals are graded using the Living Standards
Framework according to how they match up with these priorities, which places heavy
demands on the Treasury; the discussion above summarizes some reasons for this.
There have been valuable improvements in expenditure management and
control in some respects. One example of this is the process for management of
capital expenditure projects which has much improved over time although not across
all domains. In this regard, the Investment Statement is a valuable addition to the
suite of fiscal reports and the investor confidence rating creates strong incentives for
agencies faced with large capital projects. The institutional arrangements for
working on infrastructure investment have become rather fragmented and some
consolidation of these would be beneficial.
Expenditure review processes are underdeveloped. The fact that the Minister
of Finance under the last government complained about the imbalance of attention
devoted to new expenditure proposals relative to the much larger baseline is telling
in this regard. The Treasury’s guidance in 2008 on expenditure reviewsxlv remains
clear and relevant and invites reflection on the reasons for that Minister’s complaint.
The reduction in detail and clarity of the appropriations system and weaknesses in
strategic planning discussed above are likely to have contributed to weaker
expenditure control; however, not implementing successful expenditure review
processes has surely contributed to that Minister’s concern.
Expenditure caps are justified in some contexts but have weaknesses as
well as strengths. In view of the likelihood of an extended period of fiscal stress
and in consideration of the evolution of principles of fiscal prudence, the pros and
cons of putting a cap on discretionary spending deserve attention. A place to start is
consideration of the concept in a 2010 New Zealand Treasury working paper,xlvi
written in the wake of the Global Financial Crisis, when the government was
grappling with its aftermath. It did not become the Treasury’s position, although the
government did place caps on some classes of expenditure e.g. operating expenses
in government agencies were mostly not adjusted for years. This can be achieved
for a while following a period of fiscal laxity when discipline has eroded and there is
reason to send a strong signal about expenditure control. But longer term, methods
for driving up the performance of agencies must be targeted and strategic. Fiscal
decisions should be grounded in the objectives set out in planning documents,
effective business models and incentives for results and efficiency. Crude short-term

25
spending constraints have a place but usually only temporarily while deeper
solutions are put in place.
Social investment methods to evaluate expenditure over long time horizons
lost momentum over recent years. They were introduced by the Secretary to the
Treasury in 2015 thus:
I am sure you can immediately appreciate the transformative potential of this
work. We are moving to a whole-of-life investment approach to social
spending which will be transformative over time. It undoubtedly represents a
step-up for the New Zealand public financial management system.xlvii
This step-up never happened. Treasury’s enthusiasm waned and subsequent
ministers had other priorities and methods in mind. The current government intends
to have a major reinvigoration of the approach.
The basic idea of social investment methods was to identify groups of
people for whom social and other supports in the short term would likely
promote their improved wellbeing over their lives. Calculations using
longitudinal administrative and other data provided a rate of return that could be
used to prioritise such preventative spending. This initiative lost momentum but
some of the core capabilities remain in some parts of the state sector. These
methods could be used more widely including to explore the effectiveness of
expenditure programs in baseline expenditures across agencies.
The new government has made strong commitments to developing and
implementing the Social Investment methods. These have been developed
further and provide methods that can apply beyond social policy, for example
taxation and the environment.
Large Investments in Hard and Soft
Infrastructure
New Zealand has a long history of controversy over the decision-making
and financing of large infrastructure projects. The most recent example of cost
blow-outs for replacing the Cook Strait ferries and associated infrastructure is
extreme but not unique. The cost of the project was projected in November 2018 to
be $775m. By November 2019 this had risen to $1.4b and then to $1.8b by March
2021. By February 2023 this had risen to $2.6b and then to $3.0b by November
2023xlviii. A month later the incoming government cancelled the project.
There are many other examples. The cost of the Puhoi to Warkworth motorway
escalated from $700m to $1.0b. Costs for the Transmission Gully highway rose from
$850m to $1.25b.xlix An enquiry revealed that there had been problems with the way
the project had been contracted for. Cost estimates for Auckland’s City Rail Link rose
from $4.4b to $5.4b from 2019 to 2023l. Large IT projects have failed, as for
example in Police in the 1990sli. These problems are not new. In the 1970s there
were cost over-runs with an irrigation scheme in the Maniototo under construction
by the Ministry of Works.

26
Also, there are previous instances of ministers riding roughshod over
established good practices for making such major decisions. For example,
there is evidence of this in the project to build the Clyde Dam. “The Clyde Dam was
further marred by major cost overruns due to poor site selection where a fault line
was located under the dam after construction had begun. This resulted in a total
redesign of the project and a 25% loss of generation capacity“lii
Some of the major energy projects of the 1980s were largely based on
government guarantees, which were based on the assumption of rapidly rising oil
prices and supply risks that did not eventuate. These risks were not carefully
assessed and left huge taxpayer exposures that materialised in the mid-1980s.
A recent report by the Auditor General identifies startling failures in the
quality of decision-making about two very large packages of infrastructure
investments. The reports summary makes the problems clearliii:
Officials worked hard to meet expectations and provided advice about the
risks. At several points, officials advised Ministers of risks to value for money
for both the New Zealand Upgrade Program (NZUP) and the Shovel Ready
Program (SRP).
Ministers made decisions to progress some NZUP projects even though those
projects were not fully scoped or planned. Full business cases were not
always available or up to date even when the project’s planning was more
advanced, such as for transport projects that were already part of the
National Land Transport Programme.
In our view, Ministers did not have enough information to be sure that
decisions supported value for money.
The SRP was a largely well-run process, and there is good reporting on the
programme’s delivery. However, the process was let down by the absence of
clear records and a rationale of how and why some decisions were made after
an Infrastructure Reference Group provided its report to Ministers.
Ministers have the authority to make significant decisions. In our view, this
power comes with an obligation to Parliament and the public to be
transparent about how and why they made those decisions and whether
those investments deliver what was intended.
The report recommends regular reporting by Treasury on large investment
projects and review of its guidelines to agencies on processes for reaching
these decisions. This seems inadequate, as these provisions alone will not stop
agencies from submitting low quality justification or unrealistic initial cost estimates.
Nor will these measures ensure ministers push back on low quality advice or inhibit
them from over-riding tidy processes in pursuit of the political goals of getting the
projects underway. The solution broadly is to stop proposals from getting traction
and building constituencies until the net public benefit has been established and to
insist on deep analysis and peer review to forestall optimistic bias. The existing
processes for considering large investments have logical and sensible steps but
these repeated failures indicate they are too easily bypassed.

27
The Minister of Finance has announced she wants changes to the Public
Finance Act, which is the opportunity to provide more legislative backing for sound
decision processes and possibly some independence for the Treasury in pushing
back on poor advice and in transparency of information as projects proceed. This
might also require the Treasury to report on the Government’s compliance with the
fiscal responsibility rules . Ministers of course could ultimately decide to ignore such
reports, but the Parliament and others would know this in real time.
The critique of these decisions about physical infrastructure and the
remedies also apply to other kinds of major decisions. The losses by the
Reserve Bank from its intervention in the bond market amount to approximately
$12b and are guaranteed by the government but appear not have been subject to
the scrutiny and transparency they should have had.
Across the state sector there are projects and proposals for billion-dollar IT
projects. These are typically very risky, while cost over-runs and performance
failures are common. There are several proposals under consideration for big
investments in proprietary systems within the large ministries. It is worthwhile
considering whether most cost effective solutions are available based on principles of
IT architecture enabling more free-flowing data across domains instead of
proprietary systems that lock data up within silos. This issue has special relevance to
the implementation of the Government’s Social investment initiative. The
Government should also push forward on the foundational infrastructure needed for
social investment: self-sovereign digital identity, meta data and data standards and
the guidelines for APIs that promote the freer flow of data between systems.
Coordination of Monetary and Fiscal Policies
The policies and practices for coordination of fiscal and monetary policies
have demonstrable and potentially large impacts on fiscal sustainability and
therefore belong in the array of fiscal institutions. Success or failure in the
coordination of monetary and fiscal policies also has a major impact on living
standards over the course of a business cycle or in response to a shock. Recognition
of the importance of getting monetary and fiscal policies in balance has always been
a concern for the Treasury. Until the early 1980s regulatory policies were often used
in place of monetary policy to control inflation. In effect regulations were used to
coordinate monetary and fiscal policies. But the impacts on inflation were generally
temporary and commonly had negative side effects on resource allocation and
economic growth. Since floating the exchange rate in 1985, the passage of the
Reserve Bank Act in 1988, the Public Finance Act in 1989 and the Fiscal
Responsibility Act in 1994, the coordination of monetary and fiscal policy has been
grounded in inflation targeting by the independent Reserve Bank and fiscal
responsibility principles.
The credibility of the new arrangements was hard won, as Treasury advised
in 1999liv.

28
Over the next few years, monetary and fiscal policy sengs can make a major
contribuon towards sustaining the current economic expansion and therefore
improving the prospects for ongoing job growth and higher incomes. Building on the
monetary and fiscal credibility that was hard earned in the 1990s will be important.
In recent years, success in reducing inflaon and inflaonary expectaons has
allowed the Reserve Bank to lengthen its me horizon when seng monetary policy.
Over me, this may help reduce variability in output, interest rates and the exchange
rate. If you wish to amend the Policy Targets Agreement, any changes should be
made in a way that confirms the Reserve Bank’s commitment to maintain price
stability. The Fiscal Responsibility Act requires you to set long-term debt and expense
objecves – these should take account of the future fiscal pressures arising from
populaon ageing. Increasing fiscal surpluses above the levels projected in the Pre-
elecon Economic and Fiscal Update would help to reduce the extent to which
interest and exchange rates will need to rise as the economic expansion connues.
Running higher surpluses also makes sense as a buffer to the risks to sustainable
growth posed by ongoing large current account deficits and high levels of external
liabilies. Well-structured and rigorous Budget processes, along with some form of
three-year counng framework, will help ensure individual decisions are consistent
with the Government’s priories and fiscal intenons.
In 2016 the Treasury thought coordination of monetary and financial policy
was conducted successfully in the GFC:
I should emphasise that New Zealand was one of the countries that
coordinated fiscal and monetary policy effectively over the course of the GFC.
Fiscal policy supported monetary policy through the crisis by being
stimulatory when needed and then contractionary once the economy was
recovering.lv
In the same speech the Secretary pondered whether this coordination could be
improved. In 2018 he spoke about Treasury work reviewing the macroeconomic
framework but insisted that the reason for the review was not a sense the existing
frameworks were failinglvi:
Certainly, it isn’t any sense that our current frameworks have been failing.
Indeed, whenever I speak to visiting economists from international rating
agencies or global policy bodies like the IMF or the OECD, they confirm that
New Zealand’s macroeconomic settings remain as solid as ever. And my peers
in other countries often look on at how we do things in this corner of the
Pacific.
This review by Treasury was aligned with the direction of the government
in 2017 to review the Reserve Bank Act 1989lvii, following which changes
were made to the Reserve Bank Act. These changes amended the objective of
monetary policy to require consideration of maximum sustainable employment
alongside price stability in monetary policy decision making, and instituted a

29
monetary policy committee (MPC) to take decisions on monetary policy. The
Secretary to the Treasury was appointed as a non-voting member of the MPC. The
subsequent government has removed the employment objective from the Bank’s
mandate, which removes the ambiguity of what the Reserve Bank is expected to do
in a situation of excessive inflation and rising unemployment. This reverts to the
longstanding attention the Bank has always paid to the effects of its decisions on
unemployment, but without ambiguity about its focus on inflation.
Despite this attention to reviewing and trying to improve the coordination
of monetary and fiscal policies, events since these changes give grounds to
question whether the intended improvements were achieved. Arguably, the
overheating of the economy in the wake of COVID evidences unsatisfactory
coordination of monetary and fiscal policies, which has played a part in creating a
structural fiscal deficit, inflation, rapid increase in public debt, a recession and now
rising unemployment. This not the place to delve into the reasons for this situation
or whether the response of the authorities to the COVID shock could have led to
better outcomes with better macro-economic coordination. These are complicated
issues requiring detailed consideration. That said, there was strong support for
robust macro-economic support to cushion the potentially devasting shock to the
economy. The economy proved to be robust, in part due to the stimulus, but
became over heated and pushed against its capacity constraints. As the IMF statedlviii
New Zealand recovered faster than most other advanced economies. This
supported activity and, together with generous fiscal and monetary support,
resulted in strong investment and consumption. But this came at the cost of
overheating against capacity constraints exacerbated by restrictions on labor
movement due to border closures, and disruptions in global supply chains.
Along with its benefits, the stimulus program contributed to the structural fiscal
deficit and some of the inflation. The authority’s stance, to prefer doing too much
than too little, was apparently implemented in effect. The directors of the IMF put
the need for improved coordination of monetary and fiscal policy in the usual
diplomatic terms, but the message is clear:
Directors underscored the importance of careful calibration of the fiscal and
monetary policy mix to rebalance the economy and help address long-term
structural needslix.
Some of the unprecedented innovations in monetary policy made during
COVID blur the distinction between monetary and fiscal policy. Due to the
government guarantee for the losses the Reserve Bank made from its interventions
in the bond market, monetary policy became a quasi-fiscal instrument in effect and
yet the fiscal costs appear not to have gone through the same rigorous processes
normally applied to large expenditures.

30
Can Existing Fiscal Institutions Bootstrap
Improvements?
New Zealand’s existing fiscal institutions have capacity to generate
reforms. Indeed, the foregoing discussion should not be understood to mean that
there have been no significant reforms since 1994. As is illustrated in the annex on
our fiscal institutions, a lot of policies, procedures, organisations, committees, laws
and statutory bodies operate these. Each has a degree of influence, and some have
autonomy to bootstrap their capabilities and effectiveness. But this report makes
clear that a lot of elements are under-performing, although some are doing well. The
situation today has strengths and weakness but there is little evidence that the
weaker areas are under the control of decision makers who want to drive
improvements. Some of the weaknesses serve the short-term interests of powerful
decision makers e.g. ministers announcing large infrastructure investments that
have not been properly estimated nor assessed for their net benefits or against
alternatives. This gets to the heart of the questions about how to drive superior
fiscal policy and outcomes. There are powerful short-term incentives not to and
these need to be overcome in the interests of fiscal sustainability and the benefits
this provides economically and socially. It has been said that the Auditor General
worries more about these than the Parliament does. New Zealand is unusual in
having a unicameral parliament and therefore lacks some of the checks on the
passage and scrutiny of legislation found in countries with an upper house. The
Parliament must create its own checks on fiscal policies. Some brief comments on
the main players follow.
Parliamentary scrutiny of the Budget and financial and performance reports
could be greatly improved. This would require better support for the select
committees and especially the Finance and Expenditure Committee. Such support
would provide independent information and analysis going into committee hearings.
Data about expenditure could be revised to make it easier for members of
parliament to see what public money has been spent on and the extent to which the
expected results were achieved. Recent commentary on weaknesses in fiscal
information by the Parliamentary Commissioner for the Environment has been
helpful in illustrating certain problems in practical democratic accountability for
spending and demonstrate the importance of the needs of users of the information
in bringing pressure for change.
Members of the governing party or coalition usually chair and have a
majority on select committees of Parliament (although the Regulations Review
Committee is by convention chaired by a member of the Opposition.) This is in
contrast to the United Kingdom and many other Commonwealth countries where
committees reviewing the public accounts are typically chaired by an opposition MP.
New Zealand’s select committees cannot be assumed to be forthright on issues that
are, or could be interpreted as being, critical of ministers. Changes in the
membership and mandates of committees could promote better fiscal information
and scrutiny.

31
The Audit Office has a crucial role but does not have all the relevant
expertise in fiscal policy and must protect its independence. It reports to the
Parliament directly and thus has more independence than a ministry and it provides
an independent audit of the financial statements of the government and other public
bodies. It checks that public money is spent lawfully and publishes independent
reviews of aspects of their financial and non-financial performance. Its role and its
expertise could be expanded, as has happened with France’s public auditor. But it
does not currently have sufficient expertise to drive system-wide solutions to
problems with the fiscal institutional problems. Moreover, an expanded role could
weaken its existing well-defined roles. The Audit Office serves the Parliament and
must be transparently non-political, whereas issues like the choice of debt targets
that are relevant but contentious, cannot be totally abstracted from political debate.
A recent study in Denmarklx argued that the simultaneous pursuit of independence
and relevance is highly challenging, while the Danish audit office has persistently
prioritized independence over relevance. That said, the Auditor General is there in
part to provide assurance that the rules of the fiscal game are observed with probity
and so is vitally interested in the evolution of those institutions and a stakeholder
with a close interest. The Auditor General should be fully engaged in the reviews of
the topics covered in this report, which are recommended at its end, and especially
in the revisions recommended to appropriations.
The Treasury has expertise, but its independence is constrained as part of
the executive. It does have formal independence from the government in so far as
the Public Finance Act distinguishes the role of the Minister of Finance from that of
the Secretary to the Treasury, and requires technical, non-political statements like
the financial statements to be prepared by the Treasury in accordance with
Generally Accepted Accounting Practice. It has the discretion to make changes in
these methods, but its advice on fiscal institutions more widely is subject to
decisions by ministers. Treasury has a longstanding expectation for giving free and
frank advice. The writers are largely unaware of the flow of advice about fiscal
institutions that Treasury has provided over many years and what weaknesses it
sees in the current situation. Regardless, its discretion to drive improvements in
fiscal institutions is limited by the views of its ministers, although as a key player it
can expect a major role in upgrading them.
International organizations have fiscal expertise but lack local knowledge
and the resources to apply to specific New Zealand problems. Their value is
mostly in disseminating international experience and selectively addressing fiscal
institutional problems in particular countries. They are bound to manage
relationships carefully with member governments and only rarely provide blunt
critical advice.
Think tanks, academics, and journalists are not sufficiently or consistently
well-resourced with fiscal experience. Moreover, they typically have mandates
or interests much broader than fiscal matters, which are of intense interest only to a
small audience.

32
In the writers’ views there is not sufficient internal pressure for improving
the overall performance of our fiscal institutions. Our fiscal institutions are in
some respects working well, but they are not in shape to provide adequate
assurance of the removal of the structural fiscal deficit, better resource allocation
and long-term fiscal sustainability. Nor are the current institutions set to strongly
promote innovation across public sector financial management in search solutions to
current fiscal challenges. To make progress an external initiative is needed to
energise the quest for better fiscal outcomes.
Renovation of the Fiscal Institutions
This report makes the case to upgrade the weaker fiscal institutions. The
writers emphasise that, while the institutional architecture is important, how the
system is operated is what counts, which entails skills, resources, experience,
culture and leadership. Ultimately it is about the preferences and motivations of
decision-makers. The system doesn’t make the decisions; elected representatives
do. But a better system can promote attention to the effectiveness of public
expenditure, sustainability, intergenerational balance and a more stable economy.
We recommend that a review of fiscal institutions is undertaken at the
initiative of the Government and Parliament in order to make enduring
improvements. The scope of the terms of reference should be the fiscal institutions
outlined in this report and the agenda should at least go in depth into the topics
covered here. In each topic the work should describe and assess the situation and
the strengths and weaknesses of the relevant institutions. Proposals to change these
to promote improved performance should be developed and recommendations
made.
Decisions to make changes should follow from thorough consideration of
weaknesses and the best solutions. The international literature is inclined to
institutional accretion. But more controls and processes may not be better and
reductions may be justified in places. Effectiveness is what counts, and the evidence
presented here supports a conclusion that our fiscal institutions have weakened and
could be more effective. Fundamentally, fiscal rules aim to compensate for
tendencies in expenditure decision-making to resolve differences and make up for
gaps in information by compromising the quality of current spending to the
detriment of effectiveness and under-weighting the future.
Recommendations that flow from the evaluation of the topics covered in
this report follow:
1. The Minister of Finance and Treasury should set up review the suite of actual
and potential fiscal indicators and targets in order to settle on a collection
that will be maintained over time.
2. With regard to fiscal responsibility the Minister and Treasury set up a review
of:
a. The experience with fiscal responsibility policies over time to get a
deeper understanding about the periods in which they were apparently

33
observed and the circumstances in which they were largely disregarded
and the consequences and
b. Review and refresh the principles of responsibility taking account of
this experience, the current structural deficit, long term fiscal outlook
and the role of fiscal policy in improving the economy and standards of
living and
c. Refresh the reports on the long-term fiscal outlook and the Investment
Statement and incorporate these into the processes, incentives and
constraints on fiscal decision making.
3. The Finance and Expenditure Committee – supported by the Auditor General -
should review the definitions and rules around different types of
appropriations and devise tighter rules around the use of annual, multi-year
and multi-category appropriations. Review the conventions and provisions for
“supply” in the context of appropriations.
4. The Minister of Finance and Treasury should establish a review of the Living
Standards Framework to assess its demonstrated difference and value in
promoting better decisions by governments. Consider modifications or
alternatives to better focus on changing government’s priorities and more
effective advice to ministers
5. Treasury should review and provide advice about tightening the processes for
making large investment decisions to strengthen the resistance to poorly
justified proposals rolling over requirements for comprehensive and realistic
projections of costs and benefits.
6. The current select committee review of Reserve Bank performance through
the COVID period and since and the revised enquiry into lessons from the
COVID policies should include deep consideration of the coordination of
monetary and fiscal policy. The question is whether the changes made to
these arrangements under recent changes to RBNZ legislation have
advanced, hindered or left effectively unchanged this policy coordination. Of
particular interest is the appearance of quasi-fiscal monetary policy
instruments including the guarantee of losses from bond market
interventions.

34
ANNEX: New Zealand’s Core Fiscal Institutions
Constitution Act 1986
Parliament’s ultimate authority over public finances is the foundation of New
Zealand’s fiscal institutions. The Constitution Act 1986 states (section 22) that: It
shall not be lawful for the Crown, except by or under an Act of Parliament, to (a)
levy a tax; or (b) to borrow money or to receive money borrowed from any person;
or (c) to spend any public money.
Public Audit Act 2001
The Public Audit Act 2001 establishes the position of Auditor-General who is
responsible for the audit of every public entity, and the entities they control, of
which there are around 4,000. The Auditor-General is an officer of Parliament and
therefore independent of the government and provides assurances to Parliament and
the public on the reliability of the information audited. The Auditor-General is
responsible for auditing the financial statements of public entities, as well as for
auditing their service performance by reference to various statutory accountability
requirements.
Public Finance Act 1989
The Public Finance Act 1989 provides for comprehensive control of public finance.
Treasury provides a summary in its Guide to the Public Finance Act. The main
provisions of the Public Finance Act for the purposes of this White Paper are:
• Appropriations: The Public Finance Act authorises public money to be spent in
accordance with seven types of appropriation, each of which must specify the
total amount of expenses or expenditure authorised and the scope and the
period of the authorisation. Each appropriation must have a responsible
minister and must be administered by a single department. This applies also
to multicategory appropriations that pool resources in pursuit of a single
overarching purpose. Appropriations are typically for one year but may be
multiyear.
• Information Requirements: The Minister of Finance must present, as part of
the Budget, the Estimates of Appropriations, which must describe each
appropriation in detail, including its scope, amount, period and responsible
minister and department. The Estimates of Appropriations must also include,
in addition to the proposed appropriation for the fiscal year (or years) in
question, estimates of departmental and non-departmental expenditures for
the year just finishing, actual expenditure for the previous four years and
projected expenditures for the next three years. They must also explain how
performance against the appropriation will be assessed and by whom.
• Generally Accepted Accounting Practice: Financial statements must be
prepared according to financial reporting standards established by the
External Reporting Board, which are closely aligned with International Public
Sector Accounting Standards.

35
• Fiscal Responsibility: The government must pursue its policy objectives in
accordance with eight principles of fiscal responsibility, which include
principles relating to prudent debt, net worth sufficient to provide buffers to
absorb shocks and manage risks, stable tax rates, and intergenerational
equity. The government may depart temporarily from conformity with these
principles but must explain why and how it proposes to return to conformity
with them.
• Regular Reports: The following reports must be prepared regularly:
o Reports on Appropriations. After the end of each financial year, each
responsible minister must provide to the Parliament an assessment of
what has been achieved with the relevant appropriations and a
comparison of actual expenditures with the appropriation.
o Fiscal Strategy Report. The Minister of Finance must present this report
alongside the Budget. It must set out the government’s long term
fiscal objectives for at least ten years and explain their conformity with
the fiscal responsibility principles. The report must also lay out the
government’s short term fiscal intentions for at least three years and
explain their conformity or otherwise with the long-term fiscal strategy
and the fiscal responsibility principles. It must provide information on
expenditures, revenues, deficits, debt and net worth.
o Budget Policy Statement. The Minister must present this statement to
Parliament before March 31 each year. It must set out the overarching
goals for the coming Budget, the policy focus of the Budget and how
the Budget will conform to the short-term fiscal objectives set down in
the most recent fiscal strategy report. It must explain the wellbeing
objectives motivating the Budget and how these are consistent with
New Zealand’s long-term wellbeing objectives.
o Economic and Fiscal Update. The Minister of Finance must present this
update to Parliament biannually, once at the time of the Budget and
once at the end of the calendar year, as well as 20-30 days before
each general election. It must include economic and fiscal forecasts for
the current and the two following years and forecast financial
statements including statements of borrowings, commitments and
contingent liabilities. It must also include significant accounting
policies, assumptions, information on fiscal risks identified and their
sensitivity to key assumptions and a statement of tax policy changes
and their fiscal impact.
o Financial Statements of the Government. In addition to that which is
required by Generally Accepted Accounting Practice, these must
include statements of borrowings, unappropriated expenses,
emergency expenses and trust funds administered by agencies. In
addition to annual financial statements, the government must present
to Parliament monthly financial statements other than for the first two
and last months of the fiscal year.

36
o Annual Reports. The ministers responsible for government
departments and other government sector reporting entities, such as
Crown Entities, must present their annual reports to Parliament. They
must permit an informed assessment of the entities’ performance and
must include the entities’ financial statements and applicable audit
report.
o Statement on Long-term Fiscal Position. This must be prepared and
published by the Treasury at least every four years.
o Investment Statement. This must cover the value of the Crown’s
assets and liabilities, how these have changed and are forecast to
change and be prepared and published by the Treasury at least every
four years.
o Wellbeing Report. This must cover the state of wellbeing in New
Zealand, how it has changed and whether it is sustainable and be
prepared and published by the Treasury at least every four years.
• Chief Executives of Departments: They are responsible for the financial
management of their departments, including their financial reporting, and
what is achieved with the resources provided to them and the efficiency and
effectiveness of expenditure, both departmental and non-departmental (i.e.,
expenditure undertaken on behalf of the Crown). At least once every three
years, departments must provide their ministers with information on the
strategic intent, which must cover at least the nature and scope of their
functions and how they will manage them to achieve their strategic intent;
this information must be published. (By section 12 of the Public Service Act
2020, chief executives must also act in a politically neutral manner and offer
advice to ministers that is free and frank, although their obligation to offer
advice is not explicit in this Act.)
• Borrowing: Only the Minister of Finance may undertake borrowing on behalf
of the Crown and only in accordance with statute. Some Crown Entities are
permitted to borrow with the approval of their responsible minister and the
Minister of Finance. With some exceptions, the Crown is not liable for the
debts of Crown Entities.
• Bank Accounts: The Treasury may open and operate Crown bank accounts
and departments may open and operate bank accounts at the direction of the
Minister or the Treasury; and
• Delegations and Instructions: These may be issued by the Minister of Finance
and the Treasury. Instructions under these powers are classified as secondary
legislation under the Legislation Act 2019.
Crown Entities Act 2004
The Crown Entities Act 2004 provides a consistent framework for the establishment,
governance, and operation of Crown Entities and clarifies accountability relationships
between Crown Entities, their board members, their responsible ministers and
Parliament.

37
State-Owned Enterprises Act 1986
The State-Owned Enterprises Act 1986 outlines the principles governing the
operation of State-Owned Enterprises and establishes requirements for their
accountability and the responsibility of relevant ministers.
Budget Process
The annual budget process is one of the key management processes of New
Zealand’s public financial management system. It is summarised in the Treasury’s
Guide to the Budget Process. Budgeting involves reconciling conflicting demands for
funding, not just implementing government strategies. The conduct of the annual
budget process has a significant effect on Budget decisions and is therefore a key
fiscal institution.
Each year’s process begins with the strategic phase, which usually begins in June
immediately after the previous year’s Budget is presented to Parliament. It usually
runs until December and establishes priorities and assesses resource envelopes
leading up to the Budget Policy Statement.
The subsequent decision phase runs from January to April during which ministers
put forward proposals for spending. These are assessed by the Treasury and then by
Budget ministers, who are typically a small number of senior ministers and who
provide advice to the Cabinet on which proposals should go forward.
In the subsequent Budget production phase, from May until when the Budget is
presented to Parliament, the decisions are locked in, and the required reports and
documents prepared including the Estimates, the Economic and Fiscal Update, the
Budget speeches and media communications.
The Appropriation Bill (draft Appropriation Act) must be introduced into Parliament
no later than one month after the beginning the fiscal year, which is July 1st. The
Budget presented by the Minister of Finance accompanies the introduction of the
Appropriation Bill.
In the subsequent legislative phase, the Estimates are reviewed by the relevant
select committees of Parliament.
i This use of “fiscal institution”, while not universal, is common internationally. A recent
example of the use is the empirical analysis of the impact of fiscal institutions on the
efficiency of public investment in A. Baum et. al., Getting the Most from Public Investment.
ii See International Public Sector Accounting Standards Board, Handbook of International
Public Sector Accounting Pronouncements 2022 Edition. In 2009, the New Zealand Office of
the Auditor-General reviewed the compliance of the New Zealand government’s financial
statements with international public sector accounting standards.
iii The government’s accounting rules and financial year changed during the period shown in
Figure 1, making some year-to-year comparisons questionable, but the trends are clear.
iv New Zealand: Staff Concluding Statement of the 2024 Article IV Mission.
v Long term fiscal projections have been published in 2006, 2009, 2013, 2016 and 2021
vi See https://data.imf.org/?sk=89418059-d5c0-4330-8c41-
dbc2d8f90f46&sId=1437501522656.

38
vii FLP means the Reserve Bank’s funding for lending programme which creates financial
assets on the Reserve Bank’s statement of financial position.
viii The Government Finance Statistics Manual 2014, p. 82, defines net debt as gross debt
minus stock position in financial assets corresponding to debt instruments and so would take
into account advances and assets of the New Zealand Superannuation Fund that are debt
instruments. Net debt is not a defined term in International Public Sector Accounting
Standards.
ix Budget Policy Statement, 2009, p 5.
x New Zealand Treasury, Fiscal Strategy Report 2009.
xi On May 13, 2022, 6 days before the 2022 Budget, the Executive Board of the International
Monetary Fund stated in its press release following the Article IV Consultation that, inter alia,
the authorities should update their fiscal targets, which were suspended during the pandemic,
to provide an anchor for fiscal policy and manage long-term spending pressures.
xii Fiscal Strategy Report in Wellbeing Budget 2021, p 44.
xiii Fitch Affirms New Zealand at 'AA+'; Outlook Stable (fitchratings.com)
xiv In 2013: Commentary on Affording Our Future: Statement on New Zealand’s Long-Term
Fiscal Position; in 2017: Commentary on He Tirohanga Mokopuna: 2016 Statement on the
Long-Term Fiscal Position; and in 2022: Commentary on He Tirohanga Mokopuna 2021.
xv Andy Haldane, The Case for Rethinking Fiscal Rules is Overwhelming, Financial Times May
16 2023
xvi For an international survey of this issue, see J. Harris et. al., Medium-Term Budget
Frameworks in Advanced Countries.
xvii Robinson M. and van Eden H., Program Classification. Provides a discussion of issues and
international experience relevant to the organisation of accountability for outcomes, outputs
and programs.
xviii Treasury, The Living Standards Framework 2021
xix The History of the LSF, Treasury History of the LSF | The Treasury New Zealand
xx See https://www.oecd.org/wise/better-life-initiative.htm.
xxi New Zealand Treasury, He Ara Waiora/A Pathway Towards Wellbeing.
xxii New Zealand Treasury, Using the LSF and He Ara Waiora.
xxiii New Zealand Treasury, He Kāhui Waiora: Living Standards Framework and He Ara Waiora
- Covid-19: Impacts on Wellbeing.
xxiv Te Tai Waiora Wellbeing in Aotearoa New Zealand 2022 te-tai-waiora-2022.pdf
(treasury.govt.nz)
xxv New Zealand Treasury, Working Towards Higher Living Standards for New Zealanders. tp-
hls-may11.pdf (treasury.govt.nz)
xxvi Working Towards Higher Living Standards for New Zealanders New Zealand Treasury
Paper 11/02 May 2011
xxvii Social Capital and the Living Standards Framework Speech delivered by Gabriel Makhlouf,
Secretary to the Treasury University of Auckland 27 March 2018
xxviii The Living Standards Framework Dashboard - April 2022 (treasury.govt.nz)
xxix Measuring wellbeing: the LSF Dashboard Measuring wellbeing: the LSF Dashboard | The
Treasury New Zealand.
xxx Gabriel Makhlouf, the Secretary to the Treasury, speech titled “Intergenerational
Wellbeing: Weaving the Living Standards Framework into Public Policy,” delivered on
December 13, 2017
xxxi Working Towards Higher Living Standards for New Zealanders
New Zealand Treasury Paper 11/02
May 2011
xxxii Growing Our Economic Capital: Investing in Sustainable Improvement in Our Wellbeing
Speech delivered by Gabriel Makhlouf, Secretary to the Treasury 3 November 2016.
xxxiii John Whitehead 2011 speech sp-hls-25may11.pdf (treasury.govt.nz)
xxxiv New Zealand Treasury, The Treasury’s CBAx Tool.
xxxv Review of CBA advice to support budget initiatives, The impact of CBAx and lessons for
future budget processes, NZIER report to the Treasury 12 September 2018
xxxvi World Happiness Report, Sustainable Development Solutions Network, Center for
Sustainable Development at Columbia University
xxxvii Gabs Social Capital and the Living Standards Framework | The Treasury New Zealand
xxxviii John Whitehead 2011 speech sp-hls-25may11.pdf (treasury.govt.nz)

39
xxxix Parliamentary Commissioner for the Environment, Wellbeing Budgets and the
Environment – A Promised Land, p. 4.
xl New Zealand Treasury, State Services Commission and Department of the Prime Minister
and Cabinet, Performance Improvement Framework Core Guide 1: What is the Performance
Improvement Framework?
xli G. Scott, P. Duignan and P. Faulkner, Improving the Quality and Value of Policy Advice.
Findings of the Committee Appointed by the Government to Review Expenditure on Policy
Advice.
xlii See, for example, Office of the Auditor-General New Zealand, Cost of Living Payment.
xliii State Services Commission, Guidance on Outcomes-based Management. Introduction,
Building Effective Management Systems, Outcome Measures for Management Purposes.
xliv New Zealand Treasury, Demonstrating Performance: A Primer for Expenditure Reviews.
xlv Ibid.
xlvi T. Mears et. al., Fiscal Institutions in New Zealand and the Question of a Spending Cap.
xlvii G. Makhlouf, Improving Public Policy: Delivering Value through Good Financial
Management.
xlviii New Zealand Herald, December 15, 2023
xlix Newsroom, 20 April 2021.
l RNZ, 15 March 2023
li Insights into Incis debacle - Technology News - NZ Herald
liihttps://energy.nzx.com/history#:~:text=The%20Clyde%20Dam%20was%20further%20
liii Summary of our report — Office of the Auditor-General New Zealand (oag.parliament.nz
liv Towards Higher Living Standards: Briefing to the Incoming Government 1999 | The
Treasury New Zealand
lv Growing Our Economic Capital: Investing in Sustainable Improvement in Our Wellbeing
Speech delivered by Gabriel Makhlouf, Secretary to the Treasury 3 November 2016.
lvi sp-macroeconomicframework-20feb18.pdf (treasury.govt.nz)
lvii Phase 1 Reviewing the Reserve Bank of New Zealand (RBNZ) Act - Proactive Release | The
Treasury New Zealand
lviii IMF Country Report No. 23/309, 2023 ARTICLE IV CONSULTATION
lix IMF article IV, op cit
lx Triantafillou (2017) Playing a zero-sum game? The pursuit of independence and relevance
in performance auditing