A Taxing and Spending Matter.

The Public Finance Act is one of those boring statutes which shapes the nation’s wellbeing.

The power to tax and spend is at the heart of our constitutional democracy. In 1649 the English beheaded their monarch; one of their grievances was that he was levying taxes without parliamentary authorisation. The 1688 Bill of Rights, which limits his successors, is one of the few English statutes which is a part of our written law.

The Public Finance Act is critical to putting the powers into effect, as it sets out the standards and practices of how the Crown should report its tax and spending to parliament. The act is under review, in part to shift the government from a narrow focus  which, in effect, means that it operate likes a business, to one which places greater concern on the nation’s wellbeing – in effect treating its objectives as numerous and inchoate, rather like those of a household.

The business orientation of the PFA even involves a kind of business-oriented ‘bottom line’ for the PFA makes particular reference to debt levels.

New Zealand’s economic history well illustrates that public welfare has more than once been compromised by high offshore debt levels. Yet, it would be a strange (or dysfunctional) household whose primary focus was the debt level.

Just to remind us, New Zealand has one of the lowest public debt-to-GDP ratios in the world. It is better that it should stay down there; but currently we need not be obsessed with debt levels. (Were debt double the current level I would be much more concerned. I am very concerned about private offshore debt, appreciating that a reason for keeping government debt levels low is to offset private failure; we need to address that private debt problem more directly.)

To understand the power of the PFA you need to recall Gilling’s Law which states the way you score the game shapes the way the game is played.

Gilling’s Law says the  danger is that we lapse into placing the level of debt at the top of the score card even if the primary focus is meant to be wellbeing. This is well illustrated by the current ‘Budget Responsibility Rules’, which emphasise the debt track.

Moreover the PFA (Section 26G) has in it explicit directions on how the debt (and hence the fiscal deficit) should be managed. The rules are framed by a neoliberal ideology. We may argue over its economic content but the PFA is such a central part of the constitution, it should not be tied down to a particular ideology. Hopefully, the rewrite will exclude such sentiments. We may, in our wisdom, one day reelect a neoliberal government, but there is no reason we should restrict all governments to that way of thinking, even if every government must manage the nation’s debt prudently.

It was this thinking which led to the Austerianism of European economic management which imposed the burden of adjustment on the poor and destabilised democracy in a number of countries. New Zealand does not have to embed this disastrous approach into its legislation.

We wait to see how the government will incorporate wellbeing into the PFA, but here are some issues it should address.

The PFA needs to pay more attention to inter-generational issues – to future liabilities. The government is not a business; it cannot fall over and disappear as most businesses eventually do. There is a danger of being unprepared for future commitments and the key measures provided by the PFA currently do not provide a warning.

Another fundamental but deeply symbolic change would be to recognise that the government holds different sorts of assets and to stop lumping them into the same category in the Crown Accounts. Some assets are commercial, which may or may not be sold, while some assets are heritage and are never to be sold. I have suggested the latter be called Ake (forever) and be separately disclosed. It is ludicrous – and misleading – to treat a share in Air New Zealand and the document on which Te Tiriti o Waitangi is written as the same in the Crown Accounts.

 We also need a set of  subsidiary Crown Accounts which are more useful for macroeconomic management. Here is a summary from an earlier briefing which argued for four sub-accounts.

The investment activities statement, which would show government investment spending.

The social transfer activities statement, which would show social security and other benefits.

The third statement would cover the government’s activities in providing collective services, and the fourth statement, the government’s activities in providing personal services.

(In each case the account would include relevant revenue which offsets the outgoings.)

The aim is to focus on the broad purposes of government fiscal activity: investment, redistribution, providing services to individuals (which the private market does badly), and providing services which the market cannot do at all. It would frame the current fiscal debate in a more constructive way than today’s approach of lumping everything together. It is a step towards putting wellbeing in the Crown Accounts.

It would also be helpful to set out a (short) account of how to judge the performance quality of the Crown Accounts and, in particular, to identify some key summary measures. A particular aim should be to identify a better headline indicator – Gilling score – than the debt-to-GDP ratio. I shall not be surprised if it is a net worth measure but a different one from that in the current accounts.

Finally, we need think more about the presentation of the Crown Accounts. Their primary purpose is to enable parliament to to hold to account (to scrutinise and control) the government’s financial actions. Yet it would be very unusual for a Member of Parliament to come to grips with today’s Crown Accounts and the estimates of expenditure in the form they are currently presented to Parliament.

I do not think their increasing opaqueness is deliberate, although aggrieved but interested MPs might well think they were being given the mushroom treatment. What has happened is that the material presented to parliament is increasingly developed for internal public sector management. The primary constitutional role of the Public Finance Act has been forgotten, or honoured only in the breach.

This column is based on a paper to a symposium available here.