Scoring the Accountants

Elements of our Public Finance Act are world class, as a recent conference reported. But other parts need to be overhauled.

It is not an accident that it was a (now retired) professor of accounting who identified Gilling’s Law – the way you score the game, shapes the way it is played. So I was greatly disappointed that a group of (mainly) accountants, who came together recently to celebrate the thirtieth anniversary of the Public Finance Act, hardly alluded to the law.

A nice illustration was from Lynn Provost, a former Auditor General. She told how before she became Deputy Commissioner of Police, the agency paid little systematic attention to the assets it owned. She went off to see a couple of police stations which were in some disrepair, you could put your foot through the floor boards. Picked up from the air terminal, she could not converse with her driver such was the whine in the police car’s differential.

The Public Finance Act required each agency to pay attention to their assets. Its predecessor did not. The accountants were chuffed at how the new act had introduced accrual accounting. It replaced a system of ‘cheque-book accounting’ in which the government agencies only looked at their cash flows and ignored their assets and liabilities. With the new score-book, the agencies had to take an interest in them.

An economist is grateful to accountants for the data base they provide, although sometimes they get into arcane definitional tangles. At the same time we see the importance of the PFA in terms of providing accountability.

Under the pre-1989 system, the single most important table we used was not even audited. On one occasion there was a muck-up in its calculations but the Auditor General could not point that out. Aside from Lambton Quay gossip, we learned about it only the following year when the mistake was rectified.

A more serious misdemeanour was that it allowed the Minister of Finance, Rob Muldoon, to manipulate the most prominent figure in the table – the one that the public used to score the game – to a number which suited him politically.

And then there were the ‘contingent liabilities’, when the government agreed that under certain circumstances it would subsidise a business failure. I was deep in the thick of the ‘Think Big’ debate. Outsiders, such as myself, did not realise that the government was providing significant guarantees to businesses if the oil price fell; had we known we would have changed our analysis – and the public debate – dramatically.

Neither was Parliament told. Its constitutional role is that the Crown – the government – depends on ‘supply’, the provision of money from Parliament. Yet the Crown was committing the nation to potential outlays without the authority of Parliament. Fortunately, the post-Muldoon Parliament honoured the commitments – albeit grumpily. Today, under the PFA, such contingent liabilities by the government have to be reported to Parliament.

So the PFA not only improves the measurement of the government’s financial situation, it also codifies the reporting to Parliament and the public. (Recall the importance of the publication just before a general election of the state of government finances so that all parties can argue on the same data base and the public can judge them. In the past the government has deliberately obscured its financial situation for electoral advantage.)

But allow me a grumble. The budget papers which report each department’s votes (the practical way that ‘supply’ is approved) are excessively long, obscure and repetitive, as if the aim is to avoid parliamentary scrutiny by deluging MPs with bumf. I cannot believe that they can exercise their responsibilities to hold the government to account based on these documents; perhaps the bumf is deliberately designed to make it impossible. Were Parliament taking such responsibilities really seriously, it would insist on transparent reporting and even go marching in the streets in protest. (I am not sure down which streets they would march.)

One of the things hardly discussed at the conference was that the PFA changed the way that Parliament funds government agencies. Technically the parliamentary votes changed from funding inputs to funding outputs. The details need not detain us – I am not sure they are as rigorous notions as we like to go on about – but the scorecard was changed.

There were hints that it changed dramatically the way that the government agencies behaved. Of course they can be more flexible with their spending but the Secretary of the Treasury reported that they were much better at controlling the total, rarely exceeding what had been approved. (The DHBs and the polytechs are an exception.) Why it happened was not discussed; I wonder whether the hordes of accountants in departments improved fiscal control but Gilling’s law says the game may have been reshaped.

On the other hand there, are some nefarious things which go on within departmental financials which have the effect of neutering Parliament’s intentions. (See Don Gilling’s careful analysis of the actions of the Department of Internal Affairs.)

One other area which was not discussed was the section in the act that specifies the purposes of fiscal responsibility. This is about economic management and the accountants seemed to treat it as a cuckoo in the nest; nothing to do with them.

In my view Section 26g is almost unintelligible, drafted by lawyers who knew no economics. Insofar as I can interpret the section, it amounts to a neoliberal, austerian headlock on what fiscal policy should be about. The good news is that faced by the Global Financial Crisis, John Key and Bill English ignored the principle (unlike many european econoies who suffered from its pursuit). Instead of incarcerating them for breaking it, we re-elected them. (Even the ACT party, the custodians of neoliberalism, did not march out of the government in a huff.) It is crazy to include in an act of Parliament a provision which everybody ignores if they want to. (There is a subsection which amounts to a get-out-of-jail-free card – its ‘temporary’ provision was applied for over six years.) .

Essentially Section 26g scores the purpose of fiscal policy in terms of the level of the government’s debt. (Against good accounting practice it ignores assets – wonky floorboard, car differentials and all.) Let me be clear; any study of New Zealand’s economic history leaves one permanently anxious about the nation’s debt levels. But they are a threat to the economy, not the sole purpose of government. If economic circumstances permit, it makes sense for the government to invest more, even if the new capital is partly funded by additional borrowing. I support easing us through an emergency (such as the GFC) by borrowing. I am not an austerian attacking the nation’s wellbeing.

As I have said, the conference did not address this and some other issues. It celebrated the introduction of accrual accounting. It claimed that New Zealand’s public accounts, based on accrual accounting, are the best in the world, but nobody has followed us, because the upheaval of introducing them is too great (and, in any case, politicians prefer not to be accountable). But that does not mean we cannot improve the Public Finance Act.