New Zealand’s wellbeing budget must enhance current fiscal legislation

By:
20 Nov 18

New Zealand’s wellbeing budget has the potential to bring greater coherence and formality to the reporting of outcomes, says emeritus chair of CIPFA International Ian Ball.

 

The New Zealand Government will produce its first ‘wellbeing’ budget in April 2019.

This budget will formalise and extend an approach which has, within the New Zealand Treasury, been developing for a number of years under the title of the Living Standards Framework.

The government that was formed after the November 2017 election is seeking to further develop and embed this approach under the banner of ‘wellbeing’. In a recent discussion document issued by the Treasury, the minister of finance put it like this:

“Our government believes that economic growth is a means to an end, not an end in itself. The actual purpose of growing our economy is to improve the wellbeing and living standards of New Zealanders, and the natural resources that sustain us.”

The intent behind the Treasury’s proposal in this discussion document is to increase wellbeing by amending the Public Finance Act (PFA) to require governments of the future to develop fiscal policy and budgets within the framework of this very broad conception of wellbeing – wellbeing is a term which encapsulates all of the outcomes the government seeks to achieve.

It includes knowledge and skills, health status, safety, environment, and so on.

The envisaged changes to the act would also require the development and reporting of wellbeing indicators, and their use in guiding budgetary decisions.

A feature of the framework is that it sees wellbeing as flowing from four stocks of capital – natural, human, social and financial/physical.


‘There is a devil in the detail of how this is done. Determining the set of wellbeing indicators is a very challenging task indeed, especially if the aim were to be comprehensive, covering all important areas of wellbeing.’


Government interventions can enhance or diminish these capitals, and with them, wellbeing. So, for example, increases in knowledge and skills lift human capital, while increases in disease incidence reduce it.

This approach has much in common with integrated reporting, which also focuses on a set of capitals (albeit not exactly the same categorisation of capitals) and sees the capitals as being drawn on to produce services and through those services, achieve enhanced wellbeing. The document released by the Treasury describes wellbeing in a way that is consistent with the more widely used notion of outcomes.

The PFA, passed in 1989, and the Fiscal Responsibility Act 1994 (now part of the PFA), were remarkably successful in improving fiscal performance and position. The New Zealand Government’s net worth has increased almost every year since the acts were fully implemented in 1994, barring four years after the global financial crisis and the Canterbury earthquakes – a very unfortunate fiscal double whammy.

This increase in net worth has been achieved by running surpluses and by increases in asset values. The result is that net worth is now both significantly positive and larger than it was in 2008, distinguishing it from many other governments (eg Canada, UK, US) whose net worth is seriously negative and who have yet to arrest a net worth decline that has continued since at least 2008.

By embedding the wellbeing approach into the Public Finance Act, the government is no doubt seeking to achieve in relation to the (non-financial) capitals results similar to those achieved on the fiscal front.

And in a number of ways this is consistent with the framework that underpins the PFA.

First, it is consistent with the existing requirement in the act that the Budget Policy Statement “state the broad strategic priorities by which the government will be guided in preparing the Budget”. These strategic priorities relate to the outcomes the government is seeking to achieve, and should be reflected in the key wellbeing indicators.

Second, while departments are required to prepare both financial statements (reporting on use of capital) and information on performance (reporting on the delivery of outputs), the government as a whole reports only on financial capital. It does not formally report on either the delivery of services (although, of course, departments do), or more importantly the (wellbeing) outcomes achieved.

The wellbeing focus has the potential to bring greater coherence and formality to the reporting of outcomes. Currently many outcomes are reported (for example in reporting on crime incidence, environmental degradation, and so on) though this is not formally part of legislatively required reporting on the performance of the government.

And selected outcomes have previously been reported, outside the Public Finance Act, for example as part of the Better Public Services Initiative of the previous government. To require such reporting through legislation is to take a very major step forward in government accountability.

So it is possible to advance the wellbeing agenda by strengthening both the legislatively specified goals of the government and the reporting against those goals.

But there is a devil in the detail of how this is done. Determining the set of wellbeing indicators is a very challenging task indeed, especially if the aim were to be comprehensive, covering all important areas of wellbeing.

Ideally it would be done in a way that reinforces the current act, rather than undermining any of its key features. This is important because the fiscal strength that has been achieved to date has positive social and economic benefits, as was seen in the rapid recovery from the financial crisis and the earthquakes.

It is too early to say whether the proposed reforms will work - they have not yet been developed in sufficient detail to form a view. For example, we do not know what the indicators will be, nor do we know what changes will be made to the act.  

However, like the social investment approach developed by the previous government, they certainly have the potential to improve the performance of the government in enhancing the wellbeing of New Zealanders.

The proposed changes have a solid base of high-quality financial information on which to build.

The trick will be to move the focus to wellbeing without eroding that base.

  • Ian Ball
    Ian Ball

    Professor of Public Financial Management at Victoria University of Wellington and emeritus chair of CIPFA International

     

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