Chapter 31 Public Finance
Control of public finance has historically been at the heart of Parliament’s constitutional pre-eminence. In England, government expanded from being virtually the prerogative of a King, funded out of the King’s personal wealth, into a state function funded by public exactions. With this expansion and the need to broaden the tax base from its largely feudal origins there grew a dependence by the King and the King’s Ministers, who were charged with carrying on the government, on Parliament, the body representing the subjects who contributed the funds that effective government now required. Parliamentary sanction was recognised as being a legal prerequisite to taxation being levied. The consent of taxpayers, at least in a representative capacity, was a practical necessity if civil strife was to be avoided and sums of tax productively raised. Furthermore, Parliament began to restrict what the proceeds of that taxation could be spent on by directing or appropriating that it be used only for particular ends (some of the earliest appropriations of taxation of the English Parliament were for wars with the Scots, for example). From the time of the restoration of the Crown in 1660, appropriating supplies to limited purposes defined by Parliament itself became the common practice. Parliament then started to demand to see the Royal accounts to satisfy itself that supplies appropriated to one purpose had not been used for another. Thus, public audit began to develop.
By the mid-nineteenth century a comprehensive system of parliamentary control of public finance had developed. When representative government was established in New Zealand this parliamentary control was reflected in the system of public finance that was put in place in the colony.
The public finance principles
The fundamental public finance principles in New Zealand law are that taxation may be levied and public money may be expended only under parliamentary authority.
The rules for the receipt, payment and accounting for public funds derive from these principles of parliamentary authorisation.
Public finance could be seen in simplified terms as requiring all money received by or on behalf of the Crown (taxes, fees, rents, interest and so on) to be paid into a giant fund (formerly referred to as the Consolidated Fund) and all payments authorised to be made by the Crown (salaries, benefits, subsidies and so on) to be disbursed from this fund. Until 1989, with the qualification that there was more than one fund and that some departments were able to retain and reuse certain of their receipts without paying them into the fund, the New Zealand system worked very much like this. Each year Parliament authorised the Government through its departments to spend so much on various categories of expenditure (inputs) such as salaries, travel, operating costs and so on. The payments made in accordance with these authorities were drawn by the Treasury on moneys held in accounts at the Reserve Bank. While under some limited delegations small payments were made locally by departments, most payments were made centrally by the Treasury.
This system changed radically with the financial management reforms introduced in 1989. Parliament no longer simply authorised the expenditure of public money to purchase the resources used by departments (although there is still an element of this involved). Parliament began to authorise the Government to purchase particular goods or services (called outputs) from its departments and from third parties. In some cases this authorisation is for the net cost of producing the output, taking into account any revenue the department expects to make in the course of producing it. Parliament also specifically authorises the Government to meet expenses associated with paying benefits, with borrowing and with capital expenditure and to incur certain other expenses.
The outputs supplied by departments and third parties are designed to contribute to outcomes which are desired by the Government. An outcome is a state or condition of society, the economy or the environment and includes a change in that state or condition.
An outcome thus represents some state or condition that the Government, as the promoter of expenditure proposals, wishes to promote. Information presented with the Budget must give an explanation of the link between each appropriation proposal and its intended outcome.
In the past the Auditor-General has expressed concern about whether the information presented to the House is sufficient to establish such links and whether, in any event, the asserted links can be measured and reported against satisfactorily.
Public finance reforms enacted in 2004 now require greater disclosure of the information needed to make informed assessments of these links.
Select committees, in examining the estimates, are also likely to enquire into the basis for the Government’s view that the outputs being purchased will in fact contribute to outcomes.
From a parliamentary point of view, the longstanding constitutional rule prohibiting the expenditure of public money without Parliament’s authorisation is no longer adequate. The introduction of accrual accounting for the public sector means that income and expenditure are recorded in the public accounts in the time period to which each transaction relates and not necessarily when money is actually paid or received. Furthermore, the cost of an asset is spread across its estimated lifetime by depreciation rather than being fully recognised in the public accounts when it is acquired. Departments do not merely spend public money in cash terms. They also incur expenses, which must be recognised in their accounts with financial consequences that must be recorded as assets and liabilities in balance sheets. Consequently, the public finance legislation now goes further than merely prohibiting the spending of money without parliamentary approval, requiring such approval before a department may incur expenses or capital expenditure.
Parliamentary control of the Crown’s ability to borrow has historically been less developed than its control over taxation and spending. English Parliaments were concerned to prevent the monarch raising revenue by forcing “loans” on citizens. They were less interested in trying to control the Crown’s power to borrow in general, perhaps on the basis that the Crown would effectively need parliamentary authority for a loan anyway if it was to have the means of servicing it. The general power of the Crown to borrow money is now, in New Zealand, a statutory one. It is unlawful for the Crown to borrow or for any person to lend money to the Crown except as authorised by legislation.
In fact the Crown has, by statute, been given comprehensive general borrowing powers and powers to give security for such loans.
There is no limit to the amount of money the Crown may borrow in any financial year.
This legislative framework for the raising of loans means that there is no longer any special parliamentary involvement with the raising of individual loans and the House’s involvement in debt management is minimal.
However, the Auditor-General makes a regular practice of commenting in detail on central government debt which is revealed in the various financial statements prepared by the Government.
The Finance and Expenditure Committee and individual members can, if they wish, probe further in this area.
Payment of principal, interest and other financing expenses on any loan is appropriated under permanent legislative authority.
No annual appropriation is required, although such payments are revealed in the estimates and in the Government’s annual financial statements.
The House’s authority is required for the issue of one type of security. State enterprises, if authorised by the House by resolution, may issue equity bonds which are deemed to be ordinary shares but carry no voting rights.
No such authority has been given by the House.
In England, the Crown’s ever-growing need for finance led to the more frequent holding of Parliaments. This eventually resulted in a system of annual funding of government activity based on annual meetings of Parliament. New Zealand adopted an annual basis for its public accounts as soon as it obtained representative government, though there is no inherent necessity for adopting an annually-based system for public finance
– it is always a question of legislative choice.
At first, the financial year ran from 1 July to 30 June. This was altered to 1 April to 31 March in 1879. The financial year reverted to being from 1 July to 30 June in 1989. (There was a transitional quarter from 1 April to 30 June 1989 to bridge the gap between the different periods.)
Crown bank accounts
The Crown (through the Treasury) operates Crown Bank Accounts.
There may be a number of bank accounts opened and operated on behalf of the Crown that are known collectively as Crown Bank Accounts. (Indeed, legislation may require a bank account to be opened for a particular purpose as a Crown Bank Account.
) By 2002, 96 Crown Bank Accounts had been established. Most of these are with the bank that is the Crown’s principal financial transaction service provider,
though a few are with other banks (mainly overseas and in foreign currencies).
With Treasury approval, government departments may open their own departmental bank accounts.
These accounts must be set up with the bank that is the Crown’s principal transaction service provider unless the Treasury agrees to exempt a particular departmental bank account from this requirement.
The Minister of Finance specifies the terms and conditions under which a Crown Bank Account is operated and either the Minister or the Treasury may give directions as to how a departmental bank account is to be operated.
All public money must be lodged in a Crown Bank Account or a departmental bank account.
Money may be paid out of a Crown Bank Account only pursuant to an appropriation, but money may be transferred between Crown Bank Accounts and departmental bank accounts without any appropriation being involved.
This system allows for the centralised management of cash held by the Government.
The Minister of Finance may close or suspend the operation of a Crown Bank Account or a departmental bank account,
except one required to be established by legislation. The Treasury’s approval is specifically required before a department may close a departmental bank account.
Financial responsibility of the Crown
Parliament’s consent to the expenditure of public money is often known as the granting of supply. The need for regular (annual) authorisation from Parliament for the expenditure of public money and the endorsement of tax rates is the single most important determinant of the House’s sitting pattern. The financial business to be transacted by the House ensures that Parliament meets at least annually and defines the last day in each year (30 June) by which that meeting must take place. It also provides fixed points throughout the year by which certain business must be attended to. The question of whether sufficient financial authorisation exists to carry on government is always a matter that the Governor-General is entitled to seek assurances about from a Prime Minister before acceding to a request from the Prime Minister to dissolve Parliament for a general election. Indeed, a dissolution has been refused because supply had not been voted.
The Crown has the duty to take the initiative in financial matters by presenting to the House of Representatives, at least on an annual basis, its proposals for public expenditure. This is a statutory duty.
But it is also a political duty. The Crown is charged with carrying on the government of the country. If the Crown’s responsible advisers (its Ministers) were unable to take the initiative in financial matters because they did not have the confidence of the House, the continuance of the ministry in office would immediately come into question. At this point the House’s financial procedures would become a matter of high constitutional significance. They are always so potentially.
The financial responsibility of the Crown is reflected in the House’s internal rules permitting the Government to exercise a veto over legislative proposals that would have more than a minor impact on its fiscal aggregates if they were to become law.
Underlying this rule is the principle that those in office, and thus accepting responsibility for the Government’s policies of economic and financial management, should not have fiscal decisions foisted upon them. The House of Representatives’ alternative, if it wishes to change an important aspect of a Government’s policy that those in office will themselves not change, is to change the Government, not to attempt to force Ministers to carry out, and thus accept responsibility for, fiscal policies with which they do not agree.
Although a Government cannot have fiscal policies foisted upon it, legislation (first introduced in 1994
) prescribes that Governments must pursue their policy objectives in accordance with the principles of responsible fiscal management. These principles include: reducing public debt to prudent levels and, once this has been achieved, maintaining it at those levels; achieving satisfactory levels of net worth; managing prudently the Government’s fiscal risks; and pursuing policies that are consistent with the reasonable predictability of tax rates.
The Minister of Finance is required to articulate the Government’s fiscal policy and to identify how its objectives accord (or do not accord) with the principles of responsible fiscal management. These principles are not mandatory, they are statutorily ordained guidelines.
No legal sanctions are prescribed to deal with a failure to comply with them. Nevertheless, departures from them are expected to be temporary and must be fully explained by the Minister of Finance.
Thus, public opinion becomes the chief means of ensuring compliance with the principles.
The way in which the Crown must conduct financial transactions and the reporting which it must undertake are set out in considerable detail in the Public Finance Act 1989. This legislation recognises the central role of the Treasury in the management of the Government’s financial business and in ensuring that financial statements that properly reflect that business are prepared. Finally, the Public Audit Act 2001 provides for the audit of the financial statements and accounts of all public-sector entities by the Controller and Auditor-General.
Crown’s financial veto
The House reflects the principle of the Crown’s financial responsibility through the procedure known as the Crown’s financial veto, which has replaced a number of procedural rules that provided that only the Crown could initiate proposals for public expenditure.
The Crown’s financial veto was introduced in 1996. It resulted from dissatisfaction with the operation of the House’s previous appropriation rule, whereby bills or amendments involving an appropriation of public money were ruled out of order by the Speaker or chairpersons at various stages of the legislative process. It was felt that this rule operated capriciously, protecting some expenditure proposals but not others and having no application at all in regard to revenue. Where it did operate, it could operate too harshly, preventing members moving proposals that, even incidentally, involved the smallest amount of expenditure. The appropriation rule thus did not in any event protect the Crown’s overall financial position and was a source of frustration in respect of the promotion of worthwhile projects involving small amounts of expenditure.
The Standing Orders Committee, which recommended the new procedure of financial veto, recognised that it is the Government of the day that is responsible for the Crown’s financial performance and position and that the Government needs to have control over the fiscal aggregates that determine that performance and position.
The financial veto procedure is designed to reconcile this principle of fiscal responsibility with the desire of individual members to promote policies that involve some amounts of expenditure.
Application of financial veto
The financial veto procedure permits members to promote any proposals regardless of their fiscal implications, but gives the Government a right to veto such proposals if, in its view, they would have more than a minor impact on its fiscal aggregates if they became law.
As such, it applies as equally to proposals with revenue implications as it does to those with expenditure implications.
The financial veto procedure applies to bills, amendments and motions. It also applies in respect of proposals to change a vote contained in an Appropriation Bill.
In respect of bills as a whole, the financial veto procedure applies only when a bill is awaiting its third reading,
because it is only at this stage that the bill is in its final form.
This does not prevent the Government indicating earlier in the legislative process which provisions of the bill would cause it to exercise the financial veto, so that the House can remove or modify these if it chooses before the bill reaches its third reading.
Amendments are subject to financial veto at two points. Amendments recommended by a select committee may be vetoed before they are agreed to by the House on the bill’s second reading.
There can be no financial veto of amendments proposed in a select committee itself. Otherwise, amendments can be vetoed when they are proposed, and before they are agreed to, in the committee of the whole House.
There are two types of motion that are subject to the financial veto.
Any motion which, if passed as a resolution of the House, would have the force of law is subject to a financial veto.
Resolutions of the House do not have the force of law unless they are given such force by statute. Only certain resolutions of the House relating to statutory regulations have legal effect – for example, those disallowing, amending or substituting regulations.
The second type of motion that is subject to a financial veto is a motion to change a vote in an Appropriation Bill.
A financial veto may be applied to these types of motion before they are passed.
The Government’s fiscal aggregates
A financial veto may be applied only to a proposal that has more than a minor impact on the Government’s fiscal aggregates.
The term “fiscal aggregates” is defined as the Government’s intentions for fiscal policy, in particular, for the following—
•total operating expenses
•total operating revenues
•the balance between total operating expenses and total operating revenues
•the level of total debt
•the level of total net worth.
In contradistinction to the former appropriation rule, the financial veto procedure applies to changes in revenue as well as to changes in expenditure. Consequently, the House’s previous rules imposing restrictions on members proposing increases in taxation have been abolished. The effects of proposals for tax changes are considered in applying the financial veto procedure.
There is no definition in dollar terms of what “more than a minor” impact on the fiscal aggregates means. This is a matter for the Government of the day to determine in the light of the circumstances of the time.
The Standing Orders Committee instanced bills or amendments whose main objective was not expenditure, but which would incidentally involve some cost in implementing or administering the proposal and small fiscally neutral transfers between votes, as falling into the category of having only minor impacts.
Governments are expected to apply the procedure reasonably, although the ultimate judgment on whether to invoke it is theirs. Governments are able to take account of the cumulative effect of previous initiatives and proposals for the future in deciding whether to exercise the veto.
This means that the same proposal may be appraised differently at different times depending upon the overall fiscal situation.
The decision to invoke financial veto
How the Government makes the decision to invoke the financial veto is a matter for it. The Cabinet has issued instructions for the process to be followed by Ministers and officials in determining whether to invoke the procedure.
The Minister of Finance and the Minister’s office are designated as the primary points of co-ordination for the Government’s exercise of the financial veto. All Ministers’ offices and departments are enjoined to monitor House and select committee developments that affect their Minister’s portfolio or vote and that may impact on the Government’s fiscal aggregates or vote composition. They must alert the Minister of Finance’s office as early as possible to any such developments or initiatives. The Treasury is responsible for co-ordinating advice to Ministers on the likely cost range of each non-ministerial parliamentary initiative that is identified. The decision whether to exercise the financial veto is made in the first instance jointly by the Minister of Finance and the Minister whose portfolio or vote is affected by the initiative.
Any proposed amendment to a bill before a committee of the whole House that may have an impact on the Government’s fiscal aggregates and any proposed change to a vote, must, under the Standing Orders, be notified at least 24 hours in advance by being lodged with the Clerk. If 24 hours’ notice is not given, such an amendment is automatically ruled out of order regardless of its fiscal impact.
This provision for 24 hours’ notice is designed to allow the Government to have some time to consider the likely fiscal impact of a proposed amendment or change to a vote. Otherwise an amendment might be moved without any notice at all, thus rendering appraisal of its effects on the fiscal aggregates difficult, if not impossible.
Exercise of the financial veto
The financial veto is exercised by the Government certifying that it does not concur in a bill, amendment or motion because, in its view, the bill, amendment or motion would have more than a minor impact on its fiscal aggregates or on the composition of the vote.
The certificate is given in the name of the Government and is signed by a Minister of the Crown, who takes responsibility for it. Which Minister signs a certificate is a matter for the Government to decide.
Generally, it is signed by the Minister of Finance. Where there are several amendments to the same bill or proposed changes to the same vote, a single certificate can be issued in respect of the amendments or changes.
In the case of an amendment proposed at the committee stage of a bill, the certificate cannot relate to part of the amendment, it may relate only to the amendment as a whole. In the case of a certificate relating to amendments recommended by a select committee, any certificate must relate to all of the amendments recommended.
But in the case of a bill awaiting third reading the certificate can be given in respect of the bill as a whole or in respect of a particular provision or provisions of the bill.
A certificate confined to a particular provision does not itself remove that provision from the bill, but it is open to the House (by recommitting the bill) to remove the provision to which the Government objects. The bill cannot be passed as long as that provision remains part of the bill and the bill remains subject to the certificate.
A financial veto certificate must state with some particularity the nature of the claimed impact on the fiscal aggregates or on the composition of the vote and why the Government does not concur in the bill, amendment or motion to which it relates.
Provided that the certificate complies with formal requirements by stating with some particularity the nature of the fiscal impact, the Speaker or chairperson will not permit the Government’s judgment to be contradicted on a point of order. The Government, not the Chair, determines whether a proposal would have more than an impact on the Government’s fiscal aggregates. But this does not prevent the Government’s judgment being challenged by way of debate. The certificate is open to debate when the bill, amendment or motion to which it relates is next considered by the House.
Delivery of the certificate
A financial veto certificate is given by delivering it to the Clerk.
It is effective at that point. It is announced to the House or the committee of the whole House by the Speaker or chairperson as soon as reasonably practicable. In the case of a certificate relating to select committee amendments to a bill, to a bill awaiting third reading or to a motion of which notice has been given, the Speaker announces it forthwith regardless of when the bill or motion is likely to be debated. In the case of amendments to a bill or changes to a vote, the chairperson announces a financial veto certificate at the outset of the consideration of the clause or part to which it relates if a certificate has been received by the chairperson by that time and, if received thereafter, as soon as one is received.
A financial veto certificate may be withdrawn at any time by the Government so informing the Clerk in writing.
Effect of a financial veto certificate
A financial veto certificate prevents the bill, amendment or motion to which it relates being passed.
In the case of a bill, no question for its third reading can be put if a financial veto certificate has been issued in respect of it or if one has been issued in respect of a provision in the bill and that provision remains in the bill.
But the third reading debate may still be held.
In the case of select committee amendments, the amendments are omitted from the bill and cannot be again moved during the committee stage.
But the effect of the certificate may be discussed during the second reading debate on the bill.
In the case of a certificate relating to amendments at the committee stage, the amendments are out of order and no question is put on them,
though they can be debated during consideration of the clause or part to which they relate. Where a financial veto certificate relates to a new clause or a new part that has not yet been reached, the new clause or new part is out of order and no debate on it occurs. If a financial veto certificate relating to a new clause or a new part is lodged while debate on that new clause or new part is under way, the new clause or new part is out of order and debate on it terminates at that point.
In the case of a motion, including a motion for a change to a vote, the motion may be debated but no question is put on it at the end of the debate and it is ruled out of order.
The issue of a financial veto certificate does not preclude the Speaker or chairperson ruling on the acceptability of a motion or amendment on general procedural grounds. If a motion or amendment is out of order in any case, it may not be moved or debated. In these circumstances any financial veto certificate that has been issued is supererogatory. The fact that a certificate that is not needed has been issued does not permit a debate to take place that is prohibited on other grounds.
Finance and Expenditure Committee
A central role in the House’s financial procedures is played by the Finance and Expenditure Committee.
The House has consistently appointed finance committees throughout its history, though they have generally been responsible for holding departments and agencies accountable for the expenditure of public money rather than playing a leading role in giving that authority in the first place. Thus, the House had an Audit Committee from 1858 to 1867 and a Public Accounts Committee from 1871 to 1962. In the latter year a new committee, the Public Expenditure Committee, took over the Public Accounts Committee’s duties of investigating past governmental expenditure and financial transactions, and combined it with the role of examining the current year’s estimates prior to the House making its annual appropriations. The other select committees were involved in this task by the committee referring individual votes to them for examination as part of the process.
The Finance and Expenditure Committee was first established in 1985 and took over the appropriation co-ordinating functions of the Public Expenditure Committee. At the same time, it was intended that much of the accountability work, that had previously been carried out almost exclusively by the Public Expenditure Committee, would be shared to a greater extent with the other subject select committees. Further Standing Orders changes in 1992, when the House’s procedures were overhauled to take account of the financial management reforms effected in 1989, have emphasised that, while the Finance and Expenditure Committee is pre-eminent in the financial work carried out by select committees, the other committees have important responsibilities to fulfil in this respect too within their own subject areas. In 2000 the Finance and Expenditure Committee established a subcommittee to deal specifically with issues raised in reports of the Controller and Auditor-General. After receiving public briefings from the Auditor-General on the reports, it was intended to make suggestions to other committees about issues to follow up related to their own areas of responsibility.
However, this subcommittee was not re-established in the subsequent Parliament.
The Finance and Expenditure Committee is established at the commencement of each Parliament. In the 2002–05 Parliament it had 12 members drawn from six parties in the House. Its basic subject area of competence is audit of the Government’s and departments’ financial statements, Government finance, revenue and taxation.
Departments and institutions within its remit with an obvious significance in terms of economic policy and financial management include the Treasury and the Reserve Bank of New Zealand.
But the Finance and Expenditure Committee’s leading role in the House’s financial procedures does not depend on its subject-area remit. It results from the fact that the committee is the linchpin for the carrying out by all committees of their examinations of estimates (the making of the annual appropriations) and their financial reviews (the scrutiny of the past year’s financial performance) of departments, offices of Parliament, Crown entities, public organisations and State enterprises. Following the introduction of the Budget or an Appropriation Bill proposing supplementary appropriations, the estimates or supplementary estimates, as the case may be, stand referred to the Finance and Expenditure Committee. The committee then, as it sees fit, refers votes to the other select committees or retains them itself for examination.
The committee is not restricted to its own subject area in the votes that it decides to retain and may retain a vote dealing with another subject area if it wishes.
The Finance and Expenditure Committee is specifically required to make a report on the budget policy statement, on the fiscal strategy report and the economic and fiscal update and on the annual financial statements of the Government.
Half-year economic and fiscal updates and the statement on the long-term fiscal position are also referred to the committee.
It may, but does not have to, report on these statements. In addition, soon after 1 July each year, the committee must allocate to the other committees or retain for itself the task of conducting a financial review of the performance in the previous year and current operations of each department, office of Parliament, Crown entity, public organisation and State enterprise.
Again, the committee is unrestricted in the choices that it makes as to entities it will examine itself and those that it will allocate elsewhere.
As well as allocating estimates and departments for review, the committee takes a lead in how those tasks are discharged by committees. It issues a standard questionnaire to all departments on their estimates and has in the past prepared a questionnaire for the other select committees to use for their financial review work. These questionnaires suggest what information committees might wish to obtain from departments as a basis for carrying out their examinations. Carrying on a convention that developed with its predecessor, the Public Expenditure Committee, the committee expects to be informed of proposed changes to the presentation of financial information, particularly the estimates, before they are implemented. Failure on the part of the Minister of Finance to consult with the committee has led to criticism from the committee.
The Minister of Finance is now required by statute to consult with the House before changing the format or content of information presented to the House with an Appropriation Bill.
Such proposals are referred to the Finance and Expenditure Committee, which co-ordinates the House’s response to them.
The committee performs a similar role in regard to proposals to prescribe non-financial reporting standards for Ministers, departments and other organisations.
In addition to its role at the centre of the House’s financial procedures, the committee considers bills, petitions, treaties and other matters referred to it by the House.
The committee invariably holds a full public hearing, involving the Governor of the Reserve Bank, on each quarterly monetary policy statement issued by the bank. Most tax legislation is referred to the committee, and this can be a heavy burden. Any financial management legislation is inevitably referred to the committee. The committee made major reports on the 1989 public finance legislation (and on important amendments that were subsequently made to it), on the legislation reconstituting the Reserve Bank and on the fiscal responsibility legislation.
It has also made reports on other financial management issues, such as reporting by the Crown and its subentities
and on the format and layout of the Crown’s financial statements.
In 1989, on referral from the House, it conducted a seminal inquiry into the officers of Parliament
and in 1998 it followed this up with an inquiry into the legislation applying to the Audit Office.