Chapter 32 Appropriations and Authorisations
Legal authority and financial authority
There are two aspects to any governmental action involving the expenditure of public money – that is, to the incurring of expenses or of capital expenditure.
The first aspect is the legal authority of the Government or its agents to take the proposed action (in respect of which the expenditure or expenses are to be incurred) at all. This legal authority may be an inherent legal power possessed by the Government, it may be one conferred by statute, or it may be a combination of these.
The second aspect is the authority to expend public money for the purpose of performing that action should this be required. Ministers do not have authority to make payments out of public funds, even for activities that may otherwise be lawful, without parliamentary authority.
A payment made out of public funds without parliamentary authority is unlawful. Authority to expend public money can only be obtained by Parliament making an appropriation for the action which it is proposed to take or otherwise authorising the payment. An appropriation is a legislative provision which permits amounts of expenses or capital expenditure to be incurred for activities that fall within the defined scope of that provision. A financial authority for public money to be expended may be given separately than through an appropriation. Principally this occurs by means of a grant of imprest supply. However, such an authority lacks the specificity and accountability attendant on an appropriation. Consequently it is usually of temporary effect and is intended to be absorbed into the regular appropriation process.
Thus whatever the derivation of the Government’s legal authority to perform an action, that authority is distinct from the appropriation enabling it to discharge financial liabilities arising from the action.
The two concepts of legal authority and appropriation can be linked if the provision of an appropriation is made a necessary legal condition of the activity in question;
for example, where a government contract was made “subject to” an appropriation being made by Parliament
and where a subsidy was made payable out of moneys standing in a particular account and insufficient funds had been appropriated to that account.
But even in such a case, there is still a conceptual distinction between the enabling authority and the spending authority, though the former may be defined by reference to the latter. However, defining the legal power to do something by reference to the financial authority to effect it is comparatively rare.
Sometimes the same statute provides, in separate sections, both the legal authority for the activity and for the appropriation. This type of appropriation is known as “permanent legislative authority”. More often the statute conferring the legal authority on the Government to undertake certain activity does not make the appropriation itself but contains a section contemplating that Parliament will in the future (through its annual appropriations) make the appropriation necessary to discharge the financial obligations arising from that activity. In this case the need for an annual appropriation is made clear on the face of the legislation, but the effect is the same even if the statute is silent on the matter; an annual appropriation is still necessary to give any financial authorisation that is required to carry out the activity.
In any case where “expenses” are incurred under the authority of an appropriation this means expenses measured in accounting, not necessarily legal, terms.
However, any expenses incurred may well constitute legal liabilities too. Indeed the fact that a legal liability exists may be an important element in determining, in accounting terms, whether there is an expense needing to be recognised in the Crown’s accounts, and thus requiring an appropriation.
Effect of an appropriation
An appropriation has only a limited effect. It is facilitative; it enables an expenditure to be made or a financial obligation to be satisfied that the Crown could not otherwise have made or satisfied. But while an appropriation enables the Government to spend public money and discharge its financial commitments, it does not require the Government to take those actions. An appropriation imposes no general duty on the Government to exercise the spending power thus granted,
nor does it in itself confer a contractual right to receive a payment.
A direction from Parliament that something actually be done is effected separately from the appropriation process.
An appropriation does not enable the Crown, a department or anyone else to do something which they are not otherwise legally authorised to do; the existence of an appropriation does not make lawful something which is unlawful.
Thus, the fact that appropriations had been made in respect of certain departmental activities did not authorise the department to undertake those activities when they were not within the department’s functions as defined in its parent legislation. The Auditor-General consequently refused to sanction expenditure on them even though there was an appropriation for them.
Nor does the fact that Parliament has appropriated funds for a particular purpose render disbursements pursuant to that appropriation immune from judicial review. The presumption is that Parliament in appropriating funds intends that they be used in a manner that complies with the legal principles developed by the courts to apply to anyone exercising a public power.
It also follows from the requirement for an appropriation to be made before public money can be expended, that the fact that a statute has imposed an obligation on the Crown or its agents to pay money (for example, to pay benefits) does not in itself authorise that payment unless an appropriation for it has been made. For this reason statute now makes a standing appropriation allowing Crown liabilities to be settled.
But even apart from this provision the Crown is not excused from legal liabilities arising from statute, contract or otherwise, merely because no appropriation has been made to satisfy those liabilities. Judgment could still be entered against the Crown in these circumstances.
Nevertheless, formerly, parliamentary control of public expenditure was still emphasised since an appropriation was specially required to satisfy a judgment debt where no other legal appropriation for it existed.
In theory Parliament could have repudiated liability by refusing to provide an appropriation to satisfy the judgment.
Now, however, it is provided that a judgment debt entered against the Crown following legal proceedings is sufficient authority for payment to be made even where Parliament has made no specific appropriation for that payment. A judgment debt against the Crown is subject to a standing appropriation under permanent legislative authority.
Payment of public money
Money may only be paid out of a Crown Bank Account or a departmental bank account in accordance with an appropriation or other statutory authority.
Formerly there was a requirement for periodic certification from the Auditor-General before funds could be released. This was repealed in 2004 as being largely symbolic in an accrual accounting context and offering little practical check on public expenditure.
The Treasury is required to report continuously to the Auditor-General on all actual expenses and capital expenditure incurred (whether under an appropriation or other authority) and to relate this expenditure to the amounts of authorised expenditure.
The Auditor-General may direct the Minister of Finance, the Treasury or a department, as the case may be, to stop payments out of a Crown Bank Account or a departmental bank account which the Auditor-General considers to be unlawful.
If the Auditor-General considers that expenditure has been incurred that was not lawful or was in excess of legal authority, the Auditor-General may direct the Minister concerned to report that belief to the House within 20 working days. But that Minister may also, in that report, set out the Minister’s contrary belief about the legality of the expenditure, if the Minister holds one.
The Auditor-General, through the audit of public accounts, also checks for assurances that an entity has operated within the scope of an appropriation. In practice, this audit of appropriations or other authorities is the most important way in which the Auditor-General examines whether funds have been properly applied or committed.
In exercising these “controller” functions the Auditor-General is not concerned only with the existence of an appropriation or authority; the Auditor-General is also concerned to establish that the purpose to which any money to be paid from the Crown Bank Account is to be put is itself lawful. Where the proposed use of public money is not itself lawful, the Auditor-General may exercise the power to forbid payment, notwithstanding that there is an appropriation.
Where a legal obligation and an appropriation for a particular activity exist but it is likely that the amount appropriated will be exhausted, the Auditor-General has accepted a “letter of comfort” from the Minister of Finance and the Vote Minister as a condition of agreeing to the release of further public money for that activity.
A letter of comfort acknowledges the legal responsibility to continue to carry out the activity and is in earnest of the Ministers’ intention to seek further appropriations from Parliament during the course of the financial year.
Whether the Auditor-General acquiesces in the release of public money on the basis of a letter of comfort is a matter for the judgment of the Auditor-General.
The Auditor-General’s opinion is not conclusive of the validity of expenditure should it be subsequently challenged as not having been authorised.
If Parliament fails to pass detailed appropriations early in the financial year this can seriously compromise the Auditor-General’s ability to carry out the controller function.
The House’s financial procedures are now designed to ensure that detailed appropriations are made early enough in the financial year to prevent this occurring. The lack of specification for appropriations effected by way of imprest supply can undermine the effectiveness of the Auditor-General’s role though this is ameliorated by the requirement (introduced in 2005) for continuous reporting to the Auditor-General on all expenses incurred.
Duration of appropriations
Parliament is not limited to a particular period in specifying for how long an appropriation is to endure. In respect of some matters, the Act which provides for carrying on the activity goes on itself to authorise an appropriation for the purpose of that activity for an indefinite period. Expenditure of such a kind, permanent legislative authority, does not lapse (though the appropriation provision may, of course, be repealed). The exact proportion of total government expenditure which is permanently appropriated in this way varies each year. In the 2004/05 financial year it was 12.9 percent.
Permanent appropriations are not new phenomena. The New Zealand Constitution Act 1852 (UK) provided for defraying certain expenses without the necessity to seek an annual appropriation from Parliament. The expenses covered in this way included the salaries of the Governor and the judges, and of collecting state revenues.
Judges’ salaries are an example of expenditure in respect of which there is still permanent legislative authority.
The placing of the authority to pay judicial salaries on a permanent basis rather than leaving them to be voted annually is of high symbolic importance as it demonstrates the independence of the judiciary from financial pressures. Parliament could, of course, repeal the section of the Act which makes judicial salaries a permanent charge on public funds, but to do that it must take a highly visible (and probably controversial) positive legislative action rather than merely omitting an item from the annual estimates. Other expenditure made under permanent legislative authority includes the salaries and allowances of Ministers and other members of Parliament;
the salaries of the Ombudsmen, the Controller and Auditor-General and the Deputy Controller and Auditor-General;
the government subsidy to various superannuation schemes
and the repayment of debt and the servicing of that debt.
Debt is payable under permanent legislative authority as an assurance to persons from whom the Government borrows that the sums required to discharge its liabilities will be forthcoming automatically each year. But the fact that permanent legislative authority for an appropriation exists does not preclude Parliament making appropriations for that activity on an annual basis if it sees fit.
While there may be good reasons for permanent appropriations in particular cases, in general permanent appropriations are deprecated as reducing Parliament’s annual control of public expenditure.
All expenditure under permanent legislative authority must be reported to the House along with the annual estimates documents presented with the main Appropriation Bill.
The standard appropriations are annual appropriations limited to the financial year to which the Appropriation Act under which they are made relates. They lapse at the end of that year.
These annual appropriations include money already spent and expenses already incurred that year under interim authorisations.
An Appropriation Act passed near to the start of the financial year enacts the main appropriations but there is usually a set of supplementary appropriations relating to the financial year made before the year closes. The majority of government expenditure is appropriated annually in these ways.
Rather than making appropriations annually or for an indefinite period, appropriations can be expressed to apply for a fixed number of years. In fact, Parliament has rarely done this. In the early years of responsible government there were two years (1857 and 1859) in which Parliament did not meet, and for these periods, in the expectation of a lengthy gap before Parliament would sit again, supply was voted for longer periods than 12 months. For a few years afterwards there was no automatic assumption that Parliament would meet every year and a section was inserted in the annual Appropriation Act allowing the Act’s conditional extension for up to a further year if Parliament had not met sooner. The practice of including such a section in the Appropriation Acts ceased in 1865.
There is a provision in the public finance legislation contemplating that Parliament might make appropriations for more than one year – that is, a multi-year appropriation.
It is always open to Parliament in making an appropriation to express it to apply for any number of years. In that sense a provision contemplating multi-year appropriations is without legal significance. But it does acknowledge the existence of a new standard type of appropriation that may endure for up to five years.
The first multi-year appropriation was made in the 1994/95 financial year to provide for the settlement of claims under the Treaty of Waitangi over the following five years. In the next year this multi-year appropriation was extended by a year.
Because of concern that multi-year appropriations are not subject to annual parliamentary scrutiny, a select committee has sought the Auditor-General’s clarification of such a proposed appropriation and assurances that the risks to the Crown of the appropriation proving to be insufficient towards the end of the multi-year period were minimal.
Akin to multi-year appropriations, although made outside the normal appropriation process, are funding agreements between the Treasurer and the Governor of the Reserve Bank concerning the income of the bank that may be applied in meeting its expenditure. These agreements are usually for five-year periods and are not effective unless ratified by a resolution of the House.
Parliament could, before the financial year commences, decide upon the amounts to be appropriated for the coming year and appropriate them accordingly so that from 1 July the expenditure of public money could proceed on a settled basis. In practice, it has not been found possible to settle all the matters relating to a financial year before the year opens, and Parliament does not finish making the basic financial provision for the current year until some months of that year have elapsed. Indeed, until 1985 it was uncommon for parliamentary sessions even to commence before the beginning of a new financial year (at that time commencing on 1 April), thereby making it impossible to provide prospectively on an annual basis for public expenditure. Even when Parliament did meet some time before the financial year commenced, it showed no inclination to alter the usual cycle of financial business by making detailed appropriations prospectively.
In these circumstances an interim or temporary spending authority, called imprest supply, is used to confer authority to incur expenditures up to a specified limit
from 1 July (when the previous year’s annual appropriations lapse) until new annual appropriations are made. In practice, other interim spending authorities may be necessary during the course of the financial year. These authorise expenses and capital expenditure separate from and ahead of any annual appropriations that are made.
Imprest supply is a distinct and separate spending authority from the appropriations made by the Appropriation Acts or other legislation.
Occasionally interim authority to incur such expenditures in advance of an Appropriation Act may be given by legislation other than imprest supply.
An Appropriation Act when passed supersedes all Imprest Supply Acts applying to the financial year passed up to that time. The authorities conferred by an Imprest Supply Act merge into the annual appropriations made by the Appropriation Act. Imprest Supply Acts anticipate their temporary nature by expressly referring to the interim authorities which they make being charged in the manner to be set out in an Appropriation Act.
In this way they have been described as making “fictional” appropriations.
They then either expire or are spent when an Appropriation Act is passed. If no Appropriation Act were to be passed, the Imprest Supply Acts for the year would operate as distinct authorisations for expenses to be incurred and money to be paid on the bases set out in those Acts.
An Imprest Supply Act does not specify in detail how the authorisations that it makes are to be exercised; it confers a general authority to spend up to a specified amount. This lack of information as to how the authority granted under imprest supply is to be used has been criticised by the Auditor-General as the constitutional equivalent of a blank cheque.
However, no legal authority is unfettered. The Auditor-General’s ability to question the lawfulness of the objects of expenditure incurred under imprest supply is unimpaired; an Imprest Supply Act, like an Appropriation Act, does not authorise expenditure on activities that it is not otherwise lawful for the Government or its agencies to incur. Furthermore, there may be extrinsic evidence of the purposes of the imprest supply authorisations that can be taken as factors in the legal definition of the scope of the authority given by an Imprest Supply Act. Thus the explanatory note to the bill may give information about how the authorisations are to be charged
and there must be a distinct Cabinet decision authorising the use of imprest supply for each particular purpose. The Treasury’s obligation to report continuously during the financial year on actual expenses and capital expenditure incurred includes that incurred under the authority of imprest supply.
The Auditor-General is entitled to insist on a Cabinet decision being produced as authority for funds to be devoted to particular expenditure under the authority of an Imprest Supply Act. In this way the Government takes explicit responsibility for how it uses imprest supply.
Types of appropriation
Six types of appropriation are contemplated for the annual appropriations made by Parliament.
Separate appropriations must be made for each category of expenses or capital expenditure falling into each of these types. The appropriations are set out in detail in the estimates and other supporting information presented to the House in respect of each Appropriation Bill.
An appropriation made by any other Act is managed and accounted for in the same way as these types of appropriation.
Within each type of appropriation there are a number of separate appropriations. Each separate appropriation is limited in its scope and can be applied only to activities falling within the scope as defined.
The six types of appropriation are—
•appropriations for output expenses
•appropriations for benefits or other unrequited expenses
•appropriations for borrowing expenses
•appropriations for other expenses
•appropriations for capital expenditure
•appropriations for expenses and capital expenditure to be incurred by an intelligence and security department.
The first four of these types of appropriation relate solely to operating expenditure.
Appropriations for output expenses
These are the payments for the cost of producing the goods and services which a department or third party is to supply to the Government to contribute to outcomes which the Government wishes to realise. They consist of policy advice, regulatory functions, inspection and administrative services and generally the “core” activities of government. They are organised into discrete groupings of similar products called classes of outputs. An appropriation may cover a single class of outputs or more than one class of outputs (known as a “multi-class output expense appropriation”). The output may itself be supplied by a government department or from a non-departmental source.
How the Government decides what outputs it wishes departments to supply is a matter for it to determine. From 1993/94 to 2002/03, Ministers entered into annual purchase agreements with chief executives of their departments. These agreements specified the individual outputs which the department was to supply, defined the standards against which the department’s performance in delivering those outputs was to be judged and identified the costs involved. While spoken of as agreements, they were not legally binding contracts as both parties to them (the Minister and the departments) were elements of the same entity – the Crown
– although they could form an element of a legally binding direction given by the Minister to the chief executive.
From the 2003/04 financial year purchase agreements were replaced by outputs plans designed to provide detailed information about the service performance intentions of departments and to link these services explicitly with the outcomes set out in the department’s longer-term statement of intent. Although still regarded as an agreement between the Minister and the chief executive and thus an accountability document in assessing the department’s performance against the Government’s expectations, there is less emphasis in output plans than there was in purchase agreements on the contractual nature of the relationship and more on the Government’s strategic goals which the department is expected to contribute towards achieving.
Apart from outputs supplied by departments, the Government may obtain services from other organisations for which appropriations are made. The extent to which it does so will depend to some extent upon the organisation of the public sector – in particular the extent to which services are delivered by public service departments as opposed to Crown entities. A shift of appropriations from outputs supplied by departments to outputs supplied from non-departmental sources, particularly those supplied by Crown entities (which have been described as forming a “second tier” of government agencies), has been remarked.
Some of these organisations the Government may effectively control – for example, certain (but by no means, all) Crown entities – while others are entirely independent of the Government.
Crown entities must also prepare statements of intent setting out their medium-term intentions and providing an accountability base.
There may also be a purchase agreement between the Minister and the Crown entity or other provider specifying the outputs to be supplied. The management of such purchase agreements is often undertaken by the Minister’s department on the Minister’s behalf. Purchase agreements entered into between a Minister and a Crown entity may have legal force, unlike those between a Minister and a department.
Where outputs are supplied by a non-departmental entity which is not required by legislation to make a report to the House on its service performance (most Crown entities are now required to do so), the Minister for the vote must report on the performance of that entity in supplying the outputs.
Appropriations for benefits or other unrequited expenses
These appropriations consist of transfer payments which do not require the recipient to provide any goods or services (outputs) in return for the payment. They consist mainly of the payment of benefits (such as social welfare benefits) to persons who have a legal entitlement to them. They also include any discretionary grants that are disbursed.
Appropriations for borrowing expenses
These appropriations consist of payments of interest or other financing expenses in respect of any loan or public security.
Appropriations for other expenses
Appropriations for other expenses include those expenses incurred by a department other than in the production of a good or service – for example, the costs of restructuring and losses incurred in selling or disposing of departmental assets at below market value. They include expenses incurred by the Crown (other than by a department) in the disposal or extinguishment of a Crown asset at less than fair market value, such as land or resources transferred in settlement of a claim under the Treaty of Waitangi.
However, if a Crown asset had no market value when sold or extinguished, any loss does not require an appropriation.
Grants to non-governmental organisations to develop their capacity rather than for the production of deliverable outputs, also fall under this category. Overseas development aid is appropriated under this type of appropriation. Other ex gratia payments and gifts that are made from time to time may be appropriated under the other expenses category too.
Appropriations for capital expenditure
These appropriations relate to the cost of assets acquired or developed by the Crown.
All capital expenditure on non-departmental assets and all equity or loan finance contributed by the Crown to non-departmental bodies or other persons is appropriated under this head. (Departments may incur capital expenditure from the proceeds of the sale of departmental assets or from disposing of their own working capital.)
Thus payments to provide for the purchase or development of capital assets (but not inventories) to be held as non-departmental assets are appropriated as capital expenditure. Such assets are regarded as part of the Crown estate (for example, State highways, national parks) but do not contribute to the production of outputs by a department. Any loan made by the Crown to another person or to the Government of another country must be charged as capital expenditure.
Appropriations for expenses and capital expenditure to be incurred by an intelligence and security department
All of the above types of appropriations for expenses and capital expenditure are aggregated and appropriated separately for each intelligence and security department.
Aggregations of appropriations
Although there are hundreds of individual appropriations made by Parliament in the Appropriation Acts, it is convenient for these appropriations to be grouped together for the purposes of administration and presentation. For this reason appropriations are grouped into votes. Each vote is made the responsibility of a designated Minister or Ministers and is administered by one department, though a department may administer more than one vote.
In the case of the offices of Parliament – the Office of the Clerk and the Parliamentary Service – the Minister responsible for the respective votes administered by them is the Speaker.
Select committees, in their examination of the estimates, may seek explanations as to the need for the creation of a particular vote.
Though appropriations for classes of outputs are separate appropriations, transfers of amounts appropriated from one class of outputs to another class within the same vote can be made by Order in Council.
This procedure is used to deal with a small number of matters arising at the end of the financial year. They are usually confined to matters identified after the supplementary estimates have been prepared.
The amount transferred by Order in Council cannot increase an appropriation for a class of outputs by more than five percent in any year, and the total amount appropriated for all classes of outputs in that vote must be the same. There can be only one transfer to a class of outputs under this power in any one year.
The Order in Council transferring appropriations between classes of outputs must be made before the end of the financial year.
A clause sanctioning such transfers must be included in an Appropriation Bill introduced in the next financial year.
This bill is usually called the Appropriation (Financial Review) Bill. However, a transfer of an appropriation by Order in Council is valid without the sanction of such legislation.
The Crown may lend money to any person or organisation if authorised by statute or this is otherwise necessary in order for the Crown to meet a legal obligation or properly perform a function.
The Minister of Finance may lend money if it appears to the Minister necessary or expedient in the public interest to do so and may lend money to a foreign Government for the purposes of economic development or otherwise to assist the inhabitants of that country.
Any such loans must be made from a capital expenditure appropriation or under other statutory authority.
Particular statutory authority is, for example, conferred on the Government to advance money to the Accident Compensation Corporation by way of loan or grant.
Emergency expenses and capital expenditure
Expenses and capital expenditure may be incurred to deal with emergencies. The Minister of Finance may approve the incurring of expenses or capital expenditure where any state of emergency or civil defence emergency is declared or any other situation arises that affects the public health or safety of New Zealand or any part of New Zealand and which the Government declares to be an emergency.
Public money may then be spent in accordance with the approval even though it has not been appropriated.
There is no requirement for the emergency to have arisen after the passing of the Appropriation Acts, nor is there any limit on the amount which might be expended under this section (until 1953 there was a limit on the amount that could be expended in any year). The Minister may approve emergency expenses or capital expenditure even where Parliament has appropriated money for the same purpose. The expenses incurred for the purposes of an emergency or disaster affecting the public health or safety of New Zealand must be advised in the Gazette as soon as practicable.
All emergency expenses and expenditure must be included in the annual financial statements of the Government and in the following year’s Appropriation Bill for confirmation by Parliament though this does not affect the validity of such expenditure.
Approval of excess expenses and capital expenditure
After Parliament has passed the Appropriation Acts for the current financial year, it may become apparent that, notwithstanding the supplementary estimates, the amounts appropriated are insufficient to cover expenditure under a particular appropriation. The Minister of Finance has authority to approve the incurring of expenses or capital expenditure in respect of any appropriation in the last three months of the year in these circumstances. The Minister’s approval must be given during the financial year or within three months of its end.
The amounts which the Minister may approve under this provision in any financial year must not exceed $10,000 or more than two percent of the total amount appropriated for that appropriation, whichever is the greater amount.
All such expenses or capital expenditure must be included in an Appropriation Bill for confirmation by Parliament (though its validity does not depend on confirmation).
A statement of such excess expenses or expenditure must also be included in the annual financial statements of the Government and in the financial statements of the department administering the vote concerned.
Unappropriated or unauthorised expenses and capital expenditure
It is unlawful for expenses or capital expenditure to be incurred without appropriation or other authority from Parliament.
Wherever any such expenses or expenditure is incurred any person or persons responsible may themselves incur liability for the illegality. However, it is likely, where the illegality was perpetrated in good faith (and not, for instance, dishonestly), that Parliament will wish to regularise the position, remove any legal liability arising, obviate recovery action being initiated in respect of any unauthorised payments that have been made, and provide for obligations that have been entered into to be satisfied out of lawfully appropriated funds.
Consequently, an Appropriation Bill (or other legislation) may seek to validate such expenses or expenditure.
Where validation of unappropriated expenses is sought by means of an Appropriation Bill, the Minister of Finance must present a report to the House setting out the amount of each category of expenses or capital expenditure so incurred and the explanation of the Minister responsible for those expenses or that expenditure.
A statement of such unappropriated or unauthorised expenses must also be included in the annual financial statements of the Government and in the financial statements of the department administering the relevant vote.
Unless and until validated by Parliament, unappropriated or unauthorised expenses and capital expenditure remain unlawful.