Advice to Tito from New Zealand: Get your balance sheet in order

Written by Ciaran Ryan. Posted in Journalism

There’s a reason New Zealand’s economic performance is as stunning as its response to Covid. From Moneyweb.

New Zealand Prime Minister Jacinda Ardern. Image: Loren Elliott, Reuters
New Zealand Prime Minister Jacinda Ardern. Image: Loren Elliott, Reuters

SA could learn a thing or two about state finances from New Zealand, which embarked on a series of radical reforms just over 30 years ago.

For the last 25 years New Zealand has run budget surpluses in all but the four years after the 2008 financial crisis and turned net liabilities of NZ$14 billion (R154 billion) into a net worth of NZ$146 billion (R1.5 trillion) at the end of the 2019 fiscal year.

That meant it had a huge war chest to deal with the coronavirus outbreak. The country recorded just 22 deaths from about 1 500 infected cases. Though the borders remain shut, the country has largely returned to normal, and shops and restaurants are open with no masks or social distancing. By some accounts, it has virtually eliminated the virus.

But the real story behind this is its fiscal preparedness. Just like a company, one of the key measures of New Zealand’s financial success is its net worth (value of assets less liabilities). But to measure that, you have to get your national balance sheet in order, and very few governments have gone to the trouble of accurately measuring and valuing their assets.

There’s been talk of getting SA’s state balance sheet in some kind of shape, but that’s a marathon project that could take years to accomplish.

We still have little certainty as to what exactly the state owns or its value. New Zealand has shown what can be done when you do that and then make those assets sweat.

In 2018 the International Monetary Fund did a study on public sector balance sheets across the globe and concluded that countries could generate about 3% more GDP through better management of their assets. In a post-Covid world, that’s a lot of money.

Fiscal turnaround

New Zealand is seen as a model of fiscal excellence – and for good reason. It started three decades ago with a series of reforms aimed at bringing greater transparency and accountability to public sector finances, and a key piece of legislation designed to achieve this was the Public Finance Act, passed in 1989. Prior to this, the country had run up budget deficits for two decades.

Take virtually any measure you want and New Zealand outshines not just SA, but most of the world.

Unemployment is 4.2%, inflation less than 1%, economic growth has ranged between 2% and 4% for the last decade. Debt-to-GDP is below 20%, versus the 86% that lies in SA’s near future.

The Public Finance Act was one of several fairly radical legislative economic and state-sector reforms. New Zealand introduced these reforms to overcome a fiscal crisis and over-regulated economy.

One of the architects of this Act was Ian Ball, professor of Practice-Public Financial Management in the School of Accounting and Commercial Law at Victoria University of Wellington. This is his advice to Finance Minister Tito Mboweni, or indeed any minister of finance: “One of the lessons we can take from the New Zealand experience is that you cannot run a government well unless you have good financial information. The idea of running an organisation as complex as a government without proper information is just not feasible in my opinion. You have to get your country’s balance sheet properly measured and put it to work.”

One of the spin-offs of this approach is enabling trust in government and democracy, says Ball. “Good information and the knowledge that public services are responsibly run is important in bolstering democratic satisfaction.”

Another reason to get the state balance sheet in order is it allows debt to be measured against assets rather than GDP, which can be a misleading measure as it ignores significant components of the balance sheet which also impact the fiscal position.

Says Ball: “New Zealand started a series of reforms about 30 years ago, beginning with the tax system, the removal of subsidies and import licensing, and the floating the New Zealand dollar, for example.”

“The country’s finances were in crisis and the government of the day decided it needed to get better performance out of the state sector. The State-Owned Enterprise Act was the first of several laws aimed at achieving improvements in the performance and fiscal management of the state sector as a whole.”

One of the key reforms mandated under the Public Finance Act was the move from cash to accrual accounting, similar to that of the corporate sector. Under cash accounting, government departments receive budget appropriations each year and spend them in that year, with no proper accounting for longer-term liabilities such as creditors and accrued leave for staff. Accrual accounting forces government departments to properly value their assets, recognise revenue when it is earned (rather than when received as cash), and to bring longer-term liabilities onto the balance sheet – for example interest payments, accrued leave and longer-term creditors.

Two other pieces legislation – the Fiscal Responsibility Act and the Financial Reporting Act (since included in the Public Finance Act) – require the government to conform with a number of principles of responsible fiscal management, and to report according to independently-determined financial reporting standards. The government is required to set out its financial targets, report on them monthly, and then provide an explanation when targets are not met. This system is a key factor behind the swing from budget deficits to surpluses.

Government has to set out clear targets in terms of public debt, net worth, revenue and expenses. It has to define what is a prudent level of debt, and report against this. If it does not comply with principle or what it said it would do, it has to explain to the country why this has occurred.

New Zealand budget deficit/surplus as % of GDP

Source: Trading Economics

Now compare this with South Africa, which last had a budget surplus 13 years ago.

SA budget deficit/surplus as % of GDP

Source: Trading Economics

The government is required to provide four-year forecasts of financial statements and cash flows. Appropriations from Parliament to government agencies are in accrual terms, which includes a cost of capital charge and depreciation. “As manager of a state department you have a level of expenses you must manage against certain deliverables,” says Ball.

“Why are we successful? Everyone runs off the same numbers. Under a cash-based system, you have a certain amount of money to spend in a year, which you can allocate to personnel, capex, travel, and so on.

In New Zealand, we say instruct state departments that this is what they have to produce in any particular year in terms of services, and this is the cash you have to do it – but you have to deliver results.

There’s still a lot of discretion to allocate expenses within that budget.”

Some 75% of Organisation for Economic Cooperation and Development (OECD) countries have adopted accrual reporting, but only 25% doing accrual budgeting and no other country doing accrual appropriations.

“The key purpose in these reforms is to create a culture of transparency and accountability. When you are seen to manage the state finances responsibly, a lot of other good things result, such as trust in democracy and public sector management.”

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.