SA can learn a thing or two about state finances from New Zealand, which began a series of radical reforms more than 30 years ago.

Over the past 25 years New Zealand has been running a budget surplus in all but four years after the 2008 financial crisis and changing net liabilities of NZ $ 14 billion (R154 billion) to net worth of NZ $ 146 billion (R1.5 trillion) at that time. end of fiscal 2019.

That means having a very large war chest to deal with coronavirus outbreaks. The country recorded only 22 deaths from around 1,500 infected cases. Although the border remains closed, the country has largely returned to normal, and shops and restaurants are open without masks or social distance. By some accounts, it almost eliminates viruses.

But the true story behind this is fiscal readiness. Like a company, one of the key measures of New Zealand’s financial success is its net worth (the value of assets minus liabilities). But to measure it, you must complete your national balance sheet, and very few governments have difficulty measuring and valuing their assets accurately.

There is already talk of getting the SA state balance sheet in several forms, but it’s a marathon project that can take years to achieve.

We still have little certainty about what the state actually has or its value. New Zealand has shown what can be done when you do that and then makes the assets sweat.

In 2018, the International Monetary Fund conducted a study of public sector balances around the world and concluded that countries could produce around 3% more GDP through better management of their assets. In the post-Covid world, that’s a lot of money.

Fiscal Turnover

New Zealand is seen as a model of fiscal excellence – and for good reason. It began three decades ago with a series of reforms aimed at bringing greater transparency and accountability to public sector finance, and the key law designed to achieve this was the Public Finance Act, passed in 1989. Prior to this, the state The budget deficit has been running for two decades.

Take whatever action you want and New Zealand beats not only the SA, but most of the world.

Unemployment is 4.2%, inflation is less than 1%, economic growth has ranged between 2% and 4% over the past decade. Debt-to-GDP is below 20%, compared to 86% in the near future SA.

The Public Finance Act is one of several radical economic and sector sector legislative reforms. New Zealand introduced these reforms to overcome the overly regulated fiscal and economic crisis.

One of the architects of this Act is Ian Ball, professor of Public Financial Practice-Management at the School of Accounting and Commercial Law at Victoria University of Wellington. This is his advice to Minister of Finance Tito Mboweni, or even any other minister of finance: “One of the lessons we can learn from the New Zealand experience is that you cannot run a good government unless you have good financial information. The idea of ​​running a government-complex organization without proper information is not feasible in my opinion. You must measure your country’s balance sheet correctly and make it work. “

One spin-off from this approach is allowing trust in government and democracy, Ball said. “Good information and knowledge that public services are run responsibly are important in increasing democratic satisfaction.”

Another reason for compiling the country’s balance sheet is to allow debt to be measured against assets rather than GDP, which can be a misleading measure because it ignores a significant component of the balance sheet which also has an impact on the fiscal position.

Says Ball: “New Zealand began a series of reforms about 30 years ago, starting with a tax system, eliminating subsidies and import licenses, and floating New Zealand dollars, for example.”

“The country’s finances are in crisis and the government at that time decided it was necessary to get better performance from the state sector. The Law on State-Owned Enterprises is the first of several laws aimed at achieving improvements in the performance and fiscal management of the overall state sector. “

One of the key reforms mandated in the Public Finance Act is the move from cash to accrual accounting, similar to the corporate sector. Under cash accounting, government departments receive a budget allocation each year and spend it that year, without proper accounting for long-term liabilities such as creditors and accrued leave for staff. Accrual accounting forces government departments to appraise their assets properly, recognize revenues when they are earned (not when received as cash), and to bring long-term obligations to the balance sheet – for example interest payments, accrued leave, and long-term creditors.

Two other laws – the Fiscal Responsibility Act and the Financial Reporting Act (because they are included in the Public Finance Act) – require the government to comply with a number of responsible fiscal management principles, and report according to specified financial reporting standards independently. . The government is required to set its financial targets, report them monthly, and then provide an explanation when the targets are not met. This system is the key factor behind the swing from the budget deficit to the surplus.

The government must set clear targets in terms of public debt, net worth, income and expenditure. He must define a wise level of debt, and report it. If it does not comply with the principle or what is said to be done, it must explain to the country why this happened.

New Zealand’s budget deficit / surplus as% of GDP

Source: Trade Economy

Now compare that to South Africa, the last of which had a budget surplus 13 years ago.

SA budget deficit / surplus as% of GDP

Source: Trade Economy

The government is required to provide a four-year estimated financial statement and cash flow. Allocation from Parliament to government institutions in the form of accruals, which includes capital costs and depreciation. “As a foreign department manager, you have a level of expenditure that you have to manage for certain shipments,” Ball said.

“Why did we succeed? Everyone ran with 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, capital expenditure, travel, and so on.

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

There is still plenty of flexibility to allocate expenditure within the budget. “

Around 75% of the Organization for Economic Cooperation and Development (OECD) countries have adopted accrual reporting, but only 25% have done accrual budgeting and no other country has made accrual allocations.

“The main objective of this reform is to create a culture of transparency and accountability. When you are seen managing your state finances responsibly, many other good things result, such as trust in democracy and public sector management. “

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