Testimony: Mr Troup explained, by way of background, the public sector reforms that New Zealand undertook from 1984 to address poor economic performance caused by over-regulation and unsustainable government spending. The reforms undertaken aimed at promoting efficiency through the use of market mechanisms. Mr Troup then described the capital budgeting practice in New Zealand
Adopting an accrual method was a major change in budgeting and accounting. This separates operating flows from capital flows and reports them in separate statements. He said this creates a better deficit or surplus measure, because the accrual measure excludes large, one-time capital flows. New Zealand defines capital as all assets and liabilities of the Government, in accordance with Generally Accepted Accounting Practice. This definition excludes intangible capital and grant expenditures because these do not create an asset for the Government.
He said a second feature is the delegation of most capital expenditure decisions to departments. In the early 1990's, each department identified and valued all of its assets and liabilities, creating a capital base. Now departments don't require Ministerial approval to buy or sell assets. If a department can't afford to finance an asset purchase from its existing base, it seeks assistance from the Government by making "a sound business case".
A third feature of New Zealand's system of capital budgeting is that each department is levied a "capital charge" and operating statements include depreciation costs. The capital charge represents the cost of capital and is calculated as a percentage of the capital base. This minimizes the tendency to hoard capital. Depreciation costs in operating statements allow deficit or surplus calculations to include capital consumption costs.
"Crown assets", such as national parks or historic buildings, are controlled by the Government, not by individual agencies. These assets are separated from departmental assets and recorded on the "Crown" balance sheet representing the Government as a whole. Departments have no authority to buy or sell them.
Questions from the Commissioners: The questions were on the Government's lack of input control, Crown versus departmental assets, compensation incentives in meeting output targets, impact of accrual accounting on the revenue side, what the legislature votes on in appropriating funds, reviewing outputs and variances from targets, and New Zealand's unique political system.
Q. How does accrual accounting work on the revenue
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