Ian Ball on Reforming New Zealand’s Public Financial Management System, Why Governments Should Adopt Accrual Accounting, & Why They Should Track and Strengthen Public Net Worth

Ian Ball was one of the principal architects of the New Zealand government’s financial management reforms in the 1980s. He is the former Chief Executive Officer of the International Federation of Accountants (IFAC).

By Aiden Singh, January 25, 2025

Introduction

A drunken prime minister calling a snap election in the middle of the night, a constitutional crisis, and a 20% currency devaluation - 1984 New Zealand was in a difficult spot. 

Confronted with a languishing economic outlook, a newly elected 1984 Labour government set about enacting a series of reforms.

The overhaul included setting up an independent central bank, floating the New Zealand dollar, and opening up the highly-protected economy to easier international trade.

It also included reforming the government’s system for tracking, managing, and reporting on its public finances. 

Enter Dr. Ian Ball, who in 1987 took up the position of Director of Financial Management Policy at the NZ Treasury.

His mandate: redesign the New Zealand Government’s financial management system.

Dr. Ball’s efforts led to the development and passage of the Public Finance Act 1989, which sought to improve the efficiency and performance of government departments and improve the fiscal position of the government.

By modernizing government departments’ system of accounting - moving from a cash accounting to an accrual accounting standard - and integrating each department’s balance sheet with its budgeting and appropriations process, the Act sought to make departmental finances more transparent, enable reductions in waste, and facilitate better tracking of government-owned assets. 

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Professor Ball’s Background

Aiden Singh: Tell me about your earliest jobs in the government in New Zealand. What were your early positions?

Ian Ball: I should probably start by answering that I was always interested in government and politics. 

I went to university to start studying accounting and, at the end of the first year, I was offered a bursary from the State Services Commission, which was a prelude to a job.

And at the end of the second year, I got assigned to spend a little bit of time in one of the government agencies. It was a construction department that no longer exists, but it built the roads, dams, and so on for the New Zealand government. 

And even at the end of my second year of university, when I went and worked in that office, it was clear that they were only using a fraction of the information that we were being taught at the university. And I thought: why is that? 

There was really no good answer. 

And it seems that they knew that they didn't have the information they could have, and nobody really cared. So that was a bit of a puzzle for me really. 

And I became an academic for quite a long while. I always specialized in public sector accounting and financial management because that was what really interested me. 

My first real job in the New Zealand government was in fact the job in the Treasury. In 1987, I was recruited as a director of what was called the financial management support service. Its role was to help government departments improve their financial management systems.

I'd been in that job for only a matter of months and it became abundantly clear to me that government agencies were working within a government-wide system that gave them no incentive to manage their finances well. 

And so the idea of improving the financial management of an individual department was a non-starter in a context in which the whole budgetary system operated against good financial management. The government’s financial management system was narrowly focused on cash - which we’ll talk more about later. 

And around that time, the Treasury and the State Services Commission was starting to look at the way public services were managed and looking for ways to improve it.

So I went and talked to the Secretary of the Treasury. And I said, “You know, we'd be better employed if we were working on a set of financial management reforms”. And that's what happened: I became Director of Financial Management Policy in the Treasury with the specific responsibility to develop what became the Public Finance Act 1989. 

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NZ's Economic Circumstances In The 1980s

Aiden Singh: So New Zealand is working on reforming how government is run in the 1980s. But there’s a prelude to all these reforms. 

Ian Ball: Well, the reforms really started in 1984 with what internationally seems a bit of an oddity - the reforms started with the newly elected Labor government in 1984.

It was that Labour government that instituted what I think would be internationally seen as being pretty right-wing reforms. 

But the history behind that was that the New Zealand government had been progressively increasing its debt. It had been running deficits on an annual basis. The economy was weak. And it was a highly protected economy.

I think it's hard for people who weren't living through it to realize just how regulated the New Zealand economy was. You couldn't easily buy overseas exchange. We didn't import, for example, cheap clothes from China. Everything was imported under an import licensing system. There were just a raft of regulations, which is why some people referred to New Zealand as the Albania of the South Pacific. 

For example, if you wanted a color TV set, the import duty was a 127%.

And what the Labor government essentially realized was that this system wasn't working for their voters. It was not delivering an economy that worked really for anybody in New Zealand. 

And so they set about in 1984 instituting a really fundamental set of reforms. And the public sector reforms that we'll talk about in a bit came really more towards the tail end of that set of reforms.

They started with reforms like creating an independent central bank, floating the New Zealand dollar, removing agricultural subsidies, and removing import licensing. So it was really a fundamental set of reforms. 

It ended up some years later with New Zealand being ranked amongst the economically most free countries in the world with one of - if not the - greatest ease of doing business by international comparison. 

So it was a really radical shift in the way our whole economy was run with the aim of making the economy more flexible. 

I should also make one other point about what had led NZ into the difficult position it was in the 1980s. All of our agricultural products went to the UK, where we had an established market that was very rewarding for New Zealand. And then the UK went into the European Common Market causing the UK market for NZ agriculture to largely evaporate. The government tried for quite a few years to protect the NZ economy from that by increasing subsidies. But by 1984 there was a realization that it wasn't working and that the economy needed to become more adaptable, more flexible, more market driven.

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NZ Government’s System Of Financial Management Prior to Reforms

Aiden Singh: So before you got into Treasury, before you had a chance to start implementing some of the reforms you would later put forth, can you tell me a little bit about the prevailing system of government financial management prior to these reforms, and what were some of the issues with it? 

Ian Ball: Well, in some ways, it was a very typical British Westminster style public financial management system. There were a number of features of it that existed pretty much everywhere globally.

For example, it operated on a cash basis: the only real factor that was considered in thinking about budgetary decisions was how much cash would something take. There was no thought about what does the balance sheet look like now and what's it going to look like at the end of the year? That wasn't considered at all. So it was a cash-based system which was very input oriented: the focus of the controls in the system were over the inputs, not the services provided and not the outcomes.

So we had detailed regulations about how public servants could be hired, promoted, or dismissed. The level of detail on some of those regulations was just amazing. The example that's often given is that they included instructions to public servants who live in Wellington as to how to park a car on a steep hill. That was in the public service manual. 

And that was how the public service operated as a whole, but it was also how the financial management system operated. It was very input oriented. 

And it was very centralized. The Treasury took responsibility for all financial management: it wrote all the checks for every government department. The government department authorized the check, but then the Treasury paid it all out. So financial management was very centralized. 

And one of the consequences of that was that the heads of government agencies - who were at the time called permanent heads because they were in those positions pretty much permanently - took no real responsibility for financial management. They basically said ‘this is Treasury's problem’. 

And the sort of behaviors that led to were, for example, most government departments would annually overspend their budget by 1 or 2% just to suggest to the Treasury that they really couldn't afford to live within the budget they had and they needed more next year.

And there was no accountability for that. The heads of government departments weren't really seen as being responsible for the financial management of the department. 

So those were the the some of the key things that were not functioning well. 

The other thing that warrants comment is that we had what is technically called a fund system of accounting. The government held a series of distinct funds for everything: there was a consolidated revenue fund, and a loans fund, and a loans redemption fund, and a work capital works fund. And there was no consolidated set of accounts that showed you what the overall financial position of the government really was. 

And this is still very common internationally today.

When I talk about moving to an accrual basis of accounting, people will often say that cash is really all that's important and cash is much simpler to understand. 

Well cash is, in a sense, simpler to understand, but if you looked at those financial statements they couldn't be understood by somebody who was just averagely familiar with accounts. You really had to be a specialist to understand.

I recently looked at the Singaporean government's financial statements, for example, and there's no way you can know what the Singaporean government's financial position is from the financial statements it publishes. They're on a fund basis. 

The other thing was that it was not clear in the appropriation system what exactly the government was getting for its money or what the public was getting for its money. The focus was on how much you could spend on staff, how much you could spend on travel, and how much you could spend on accommodation - not how much you can spend on generating a particular set of services.

The whole system really worked against efficient management and good financial management.

So there were a number of things about the system that prevailed in New Zealand that we really wanted to change.

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Accrual Accounting

Aiden Singh: You mentioned accrual accounting. For readers who may not be familiar, could you explain the difference between accrual accounting versus cash accounting? 

Ian Ball: If your readers are old enough to have or remember checkbooks, that’s essentially cash accounting - it just records where our cash comes in and what cash goes out. That's it. Full stop. 

And so if you ask, ‘well, what’s your financial position?’, all you can say is, ‘well, this is the amount of cash we've got.’ 

And most governments, even if they're on a cash basis, would also say, ‘and this is our level of debt’.

But what government’s using cash accounting don't know is what assets they've got and what other liabilities they have other than debt. 

And if all you do is look at debt, you wouldn’t realize, for example, that you also have a liability for employee pensions. And that liability might actually be bigger than their debt. 

And you're totally ignoring the assets.I view accrual accounting as just normal accounting. In the private sector, there's no reference to accrual accounting - they all do accrual accounting. They would just say that's accounting. They measure their financial performance during the year and they measure financial position at the end of the year. 

And the financial position is summarized in the balance sheet. The balance sheet shows you what assets you've got, what liabilities you've got, and what the difference is.

If I asked you, ‘what's your personal financial position’, you wouldn't just look at what's in your bank account. You would look at what your mortgage is, what your house is worth, what other assets you own, and so on.

And that's really all me and my co-author’s call for governments to adopt accrual accounting is asking them to do: know what your assets are, know what your liabilities are, and manage all of those properly. 

Aiden Singh: So when you read a 10-K for a U.S. publicly traded company, that's accrual accounting. Most people who are working with accounting on a day-to-day basis as part of their work, they're dealing with accrual accounting. 

Ian Ball: Absolutely. So it's not magic. It's not sophisticated, really. It's quite technical in some in some areas but, as you say, it’s what every business does when it files a 10-K or produces an annual report. 

And if you're using cash accounting, it's pretty clear to see you're missing lots of assets and liabilities, like pension liabilities.

Aiden Singh: I spoke with Dag Detter recently about the hidden real estate assets that many governments are sitting on which don’t show up in cash accounting, but which would show up in accrual accounting.

Ian Ball: Absolutely. I guess I should just qualify a little bit in the sense that I'm not pretending to say that if you're using cash accounting you have no idea what any of your assets are. 

You know that you own the national parks, for example. You know that you own certain roads, for example. 

But there's quite a lot you don't know and nobody has a great incentive to manage it well either. 

What we found was that the record-keeping was a mess: you'd have one department owning a piece of land, another department had put a building on it, and another department was using it. 

And then we had to figure out, okay well whose balance sheet is this on, and who's accountable for the use of the building, and all that.

So accrual account is really just about having good information about what your resources are. And to me, that's just common sense.

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The Political Setting

Aiden Singh: Set the scene for me politically. The Labour government comes in and starts implementing these reforms. Who was opposed to these reforms, who was in favor of it, what sorts of arguments were made for and against them? How did government ministers react? How did civil servants react?

Ian Ball: Well, it was a Labour government that was implementing these reforms which, by and large, you would normally expect to be coming from a Conservative government - in our case, the National Party. So the National Party wasn't opposed to the reforms that were being carried out.

And later on, when they next came into power, they didn't roll back those reforms - they extended them.

So the politics of it were more internal within the Labour Party: there were people within the Labour Party and within the trade union movement who didn't like some of the reforms. 

And there was pain associated with some of the changes. For example, New Zealand is an agricultural country. And up until this 1984 Labour government, we subsidized just about everything that moved on a farm: we subsidized the fertilizer, the transport of the fertilizer, the farmers got tax breaks for investments, and so on.

And all of those were removed, basically, at a stroke. And for anybody who just bought their farm at the prior market price, they stood to lose a lot of money. 

So it would be wrong to pretend that it was all easy; it was a difficult time for sure.

The Minister for State Services who was responsible for the State Sector Act - which I'll come to a little bit later because it's quite important in the context of the Public Finance Act - had been the president of the trade union movement. And the union movement took away his life membership. 

And there were some occasional short strikes in relation to the public sector reforms. 

But, nevertheless, the ministers were pretty determined. And the country as a whole was generally, I think, supportive.

Even farmers, who were perhaps the most immediately and most seriously impacted in the short term, I think they look back on it now and say it was the best thing that ever happened. New Zealand farming is so much more efficient now and so much more adaptable than it was then.

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Reforms - ‘New Public Management’

Aiden Singh: So the reforms begin. Prior to the Public Finance Act, which you played a central role in crafting, there’s a bunch of other reforms as well. 

This is really an economy-wide reform effort: setting up an independent central bank, deregulating the currency, and governance reforms of state-owned enterprises. 

Can you tell me a little bit about the State Owned Enterprises Act, why it was important, and what it did? 

Ian Ball: Sure. It was passed in 1986, two years into the government's term. 

The reason for it was that the government owned a number of commercial operations within a government department structure that were increasingly being used for non-commercial purposes. 

For example, the New Zealand Railways department became basically a way of vacuuming up the unemployed. So New Zealand had a very low unemployment rate, but part of that was because there were huge numbers of people employed by the railways that really didn't have, so to speak, a proper job. They were there to avoid being on the unemployment rolls. 

The government saw that and wanted those organizations to become commercially profitable and efficient. 

So under the reforms, these commercial operations were set up as companies owned, initially at least, wholly by the government. And the companies had a board of directors whose members were selected for their business skills rather than for their party affiliations or their previous roles in government. 

And what the ministers saw very quickly was how much the efficiency of those operations was enhanced by these reforms.

The railways, for example, reduced employment figures from something like 40,000 people before the reforms to about 6,000 people after they established in corporate form - and they were still moving the same amount of freight and passengers.

Those figures were then streamlined even further after the railways were privatized. 

So the ministers, having seen these sort of efficiencies being achieved in the commercial parts of the government, were then basically confronted with the likelihood that the rest of the government was inefficient and in need of reform. So it's not surprising that the government's attention then turned in its second term to reform of the public sector.

Aiden Singh: So in 1986, NZ passed the State Owned Enterprises Act. You then arrived in the Treasury Department in 1987. And shortly after that, in 1989, NZ passes the Public Finance Act.

Ian Ball: In 1987, I took the role of Director of the Financial Management Support Service, and that was technically housed in Treasury. 

But I was actually accountable initially to a committee that comprised the Auditor General, the Secretary of the Treasury, the Head of the State Services Commission, the head of one of the government departments, and a private sector person. 

And I was in that role for, I think, about 6 or 8 months. Then I went to the Secretary of the Treasury and said: ‘look, we can do some things with the departments, but the system overall is dysfunctional’. And that's when I moved more fully into the Treasury as the Treasury Director of Financial Management Policy. 

Aiden Singh: You become the Treasury Director of Financial Management Policy and you're given the chance to start thinking about some reforms. And the reforms culminate in the 1989 Public Finance Act. What were the main reforms enacted by this Act?

Ian Ball: In the earliest discussions - which I wasn't part of - between the Secretary of the Treasury, the Chairman of the State Services Commission, and the ministers, there was an agreement that there would be a reform of the public service. And this reform would cover both public service employment (i.e. the people) - which is the purview of the State Services Commission - as well the financial management dimension (i.e. the dollars), which is the Treasury's responsibility. 

So two pieces of legislation to get these reforms done were both worked on pretty much over the same period of time. The State Sector Act - which dealt with the people - was passed first in 1988. And then - delayed a little bit because of some parliamentary timetabling issues - the Public Finance Act, which dealt with the dollars, was passed in 1989.

But the two acts were developed as an integrated public management system.

And that is quite important, I think, for understanding why, at least in my view, they worked in New Zealand in ways that they haven't worked elsewhere. 

The State Sector Act made some changes to the way public employment operated in New Zealand that were probably as radical or more radical than the financial management changes. It removed the permanent tenure of heads of government agencies, making them chief executives instead. It gave them limited-term contracts of five years, which could be extended for another three. And it had a performance related component to it.

So basically, it gave them a set of authorities that was very similar to that of a chief executive in the private sector. In other words, we didn't think about it as a public service running across the whole government any longer. It was basically now thought of as an operation run by a chief executive who had real authority over what resources they used and whether they employed people or consultants. And they had freedom on how they ran their affairs, so long as they were prepared to be accountable for it.

That was the trick: they had to be able to stand up and defend what they were doing in their management processes. 

There's a number of reasons why that's important to the Public Finance Act. The Public Finance Act initially sought to do one thing more than anything else: improve the efficiency and performance of government departments. 

And we basically viewed it as there being two components of the performance of a government agency. 

One of them was performance in the sense that you might normally think about. If I were to ask you how is General Motors performing, you'd probably answer me by talking about profit or return on capital or something like that. And that's a measure of their performance. But it's a measure of performance through the eyes of a shareholder. 

If you ask the same question - how’s it performing - from the perspective of a customer, your answer would be very different. You'd be interested in whether you got the car you bargained on, is it reliable, and so on. 

And we basically said that, for a government agency, the chief executive has to manage both those dimensions of performance. He or she has to manage the delivery of services (i.e. outputs) and the operation of the organization. They have to maintain its capital, for example. They couldn't run down its human capital or its financial capital. 

And the prior system of cash accounting wouldn't tell you what you needed to know about either of those dimensions of performance. It wouldn't tell you what the cost of the services was. (It would tell you what the current cash outlays were, but that's a quite insufficient measure of cost.) And it wouldn't tell you whether or not the capital had been be maintained.

You need accrual accounting for that purpose. 

And so the rationale for adopting accrual accounting was not because it’s better accounting, although it is. It was because it enabled us to measure the performance of departmental chief executives in a way that enabled them to be to be really held accountable. 

So the focus of the Public Finance Act was largely on departmental accountability.

It was also, to a lesser extent, on the overall fiscal management of the government.

We were also concerned that the system had to be integrated - the bits of the system had to be linked. 

What you see in quite a lot of jurisdictions that have adopted accrual accounting more recently is that they will move to reporting on an accrual basis, but they still budget on a cash basis. Their budget is still just about how much will be spent in the year.

And our view was that would be dysfunctional or confusing. That approach would have managers operating throughout the government all year on the basis of how much they spent - the cash outlays. And then at the end of the year, they’d have to turn around and produce a set of financial statements on a completely different basis.

So we focused on changing, not only the accounting, but also the budgeting and the appropriation so that the Treasury had to produce a budget for four years out, including forecast financial statements and a forecast balance sheet for the medium term: current year plus 4 years after. 

Aiden Singh: And it was your role to craft and design these reforms.

Ian Ball: Yeah. It was my responsibility directly. That was my job. That's really what I was employed to do. And I had a small team, but it was relatively small.

We worked very closely with the people in Treasury who were working on the State Sector Act.

But that was my central responsibility. That's what I was there to do. 

Aiden Singh: The team that you put together to help you craft these reforms, what sort of background do they have? Are they accountants? 

Ian Ball: Mostly, though not all.

The next in line within my area of the Treasury was also an accountant. And, yes, we had something like 40 qualified accountants in the Treasury. So there was a lot of accounting knowledge for sure.

Aiden Singh: You were kind of blazing a trail here and New Zealand was really the first to do this.

So when you were designing these reforms, is there anywhere that you're pulling inspiration from? Or was it just working from scratch to put all this together? 

Ian Ball: There was a professor at the University of Washington called Kavasseri Ramanathan.

He had written a book and articles which were about a management control framework for public services or for non-profit organizations. And we used some of his ideas in terms of the framework as a starting point. We did build on those, but they were quite an influential starting point. 

More generally, I think it's fair to say that a lot of the microeconomic reforms were driven by ideas that came out of United States universities, as did a number of the senior members of the New Zealand Treasury at the time. 

There were a lot ideas from what was then called new institutional economics. Agency theory and public choice theory all contributed to the way we were thinking about issues.

But the term ‘new public management’ wasn't around in those days. Our reforms in New Zealand became an example of what other people now describe as ‘new public management’. 

Aiden Singh: How much was the way accounting is done in the private sector an influence on the reforms?

Ian Ball: It was certainly not our intent to copy what the private sector does in all cases by any means. We were looking to design things that worked in government. 

So, for example, the role of appropriations in government - there's no equivalent. There is a budget in the private sector, but there aren't legally binding expenditure limits like there are in government.

Just to elaborate on that a little bit, in its initial version, the Public Finance Act said that, going forward, appropriations will be on an accrual basis. That is, they’ll include all the costs of production, not just the cash costs. And after a two-year period, there will only be appropriations on an accrual basis. So that said to government agencies, you have two years to get this in place. 

As it happened, the slowest government department took 18 months; it was all done within 18 months.

One of the reasons that happened was that the chief executives had the authority to change their chief financial officer. And every government agency except one changed out their chief financial officer because those people - directors of finance, as they were called - were good at operating the system that we'd had in the past, but they knew nothing about accrual accounting. They had never implemented an accrual accounting system, which they were now required to do. And chief executives recognized that. They had an incentive to make this work, so they brought in the people that would make it work - and it did.

It then took another couple of years before we produced financial statements on an accrual basis for the government as a whole. Up until 1994, we weren't budgeting on an accrual basis for the whole of government. The appropriations for departments were on an accrual basis, but in its fiscal management, the government hadn't completely swapped over. That happened in 1994. 

So the longest you could describe the reforms taking was 4 or 5 years, but all of the departments were operating on an accrual basis after 2 years.

Aiden Singh: While this series of accounting reforms is going on, is there much public awareness? 

Ian Ball: No, there really wasn't a lot. It’s sort of back office stuff.

Aiden Singh: These reform proposals come from you and your team and then go out to the politicians who implement policy. How did that process work? Are you working on things very independently and then going to politicians and saying, ‘here's what we have’, or was there a back and forth between you and them as the reforms are being developed? 

Ian Ball: There was certainly some back and forth.

There was particularly back and forth with our minister. And he would progressively take things to cabinet as it developed. 

Ruth Richardson was the opposition spokesperson for finance. She made the comment that the briefings that we were giving her on what we were doing were the only briefings she got from the Treasury while in opposition. She later became the new minister for finance under the National Party after the Labour Party got voted out in 1990. So we were very conscious that, if this was going to be a long term shift, it needed to be supported by both parties. And so we were briefing, as I say, the opposition spokesperson during that process so that the reforms would not be resisted when they went before parliament.

The only person who really spoke against it in the parliament was former Prime Minister Robert Muldoon.

Aiden Singh: When you're at treasury and you're coming up with these reform proposals and trying to push them forward, when you go to present them to policy makers, how are you pitching this to them?

How are you showing to them the benefits of this? Are you putting together slideshows? Is it reports? Are you showing them what an accounting statement will look like after these reforms?

Ian Ball: We did produce those kinds of illustrative documents. But I think in terms of getting this set of reforms into law, the real crunch point was a briefing that the Secretary of the Treasury, myself, and the Treasury person responsible for the state sector gave to the cabinet. We did a presentation which took them through it.

Aiden Singh: So it was this crunch meeting that essentially you came away from thinking, alright, we got it.

Ian Ball: Well, that was the meeting that I think got it through, but at the time I didn't come away quite like that - I came away a little bit nervous.

Aiden Singh: Are you are you being interrogated intensely during this during this meeting, or is it a kind of amicable meeting?

Ian Ball: It was an amicable meeting. There were some hard questions, which was fair enough. But it wasn't it wasn't confrontational. They were wanting to understand the reform proposals and wanting to get assurance that it would work if they were adopted.

Aiden Singh: So you work on these reforms. You're going back and forth with lawmakers. You’re briefing opposition lawmakers. How confident were you that these reforms were going to be adopted and remain in place long term?

Ian Ball: I was confident they would get through because we weren't really seeing a lot of resistance to the reforms.

There were two main threats I saw to the long term success of the reforms, one of which has been borne out. 

One was the threat that we'd be the only country that adopted these types of reforms. You could see a time in the future when a minister of finance would say, ‘Why are we going through all this struggle when nobody else is doing it?’. So there was an incentive for us to encourage other governments to move in the same direction as us. This was part of the reason why I went into a consulting role later and why I took up a role on the International Federation of Accountants (IFAC) public sector committee.

The other threat, which in my view has played out, is just the entropy of the system. The system we designed was quite demanding in the sense that it required departments to say in advance, ‘these are the services we expect to produce during the coming year and this is how much we think they'll cost.’ The public service didn't enjoy doing that.

That's the bit that, in my view, has lapsed over time. Not entirely, but it's deteriorated.

Aiden Singh: Is it severe enough that it significantly undermines the benefits of the reforms? 

Ian Ball: No, I don't think so. I don't think it undermines the benefits too significantly, but it does limit their effectiveness.

Aiden Singh: As these reforms are being adopted, what kind of help are different departments in government receiving, if any, with updating how they operate? 

Ian Ball: I had a group called the financial management assurance team. They supported the departments in getting their accrual accounting systems in place, if departments wanted help. 

The departments weren’t required to use it, but it was there if they wanted it.

We also put out a video and plain language booklets on what this new system means. 

So we did a lot of marketing or instruction to make them aware of what was being done, why it was being done, what their role in it was, and so on.

Aiden Singh: Are there additional reforms that you would like New Zealand to adopt which it which it hasn't or didn't during the period when you were pushing for reforms? 

Ian Ball: At the time, the reforms that we got implemented were beyond my conception, really, in the sense that as an academic working in this field two years earlier I wouldn't have believed that a government would do those things.

Speaking now, though, yes. We don't have an independent financial institution like the Congressional Budget Office in the US. I’d like us to have some form of parliamentary budget office that can critique the government's fiscal policy - an independent voice on fiscal management that's not beholden to the current government. 

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Public Net Worth

Aiden Singh: Tell me about the New Zealand government’s efforts to track and build its public net worth.

Ian Ball: In 1994, Ruth Richardson introduced a piece of legislation called the Fiscal Responsibility Act, which took the accounting component of the 1980s reforms and applied it to the fiscal management of the government as a whole in a way that we really hadn't done up until then. 

She wanted this machinery to be used to develop a strong balance sheet for the government.

There were a number of principles of responsible fiscal management that were articulated in that Act. 

One of these principles was building a level of net worth that would act as a buffer in the event of an economic shock.

And in fact, from about 1994 until the global financial crisis in 2008, the government ran a surplus every year. So for that period of 14 or so years, the government progressively built up its net worth to the point where, in 2008, it was something like 55% of GDP. 

By comparison, in most other countries that measure net worth it would currently be significantly negative.

Aiden Singh: Can you tell me why you consider it important for governments to try to maintain a positive net worth? 

Ian Ball: My co-author Dag Detter would cite IMF research which suggests that a government with a stronger balance sheet (i.e. a higher net worth) will come out of an economic shock more quickly. 

And I think has certainly been the New Zealand experience.

What often happens in during an economic shock is that, if you've got to spend money and you don't really have a strong balance sheet, you’ve got to cut back other stuff. Or as Dag puts it, if you've got to repair the car in a hurry you cut back on the food budget.

Having a positive net worth means you’re able to manage the government's finances in a more orderly and predictable fashion, and stability is good for people and good for business. 

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Public Accountability

Aiden Singh: Tell me about the publishing requirements the NZ government adopted with respect to making its fiscal position public.

Ian Ball: The other thing that happened when Ruth Richardson passed the Fiscal Responsibility Act was she was very conscious that fiscal policy, in the public mind, took a back seat to monetary policy. Monetary policy is on the public's radar screen - every time the central bank raises or lowers interest rates, everybody gets excited by that.

Richardson was concerned that, in an environment where fiscal policy is discussed once a year on the budget day and monetary policy is discussed all-year round, fiscal policy gets overlooked. 

That was the reasoning behind two things that she did.

The first was to require the government to produce monthly financial statements, which keep fiscal policy in the public mind. So every month we get to read about whether the government's fiscal management is on track. And that gets coverage every month in the press. That was a significant change from how it used to be prior to the Act. And it's worked extraordinarily well. 

The second thing she introduced was what is called the pre-election economic and fiscal update. The New Zealand government is required to produce, 6 weeks before a general election, an economic and fiscal update. And this fiscal update includes an up-to-date set of financial statements.

So voters can see exactly where we are fiscally when we go out to vote and it's right up to date. 

That’s also had an impact on conditioning political party promises, I think. You'll frequently see political parties not finalizing their policy platforms until they've seen the pre-election fiscal update and know what the fiscal financial position is. 

It doesn't stop them from putting anything in their policy platform, but it constrains them a little bit. We've had elections prior where the government's known that its fiscal position is much worse than it's publicly admitted and it's promised things that it knows it can't afford. And it knows its financial position while the opposition doesn't know. So you have an election on two entirely fictitious sets of policies, neither of which is actually constrained by the true fiscal position. So the pre election economic and fiscal update acts as a constraint on that kind of irresponsible set of policy promises.

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Public Corruption

Aiden Singh: Do you believe that the methods of financial management you recommend and those that have been adopted by New Zealand affect levels of public corruption?

Ian Ball: Yeah. I think they can they help control public corruption.

Although, I don't think it was a big plus for New Zealand in particular because we've always had rated well on international corruption indices. So public corruption has never been a big problem in New Zealand. 

But good accounting, unquestionably, can have an impact.

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Government Efficiency

Aiden Singh: What about the efficiency of government and the level of waste in government? Did better accounting practices and some of these other policy reforms that went alongside those accounting changes improve government efficiency?

Ian Ball: Well, there were a series of reviews of the system in the decade after it went into force. They almost all said that efficiency had increased.

And it was not just efficiency. It was also the performance in areas like cash management. The estimates of the savings from better cash management alone were really significant. They probably paid for the whole reform process, because you no longer had a lot of cash sitting around in departments not being well managed. 

So pretty much all of those early studies indicate that there was clear efficiency gains. 

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