Accounting for the government

Brian Easton

The 1989 Public Finance Act adopted a new approach to the presentation of the government’s accounts. Its purpose was to enhance the government’s management of financial flows by combining them all into a single set of accounts.

But as so typically happens, a measurement system for one purpose is used for others for which it is not really designed and which, inadvertently, are misleading. This is known as Gilling’s Law – that the way the game is scored shapes the way the game is played – one of the most universal of all social science regularities.

Such it is with the government accounts, well illustrated by the clamour which surrounds the budget. Since the accounts are not designed to track the purposes of government, the public comment is rarely framed about what the government is really for. For example, while it is possible to identify what is happening in spending terms to the environment, albeit with some effort, that is rarely done despite the passionate interests of environmentalists. Trying to understand the fiscal contribution to the wider issue of sustainability is even more difficult.

The result is that the Public Accounts portray the overall government as simply receiving and spending money. Richard Musgrave, one of the great public-finance economists, proposed three economic ‘branches’ of government: stabilisation, allocation and redistribution. You may not agree with exactly these functions – I shall use different ones – but you may ask what the Public Accounts tell us about them – or whatever broad functions with which you are concerned. The answer may be there somewhere, but not transparently so.

In fact, almost certainly unintentionally, the current format of the government’s financial statements plays into the hands of those with a neoliberal disposition (including Austerians) who want to minimise the activities of the state and prefer to ignore its positive possibilities. That is why most of the informed public fiscal discussion which, necessarily, is framed by the Public Accounts, appears to be neoliberal.

This can be illustrated by the debate over whether the Labour-led Government should borrow more thereby running a higher debt track.

By way of factual background, New Zealand’s debt-to-GDP ratio is low compared to that of most other OECD countries and there are lenders who would like to hold more New Zealand government debt given the quality of the country’s fiscal management and low debt levels.

Offsetting this is that were there another international financial crisis, low debt would ease New Zealand through, as happened after the Global Financial Crisis when New Zealand borrowed almost an extra 20 percent of annual GDP. We need to keep our public debt low because of the very high private debt some of which will be covered by public bailouts in a financial crisis. Similarly there is a need to provide for physical shocks such as earthquakes, for which the private sector cannot always provide well.

Aside from these considerations, borrowing imposes a charge on future generations. Morality suggests a country should not fund a consumer binge now to be paid for by its children and grandchildren; that public borrowing should normally be only for investment which will generate later benefits to the New Zealanders who will pay the debt servicing. That would include commercial investment with long-term financial returns (such as housing) and infrastructure which does not generate a direct commercial return. It may also make sense to include spending on environmental enhancement (like towards a pest-free New Zealand) which adds to future generations’ wellbeing even if it does not add to its material output.

However, it is difficult to infer from the current format of the government’s financial statements to what extent we are doing this. The statement of cash flows provides some relevant information but its emphasis is upon cash flows going in and out of the government’s bank accounts, rather than the nature and purpose of the expenditure, which ought to be at the centre of major public debate.

This leads to the conclusion that we need additional disclosures within the Public Accounts which reflects the economic purposes of a government, albeit without undermining the accounting practices developed over the last four decades. I illustrate as follows, acknowledging that a group of experts, sympathetic to the need for transparent purpose-driven measures, may come up with a different scheme.

I identify four main economic purposes of a modern government. It invests in the future, it redistributes income, it provides collective services and it provides personal services which the market otherwise delivers poorly. Slightly different from Musgrave’s branches but we are on the same page.

Additionally, the government does not only raise revenue to enable its spending. Much tax also has other purposes such as to redistribute income and to discourage poor-quality private spending. Where taxes are for such purposes they should be shown along with the spending. Examples are given below.

This all suggests there should be four additional sub-statements to go alongside the existing financial statements.

An investment activities statement which would show government investment spending including (net) interest payments on debt. Offsetting revenue would include motoring levies and (net) borrowings.

The social transfer activities statement which would show social security and other benefits as outgoings offset by ACC levies and revenue from income tax accruing above the base rate (currently 10.5 percent).

The third statement would cover the government’s activities in providing collective services (such as core administration, defence, the environment and justice), and the fourth statement the government’s activities in providing personal services (such as education, health and legal aid). The fourth account would include excise duties from alcohol and tobacco.

This fourfold division is schematic and there is much devil in the details. By focusing on the broad purposes of government fiscal activity – investment, redistribution, providing services which the private market does badly, providing services which the market cannot do at all – it would frame the current fiscal debate in a more constructive way than today’s approach of lumping everything together.

There would to be a fifth ‘reconciliation’ statement which would show the net spending of each of the divisions and the funding from taxation whose main purpose was revenue raising and any other source not elsewhere included. A critical element of the exercise is to keep the statements sufficiently simple that members of the public would be able to follow them.

Identifying the various fiscal functions of the state offers a different framework from grudging neoliberal minimalism. Instead it recognises that fiscal policy has the potential of making positive (indeed creative) contributions to the public’s wellbeing.

Intriguingly, the May 2018 budget promised to make greater use of the Treasury ‘four wellbeings’ framework, for 2019. Unless the Treasury adapts its financial statements to include a set which aligns with its wellbeing framework the exercise will be pointless.

It may be that the Ardern-Peters-Robertson Government looks (mildly) Austerian because the accounting system, the parliamentary framework and the public rhetoric shape both perceptions of it and the way it operates. Providing a more purpose-driven presentation of the government finances would be a step towards its being, as promised, ‘transformative’.


This briefing has been markedly improved following discussions with Dr Don Gilling, a retired professor of accounting and finance. However its eccentricities and errors remain mine.

Brian Easton
About the author

Brian Easton

Brian Easton is one of New Zealand’s leading economists with a unique profile as an economic development practitioner, consultant, journalist and commentator. A former director of the New Zealand Institute of Economic Research and a one-time member of the Prime Minister’s Growth and Innovation Advisory Board Brian has numerous awards to his credit including being a distinguished Fellow of the New Zealand Association of Economists. Dr. Easton is an adjunct Professor of the Auckland University of Technology and is currently writing a history of New Zealand from an economic perspective, Not In Narrow Seas: A Political Economy of New Zealand’s History, to be published by Massey University Press.