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Government in New Zealand

7 — The Control Of Spending

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The Control Of Spending

The System whereby in British countries governments raise and spend money has its rationale in history rather than in contemporary needs. In England, the High Court of Parliament, a royal judicial and administrative body, became an instrument of the Crown for raising taxes; and the early history of representative government is largely the history of an effort by Parliament, successful over the long period, to control the executive through its financial powers. The assumption underlying British parliamentary procedure in respect of financial measures and the British system of public accounting is the assumption of an executive greedy for money and a Parliament determined to protect the community against excessive imposts. The British system of public finance, says Finer, is 'the residual deposit of all the constitutional currents which, in the course of centuries, have transformed a monarchy into a virtual republic.'

The most important underlying principles of this page 105system are (1) that only ministers of the Crown may initiate or increase expenditure; (2) that ministers must initiate their demands in committee of 'the whole House'; and (3) that the purpose and the duration of parliamentary appropriations must be specified. The first principle throws the whole responsibility for initiating expenditure on the shoulders of the ministry, as the representative of the Crown; the second ensures that every member of the lower House (which by constitutional convention has the exclusive right to approve estimates of expenditure) shall have an opportunity to discuss the ministry's financial proposals; the third prevents the ministry from spending money on objects other than those for which it was voted and, since by convention all money grants are on a yearly basis, compels it to summon Parliament at least once a year.

Finance by annual and specific appropriation necessarily dictates the form of the public accounts. It means that the accounts must reduce all transactions to a cash yearly basis, assets and liabilities being ignored until such time as they are realised and enter as cash transactions into a subsequent account. 'It is the system of annuality strictly applied', writes an authority. 'Only actual incomings and outgoings of the exchequer within the financial year are considered in the national accounts, and the departmental accounts are similarly accounts solely of the cash transactions which actually take place within the year. If, for instance, there is page 106money still owing to a department for a repayment service, it cannot be shown in the appropriation account as an asset, for that account is a cash account simply. If, owing to the importance of the outstanding asset, Parliament ought to be informed of it, the fact must be recorded by means of a note. If the failure to realize the asset within the year results in a deficit, the fact would, of course, be brought to the notice of Parliament in the explanation of the deficit.

'Such a system possesses the beneficial qualities of simplicity, directness, and rapidity in closing the accounts. It is true that balance-sheets are prepared, but these deal only with cash balances and are in no sense balance-sheets in the commercial sense. An Imperial balance-sheet, or even a departmental balance-sheet on such lines, would be a practical impossibility, for many of the assets or liabilities of the State could not be expressed financially in the manner in which the goodwill of a business concern is assessed.' There is, however, an important qualification to the 'annuality' of the British system of public finance. It is recognised that some classes of expenditure—salaries of judges, the civil list, and interest payments on state loans, for instance—ought not to be liable to annual variation. They are, accordingly, provided for in the act governing the particular service and are known as 'permanent appropriations' in contradistinction to 'annual appropriations'.

To complete this outline sketch of the British page 107system of public finance it is necessary to notice two important developments brought about by Parliament's desire to make its control over finance fully effective. The first is the creation of the consolidated fund. Until towards the end of the eighteenth century, each of the various sources of revenue was earmarked for a special purpose. This had two bad effects: it made the revenue available for a service dependent, not on the needs of the service, but on the yield of a particular tax and it prevented any effective control being exercised over public finance as a whole. In 1785 the commissioners of the public accounts recommended the establishment of 'one fund into which shall flow every stream of the public revenue and from whence shall issue the supply for every public service.' The other important development was the creation of the office of Comptroller and Auditor-General. Parliament is a deliberative and not an executive body; nor are its members experts in accountancy. It follows that Parliament cannot, of its own efforts, ensure that its financial appropriations are spent in exact accordance with the terms of the appropriations. This fact was recognised in Great Britain in 1866, in which year Parliament delegated to a permanent official the responsibility for ensuring, first, that there is legal authority for every issue out of the exchequer and, second, that such issues are spent solely for the purpose for which Parliament authorised them. This official, the Comptroller and page 108Auditor-General, is under the control of, and is responsible to, Parliament and not the ministry; like judges, he holds office during good behaviour and cannot be dismissed by an executive act.

The New Zealand system of public finance has been modelled on the English, but, as will be seen, has in recent years been more closely adapted to the realities of government than the English. In New Zealand, as in England, the financial year runs from 1 April to 31 March next. Early in the financial year, the Treasury instructs the various state departments to submit detailed estimates of their estimated revenue and expenditure for the year. These estimates are then subject to a process of sifting and discussion, first by the Minister of Finance and the high officials of the Treasury and then by the Cabinet. When agreement has been reached, these departmental estimates, together with estimates for the various permanent charges, are set out in a bulky printed volume in which, for purposes of comparison, there are included also the estimated and actual expenditures for the various items for the previous year, together with explanations of abnormal variations. The House of Representatives, upon receiving the estimates, resolves itself into a Committee of Supply (which is a committee of the whole House) and, over a period of weeks, approves them item by item. When this process is at an end, the estimates are included in an page break
Laying The Foundation-Stone Of The Houses Of Assembly, Wellington

Laying The Foundation-Stone Of The Houses Of Assembly, Wellington

page 109annual appropriation bill passed towards the end of the session.

Before the House of Representatives is called on to deal with the estimates, however, it is presented by the Minister of Finance with a financial statement (the Budget), in which the financial position of the country is placed in perspective, Government financial policy expounded, and methods of defraying expenditure indicated. In England, the Budget is presented in the first month of the financial year. In New Zealand, Parliament does not normally meet until June and the Budget is not often presented before August—five months after the beginning of the financial year.

Since the processes of government must go on while Parliament is dealing with the estimates and passing the annual Appropriation Act, it is necessary to make some interim provision for government expenses. This is done by means of Imprest Supply Acts. One of the first items of business after the formal opening of the parliamentary session is the communication to the House of Representatives of a message from the Governor-General recommending the provision of a sum for the payment of salaries, wages, and contingencies. This message is considered by the House in Committee of Supply. When the committee has passed a resolution authorising the expenditure of the amount specified (refusal to do so would be the equivalent of a vote of no-confidence in the Government), the House resolves itself into a Committee of page 110Ways and Means, which, like the Committee of Supply, is a committee of the whole House. The Committee of Ways and Means was originally, in the English parliamentary system, what its name implies —a committee to find ways and means of raising the amount voted by the Committee of Supply. In the New Zealand parliamentary system it merely goes through the formality of allocating among the various accounts the total amount voted by the Committee of Supply. When the Committee of Supply and the Committee of Ways and Means have completed their solemn ritual, a bill embodying their resolutions—the Imprest Supply Bill—is introduced in the House of Representatives. In New Zealand, it is usual to introduce an Imprest Supply Bill every two months until the Appropriation Act, which is the authority for the year's expenditure, has been passed.

It has already been noted that the corollary to this system of parliamentary control of expenditure is a system of public accounts in which every item of expenditure is separately specified and in which all transactions are reduced to a cash basis. In New Zealand, as in England, this system of public accounting centres on the Consolidated Fund, which is (or rather, was originally intended to be) the reservoir into which all state revenue flows and out of which all the State's financial needs are supplied. The device of the Consolidated Fund was, however, adopted at a time when the activities of the State were confined mainly page 111to the maintenance of internal order, defence, and the provision of such elementary services as sanitation and roads. Since expenditure on these services was not revenue-producing and was defrayed out of taxation, the pooling of state revenue and taxation clarified the public accounts and made possible an economical distribution of tax revenue. But in the case of the trading activities of the State, which in New Zealand are of great importance, pooling of revenue and expenditure makes for confusion rather than clarity, since in a trading undertaking revenue and expenditure are intimately related. Accordingly, gross receipts and payments of state trading undertakings do not normally enter into the Consolidated Fund in New Zealand, though some trading undertakings pay over their net surpluses. There are other exceptions, two of them of particular importance. New Zealand being still in the developmental stage, public works activity is on such a large scale that it has been considered advisable to maintain a Public Works Fund separate from the Consolidated Fund. Since 1931 the finance of unemployment relief has also been kept separate from the Consolidated Fund. In 1939, on the introduction of the social security scheme, which greatly extends the scope of state pensions and allowances and therefore impinges on the unemployment problem, the Employment Promotion Fund was abolished and its balances paid into the Social Security Fund, which is also separate from the Consolidated Fund.

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The actual procedure for dealing with revenue is that all public moneys, except those received by the state trading undertakings and certain other departments are paid into the Public Account at the Reserve Bank of New Zealand and thence carried to one or other of the following funds or accounts in the books of the Treasury: the Consolidated Fund, the Public Works Fund, and separate accounts specially created. Until a few years ago, the operations of the Consolidated Fund afforded a means of comparing state revenue and expenditure from year to year but changes in system have now destroyed the comparability of the figures. As at present constituted, the Consolidated Fund might be regarded as a statement of the Government's general revenue and expenditure, eliminating capital items and the revenue and expenditure of trading undertakings.

In New Zealand, as in Great Britain, the task of ensuring that all acts of expenditure are legally authorised has been delegated by Parliament to a Controller and Auditor-General, an officer not subject to control by the political executive. As his title implies, he has two main functions: the first is to control all issues out of the Public Account at the Reserve Bank; the second is to audit the public accounts. Orders for payments out of the Public Account must be countersigned by the Controller and Auditor-General, who is required to satisfy himself that the necessary parliamentary authority exists for page 113the transfer and that the funds in the Public Account are sufficient to meet the order. In the auditing of public expenditure in New Zealand both the pre-audit and the post-audit systems are used. That is, in the case of certain payments, as for instance unauthorised expenditure, transfers between accounts, loan transactions, and salaries of new appointees, the Auditor-General must satisfy himself before the act of payment that it has been authorised. Other classes of payments are dealt with by the Auditor-General in his audit of the various departmental accounts and special funds.

This is a brief outline of the system whereby, in New Zealand, effect is given to the constitutional principle that Parliament controls public expenditure. It is important to realise, however, that this principle is valid only in constitutional law; translated to the political sphere, it becomes a fiction, a part of that elaborate mythology which constitutes so large a part of the British political tradition. Parliament legalises expenditure; it does not control expenditure in the sense of subjecting it to a critical and effective scrutiny in the interests of economy. Parliament is not, nor has it ever been, the guardian of the public purse. 'There has not been a single instance in the last twenty-five years when the House of Commons, by its own direct action, has reduced, on financial grounds, any estimate submitted to it,' says the British National Expenditure Committee of 1918. 'The debates in page 114Committee of Supply are indispensable for the discussion of policy and administration. But so far as the direct effective control of proposals for expenditure is concerned it would be true to say that if the estimates were never presented, and the Committee of Supply never set up, there would be no noticeable difference.' This is as true of the New Zealand Parliament as of the British. Nor is the reason far to seek. 'Parliament,' says Major Walter Elliot, 'is inefficient in protecting the taxpayer because its begetters do not wish to protect the taxpayer, at least to protect the small organised minority which is conscious of itself under that name.' The expenditure of the State is controlled by the political executive and the Treasury; in so far as there is any effective demand for economy it comes from chambers of commerce and other organisations representing the higher income groups in the community.

It is thus necessary to realise that the system of public accounting in British countries and that part of parliamentary procedure which applies to financial measures have been built around a political fiction. They are not on that account useless. Parliament's exclusive right to vote expenditure is a guarantee that it will be called together at least once a year; and the lower House's item-by-item consideration of the estimates means that, at one time or another in the debates in committee of supply, almost every conceivable public question will come up for discussion. The page 115ordinary public accounts on a cash basis are a perhaps indispensable method of ensuring that no act of public expenditure takes place without a prior legal authorisation.

Nevertheless, it has to be recognised that, as a means of setting out the financial position of the State for the benefit of Parliament and of the public the cash accounts are inadequate and misleading. They are, in the words of Sir Henry Higgs, 'a mere pass-book record of sums paid out and received during the financial year. Outstanding assets and liabilities are not revealed. Capital sums received are treated as revenue. Outlay for capital purposes is regarded as expenditure.'

As has been suggested, these cash accounts assume a financial system in which revenue is derived mainly from taxes and imposts and expenditure is mainly on public services, such as defence, police, and justice, which are not in any sense commercial undertakings. Adam Smith's verdict that 'no two characters seem more inconsistent than those of trader and sovereign' is enshrined in the British system of public accounting. In Great Britain, it is perhaps permissible to regard the trading activities of the State as unimportant. Five years ago, before rearmament had begun to distort public finance, only 14 per cent of public revenue (apart from loans) in Great Britain was derived from what writers on public finance call the 'public domain'. In New Zealand, at about the same time, the public domain accounted for 44 per cent of revenue. It is page 116therefore clear that any system of public accounting not designed to show assets and liabilities or to distinguish between capital outlay and expenditure is unsatisfactory as far as New Zealand is concerned. Accordingly, in 1920 the New Zealand Treasury inaugurated a system of departmental balance-sheets and statements of accounts on commercial lines; and this system has been gradually extended until at the present time it covers all state activities. More recently, these commercial accounts have been combined to give what is, in effect, a national balance-sheet. In this respect, the New Zealand system of public accounting is greatly in advance of any other system in the British Commonwealth. Both Canada and Eire have made some progress in supplementing the traditional cash accounts by commercial accounts, but neither is yet in a position to present a complete and reasonably accurate summary, on a commercial basis, of the finances of the State.

There has been some conflict between the two systems of accounting. Departmental accountants and the Treasury tend to regard the commercial accounts as the more important and, in their efforts to avoid duplication of work, eliminate from the cash accounts details which are more intelligible in the commercial accounts. Since the duty of the Controller and Auditor-General is to safeguard parliamentary control of expenditure, it is perhaps natural that he should disapprove of this tendency. His strictures, and the page 117replies of the Treasury, are of considerable interest to students of public finance and constitutional theory. Thus, in his report to Parliament on the Public Accounts for the financial year 1932-33 the Auditor-General notes 'a growing tendency to subordinate the Public Accounts, which are statements of "receipts and payments" prepared by the Treasury pursuant to statute for submission to Parliament, to the departmental balance-sheets and revenue accounts (the "commercial accounts") prepared by the various Goverment departments. The statutory accounts prepared by the Treasury are on a cash basis, and are designed for the purpose of controlling the expenditure of public moneys, and are suitable for that purpose.' The Auditor-General thinks that 'to the extent to which the statutory accounts drawn up on a cash basis are subordinated to departmental accounts drawn up on a commercial basis, parliamentary control of expenditure must be rendered less effective.' The Treasury, in a statement to the Public Accounts Committee of the House of Representatives in December 1933 contends that 'Parliamentary control of expenditure does not require a mass of detail that can be better dealt with in the balance sheets and the revenue accounts to be duplicated in the abstract of the cash accounts, where a more intelligent picture of the financial position as a whole can be presented by summarising the expenditure.'

The growth of the commercial accounts at the page 118expense of the cash accounts is not the only factor which has weakened Parliament's legal powers over expenditure. In finance, as in other spheres of government, the authority of the executive is steadily increasing. In the report already quoted, the Auditor-General gives examples of this. 'The two essentials of an appropriation,' he says, 'are that it should designate the fund from which the expenditure is to be made and the purpose for which it is to be made.' In recent years, he points out, there has been a tendency for Parliament to depart from the practice of specific appropriation. Thus, section 6 of the Finance Act, 1932 (No. 2) empowers the Minister of Finance to make transfers between the accounts or funds within the Public Account in connection with dealings in land vested in the Crown. 'The effect is to enable the Minister … to appropriate the moneys of one statutory fund for the purposes of another statutory fund, and apparently the Minister, instead of Parliament, is constituted the sole judge as to the propriety of the transaction, and the Audit Office has no power to object if any transfer were made under this section even though it might be of opinion that the transaction is improper from an accountancy point of view.' Similarly the New Zealand Loans Act, 1932, provides that the charges and expenses of raising loans may 'without further appropriation than this section' be charged to and paid out of the Consolidated Fund or such other fund as the minister thinks fit. Section 65 of page 119the same act empowers the minister in certain cases to determine the particular fund or account to be relieved of the capital liability in respect of loans redeemed, thus transferring to the minister the power formerly vested in Parliament to determine to which particular account a loan relates. 'It would appear, therefore,' says the report, 'that Parliament has divested itself of the power to control expenditure in cases such as those above mentioned, and the Controller and Auditor-General has been divested of the responsibility placed on him as an officer of Parliament of satisfying himself that the limitations hitherto placed by Parliament on such transactions were being observed.'

Although by applying the principles of commercial accountancy to state activities New Zealand has moved further than most British countries towards a rational system of public accounting, the problem of ensuring a continuous, critical, and enlightened regulation of public spending remains unsolved. The system of specific appropriation and the activities of the Controller and Auditor-General are a most adequate safeguard against illegal or dishonest use of public funds by officials; the commercial accounts assist the detection of wasteful practices in the operations of state departments. But it is obvious that these safeguards against misappropriation, waste, and illegal expenditure by officials touch only the fringe of the problem of regulating public expenditure in the page 120national interest. For every pound of public money that the Treasury and the Auditor-General save by their minute scrutiny of departmental accounts and estimates, hundreds are lost through decisions over which permanent officials have no control and through the discontinuities of policy inherent in a system of government by parties. In 1929, for instance, the work of completing the South Island main trunk railway was put in hand at an estimated cost of £2,300,000. In 1931 a new government stopped the work on grounds of economy. In 1936, as the result of another change in government, work was begun again. The cost of reconditioning the works abandoned in 1931 was about £100,000, while the interest charges between 1931 and 1936 on the amount spent before the interruption probably amounted to another £200,000. Waste of this sort must be listed among the overhead costs of democratic government.

In New Zealand, and in all democratic countries, the only checks on state spending are public opinion and the instinct to economise inherent in Treasuries. But in New Zealand public opinion is not always an influence making for true economy; and the problems of public finance are so complex that this must always be so. The great majority of conscious taxpayers are content to judge state finance by false analogies with their own finances. The balancing or unbalancing of the Budget is still invested with a fictitious importance. If the Minister for Finance can produce a page 121surplus, it is solemnly agreed that the national finances are 'healthy', and the Government has a good press, and New Zealand stocks appreciate on the London market. Yet in certain circumstances the balancing of the Budget may be achieved at the cost of unemployment and economic dislocation. The wisdom or otherwise of public spending is to be judged, not by whether it is more or less than the sum which is somewhat arbitrarily set down in the Budget as public revenue, but by its effect on the credit situation, on money rates, on employment, on industrial output, and on the general economic life of the nation. This is particularly true in New Zealand, where the State enters so largely into competition with private enterprise. There is thus no escape from the conclusion that neither public opinion nor any system of external safeguards can ensure a wise disposition of public revenues. In its origins, democratic government is a system of checks against abuse of authority. But in the sphere of public finance, where the checks are particularly elaborate, it is becoming more and more apparent that it is the nature of authority itself, and not the restrictions upon it, which will determine the quality of government.