Reforming Financial Management In The Public Sector

Publication, Public Sector, Frontier Centre

Executive Summary

In governments across the world, public-sector financial systems are being transformed more fundamentally than at any time in decades. The changes taking place-in governments from Wellington, New Zealand to London, England-respond to a number of deficiencies of government accounting and financial-management systems, specifically,

  • Accountability is unclear.
  • Goals and performance requirements of government departments are poorly specified.
  • Incentives often encourage dysfunctional behaviour, like year-end spending.
  • Assets are poorly maintained, and changes in value or depreciation are poorly recorded.
  • Losses and long-term liabilities are hidden by cash-based accounting systems.
  • Responsiveness to changing circumstances is slow.
  • Global competitive forces that demand efficiency for survival are often ignored in designing govern-mental financial systems.

Moreover, an important consideration for fiscal policy is intergenerational fairness. By allowing governments to hide both their liabilities and the real state of their finances, traditional government financial reporting enables governments to pass off present costs to future generations.

These problems can be addressed by moving from traditional financial management systems in government based on modified cash accounting (officially called modified accrual) to the business model of accrual accounting.

In Canada, our governments are also inching towards more useful financial and accounting systems. They could find no better model for how to get from traditional to new practices than that in New Zealand. It has moved further than any other government in the world in revamping its financial management, accounting and budgeting systems.

New Zealand’s reforms have four main features:

  • Adoption of accrual accounting and budgeting;
  • Introduction of a capital charge and decentralized authority to buy and sell assets;
  • Output-based management and budgeting; and
  • Devolution of financial decision making coupled with increased accountability.

Together, these reforms have had a dramatic impact on the New Zealand public sector. Thanks in part to these reforms, the quality of financial information has vastly improved, efficiency has increased, assets are managed more proactively, accountability is stronger, and public disclosure of information has improved immensely.

For policymakers embarking on overhauling and modernizing their financial management and accounting systems, the highly acclaimed New Zealand reforms offer powerful lessons. This study concludes with seven strategic lessons on financial-management reform for our own policymakers.

Full Text of Policy Series No. 6 – (PDF, 38 pgs, 218 Kb)