Financial management has been successfully reformed in New Zealand. Within a short period, all departments shifted budgeting and accounting from cash to an accrual basis and applied commercial accounting principles in preparing budgets and financial statements. The shift from input to output budgeting was also implemented as part of this process, though some difficulty was encountered in defining output classes. Departments learned a new vocabulary and new techniques, and they took responsibility for managing their own bank accounts. The Estimates were reformatted from 1994/95 to distinguish between Ministers' Votes and departmental resources. A capital charge was imposed on the net asset base of departments, and though it stirred considerable confusion and some anxiety when it was introduced, most of the start-up problems have been overcome and the concept is now accepted as a sensible means of encouraging the efficient management of physical and financial assets.
The study did, however, encounter a pattern of complaints concerning the adequacy of operating resources, the barriers against carrying forward unused funds to the next fiscal year, limits on shifting funds among output classes, and the authorization of Mode B net appropriations. This chapter examines these concerns, beginning with a fundamental question that must be faced by all governments, regardless of their financial management practices. How much should be provided for operating government departments? In New Zealand, pricing operations in terms of input costs has been discredited, but the new system of pricing outputs remains underdeveloped. The discussion then moves to two special pricing problems: the capital charge and the suitability of Mode B net appropriations for noncontestable trading revenue. The chapter concludes with consideration of efficiency savings and limits on carrying funds over to the next financial year.
Each of these issues boils down to a matter of incentives. Getting financial incentives right is essential in New Zealand management reform. In government, no less than in the marketplace, money is a powerful signal; it prods entities to produce more or less, to care about costs or to ignore them, to be more or less efficient, to take risk or to avoid it. The old command-and-control system gave managers the message that risk would not be rewarded, that inefficiency would not be penalized, that what mattered most was complying with preset rules and restrictions. The reformed system intends to reverse these incentives by encouraging and rewarding efficiency, letting managers take risk and initiative, giving them discretion to get the job done the best way they know how.
Getting the incentives right means getting the price right, that is, providing the amount of money that enables managers to efficiently produce what is required of them. This is the first and most important issue considered in the chapter. The capital charge and criteria for Mode B net appropriations also raise incentives questions: whether charging for net assets might lead to under-capitalisation of departments and whether strict criteria for Mode B net status might discourage departments from generating trading revenue. The last issue considered in the chapter also stirs up questions about incentives. Does the rule barring departments from carrying surplus funds into the next financial year give them the message that if they don't spend the money they will lose it?
Certain aspects of financial management are considered in the next chapter because they pertain to the accountability framework. These include the ex ante specification of the outputs to be purchased and the ex post reporting and auditing of performance.