Implications of Line byLine Consolidation of State Owned Enterprises and

Implications of Line-byLine Consolidation of State Owned Enterprises and Crown Entities for the Crown Financial Statements and for Setting Fiscal Objectives Discussion Document for Consultation February 2001 Prepared by the Treasury This technical discussion document is released by the Treasury as signalled in the 2001 Budget Policy Statement published on 19 December 2000. This document is for comment only and does not represent the views of the Government. It deals primarily with forthcoming changes to how the Crown’s Financial Statements are prepared (both actual and forecast) and the implications this will have for a government’s obligations under the Fiscal Responsibility Act 1994 (i.e. the establishment of fiscal objectives). Changes to be made to fiscal objectives as a result of forthcoming developments are expected to be enduring over time and robust to different policy settings. Feedback received will be considered and incorporated into the position adopted in the 2001 Fiscal Strategy Report to be issued prior to 30 June 2001. Since the final position recommended to the Government may be modified as a result of comments received, the Treasury would like to hear both from those who agree and from those who do not. Comments are more helpful if they are supported by specific reasoning and should preferably be submitted in writing to the Treasury to: Steve Leith Budget and Macroeconomic Branch The Treasury 1 The Terrace PO Box 3724 Wellington New Zealand Fax: (04) 499 0992 Email: Steve.Leith@treasury.govt.nz Treasury would welcome comments by no later than 5pm Wednesday 28 March 2001. If you would like to discuss any issues, please contact Steve Leith (04 471 5254). CONTENTS This discussion document is structured into the following sections: 1 2 3 4 5 Introduction .......................................................................................... 4 What is done now – financial statements and FRA disclosures................. 6 What is changing? ................................................................................. 9 Proposed changes to fiscal objectives .................................................. 14 Proposed changes to disclosures in the Crown financial statements...... 19 On pages 18 and 21 there are sections seeking feedback on specific questions. General comments are also welcome. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 3 1 INTRODUCTION Current Obligations on the Crown The Public Finance Act 1989 (PFA) and Fiscal Responsibility Act 1994 require a government to produce actual and forecast financial statements in accordance with Generally Accepted Accounting Practice (GAAP). This ensures that the financial statements and forecasts of the Crown are prepared on a basis consistent with other financial statements – providing a transparent and independently established set of principles on which to measure a government’s financial activity. The Fiscal Responsibility Act 1994 (FRA) requires a government to set long-term fiscal objectives and short-term fiscal intentions consistent with the principles of responsible fiscal management specified in the FRA. The principles and objectives have always related to the fiscal aggregates in the Crown financial statements and forecasts, and are therefore consistent with GAAP. GAAP is Changing GAAP is refined over time in line with international and New Zealand specific accounting developments. GAAP will soon require the full line-by-line consolidation of State Owned Enterprises (SOEs) and Crown Entities (CEs). This is a change in the form of the existing approach. At present the Crown financial statements and forecasts consolidate the SOEs and CEs by recording only the net surplus and the net investment (i.e. the net worth). Full line-by-line consolidation of SOEs and CEs will record the: • • full revenues and expenses of SOEs and CEs (rather than just the net surplus); and full assets and liabilities of SOEs and CEs (rather than just the net investment/net worth). Crown Financial Statements – what they do and don’t do The Crown financial statements and forecasts form a significant component of New Zealand’s financial management system. They bring together the various facets of the government’s financial operations and provide a rich picture of government activity and involvement across the economy and society. The Crown financial statements are a means of measuring the overall financial performance and financial position of the public sector. Full line-by-line consolidation of SOEs and CEs provides a better measure of this financial activity. It is important to note that the Crown’s financial statements do not fully convey the full economic impact a government has on the economy, as financial statements do not capture all regulatory impacts (for example costs imposed on the economy from the Resource Management Act or Local Government activities). Financial statements principally report on the ownership interest. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND 4 CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES Fiscal Responsibility Act Obligations The introduction of full line-by-line consolidation of SOEs and CEs requires a reexamination of the entity that the principles of responsible fiscal management and the fiscal objectives apply to. Any change to the entity that the fiscal principles and objectives apply to needs to comply with both the letter and the spirit of the FRA. Any change will need to be robust across time, and not specific to a particular government’s policy settings. To be robust over time, any solution needs to be widely understood and endorsed. The Purpose of this Discussion Document This discussion document outlines the impact of full line-by-line consolidation of SOEs and CEs on the Crown’s financial statements and forecasts, and therefore the implications this has for how a government specifies its fiscal policy in accordance with the requirements of the FRA. The aim of this document is to explain the forthcoming developments and to outline the Treasury’s proposed approach to tackling them. Treasury is keen to receive external comment on the issues and the proposals prior to advising the Government. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 5 2 WHAT IS DONE NOW – FINANCIAL STATEMENTS AND FRA DISCLOSURES Crown Financial Statements The Crown financial statements and forecasts are prepared in accordance with GAAP. As part of the financial reforms instituted during the late 1980’s and early 1990’s, it was determined that the best means of preparing Crown financial statements and forecasts was to use GAAP rather than a set of principles specific to the public sector. The main reasons for this were to ensure that the Crown financial statements and forecasts were prepared based on a set of principles that are independently established and transparent, and are therefore not able to be manipulated by the government. Financial statements principally report on the ownership interest. At the moment the Crown financial statements and forecasts are based on the consolidation of those entities (i.e. adding together a number of entities) that are the Crown reporting entity. This consolidation takes the form of: • • • adding up line-by-line all expenses, revenues, assets and liabilities of departments and the Reserve Bank of New Zealand; plus including the surplus of all SOEs and CEs as a separate line in the Statement of Financial Performance (the operating statement)1; plus including the net investment (i.e. the net worth) of all SOEs and CEs in the Statement of Financial Position (the balance sheet). While the net results of SOEs and CEs are currently included in the Crown financial statements and forecasts, the total revenues, expenses, assets and liabilities of SOEs and CEs are not. This means that the results of all SOEs and CEs are included in the Crown’s overall operating balance and net worth, but are not included in the Crown’s total revenues, expenses or debt for example. This is illustrated in table 1 in section 3 along with the changes to occur. At the time the Crown financial statements were established in accordance with GAAP (in the early 1990’s in accordance with the Public Finance Act) the Government and the Finance and Expenditure Committee agreed that logically the Crown should report on the whole of the Crown estate, including SOEs and CEs so as to present a combined picture of the whole Crown as a single economic entity (i.e. to show the substance of the Crown’s net worth and financial performance, seeing past the legal or administrative form of various sub-entities making up the Crown reporting entity). However, it was determined that the SOEs and CEs should not be fully consolidated into the total revenues, expenses, assets and liabilities of the Crown at that stage. The prime reason was due to the assessment at that time that the cost of collecting and processing the information outweighed the benefits that information would provide. 1 The gross surplus of SOEs and CEs is recorded in the operating statement. However, this is split into dividend income to the Crown (recorded in investment income) and the remaining net surplus after dividends is shown separately. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND 6 CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES Fiscal Responsibility Act Requirements – Principles, Objectives and Indicators The FRA requires governments to operate within a framework of fiscal responsibility. This involves following a set of legislated principles of responsible fiscal management, and publicly assessing their fiscal policies against these principles. The requirements of the FRA mean that the government of the day has to be transparent about both its intentions and objectives, and the shortand long-term fiscal consequences of its spending and taxation decisions. Fiscal indicators and objectives In terms of monitoring its performance, the Government currently uses a range of fiscal indicators based on the information that is contained in the Crown financial statements and forecasts. For example, revenue, expenses, gross debt, net debt, operating balance and net worth are all used as indicators of progress towards the long-term fiscal objectives and short-term intentions established by the Government. Measurement of these indicators is based on the information in the Crown financial statements and forecasts. The Fiscal Responsibility Act (1994) requires the Government to set long-term fiscal objectives and short-term fiscal intentions for the: • • • • • Crown’s total operating expenses; and Crown’s total operating revenues; and balance between the Crown’s total operating expenses and the Crown’s total operating revenues; and level of the Crown’s total debt; and level of the Crown’s net worth. Because progress towards the long-term fiscal objectives and short-term fiscal intentions is measured by the fiscal aggregates in the Crown financial statements and forecasts, the fiscal objectives and intentions are implicitly set for the same reporting entity used in the Crown financial statements and forecasts.2 This means that three of the five current objectives – expense, revenue and debt objectives – currently exclude the expenses, revenues and debt (financial assets and/or financial liabilities) of SOEs and CEs. However, the operating balance and net worth objectives do include the net results of all SOEs and CEs. The objectives have been specified this way since the introduction of the FRA (although the wording and numerical targets have changed as policy has altered through time). Currently, both the expense and debt objectives contain a specific numerical target. The revenue, operating balance and net worth objectives are specified in qualitative terms. 2 The FRA is unclear about the definition of Crown that is to apply to the objectives and intentions, and so the definition of Crown has always been based on GAAP. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 7 The principles of responsible fiscal management, along with the current longterm objectives, are as follows: Principles of responsible fiscal management • Reducing total Crown debt to prudent levels so as to provide a buffer against factors that may impact adversely on the level of total Crown debt in the future, by ensuring that, until such levels have been achieved, the total operating expenses of the Crown in each financial year are less than its total operating revenues in the same financial year. Once prudent levels of total Crown debt have been achieved, maintaining these levels by ensuring that, on average, over a reasonable period of time, the total operating expenses of the Crown do not exceed its total operating revenues. Achieving and maintaining levels of Crown net worth that provide a buffer against factors that may impact adversely on the Crown’s net worth in the future. Managing prudently the fiscal risks facing the Crown. Pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years. • • • • Long-term fiscal objectives Operating balance Operating surplus across the economic cycle to ensure: • government revenues and spending (excluding the allowance for funding the costs associated with the ageing population) are at least in broad balance and net debt is below 20% of GDP an allowance for prefunding the costs associated with the ageing population. • Crown debt Gross debt below 30% of GDP, consistent with net debt (excluding the accumulated allowance for funding the costs associated with the ageing population) below 20% of GDP, across the economic cycle. Expenses around current levels of 35% of GDP. Raise sufficient revenue to meet the operating balance objective. A robust, broad-based tax system that raises revenue in a fair and efficient way. Operating expenses Operating revenues Crown net worth The Government will increase net worth. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND 8 CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 3 WHAT IS CHANGING? Generally Accepted Accounting Practice (GAAP) is Changing GAAP is changing in relation to the consolidation of financial statements. As noted in section 2, the Crown financial statements and forecasts are currently prepared by: • the line-by-line consolidation of the revenues, expenses, assets and liabilities of all departments (and the activity they undertake on behalf of the Crown, for example benefit payments) and the Reserve Bank; and consolidation of the SOEs and CEs – but ONLY their net results (net surplus in the operating balance and net investment/net worth in the balance sheet) – NOT the full revenues, expenses, assets and liabilities. • The Crown will continue to prepare consolidated financial statements – but the form of that consolidation will be changing to comply with forthcoming changes to GAAP. From the 2003 financial year, the Crown financial statements and forecasts will FULLY consolidate line-by-line the revenues, expenses, assets and liabilities of ALL entities making up the Crown reporting entity. The change from current practice will be the inclusion of ALL revenues, expenses, assets and liabilities of SOEs and CEs. The change to how consolidation will operate will impact upon the composition and look of the financial statements (both forecast and actual financial statements). Although the net results for the Crown will be the same (i.e. operating balance and net worth), the composition and total of items such as revenues, expenses, assets and liabilities will change. In summary, as an illustration, the key fiscal aggregates (as at 30 June 2000) will change as follows: Table 1: Illustration of change to fiscal aggregates Headline fiscal indicators Revenue Expenses Operating Balance Gross Debt Net Debt Total Assets Physical Assets Net Worth 3 Impact of full consolidation Increase Increase No change Increase Currently little change Increase Increase No change Current numbers (30 June 2000) $billion 36.5 36.2 1.5 36.0 21.4 60.4 16.0 8.6 New numbers3 $billion 42.0 40.5 1.5 38.0 19.6 77.6 34.6 8.6 These are illustrative impacts to provide a likely indication of new numbers. Until a full set of fully consolidated results is completed in detail (including new internal eliminations that will be required), a more accurate indication will not be available. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 9 The main drivers of the changes to the numbers are: • Expenses (and revenues) increase from including the expenses of SOEs (especially electricity SOEs), ACC, and additional expenses in the Education sector. Net debt decreases because the added debt (mainly from SOEs) is outweighed by the investment portfolios of ACC and EQC. • The increase in spending is not as simple as adding existing core Crown spending to all spending of SOEs and CEs. For example, a lot of the expenses of CEs are funded from the Crown, for example, health spending. In a set of fully consolidated financial statements, the health spending of District Health Boards would replace the current core Crown spending, so that the same expenses are not counted twice. Table 2 provides an illustration of the treatment of an SOE or CE in its own financial statements, as well as the current and future treatment of an SOE or CE in the Crown financial statements (CFS). Table 2: Illustration of change in consolidation treatment Financial statements of an individual SOE or CE Operating statement Revenues Expenses Operating balance Balance sheet Cash 50 Physical assets Total assets Current liabilities Debt Total liabilities Net worth/equity 350 400 30 200 230 170 Total liabilities Net worth Total assets Investment in SOEs and CEs 200 150 50 Operating balance Consolidation recognition in CFS Current approach Future approach Impact on CFS aggregates 200 150 50 50 Physical assets Total assets Current liabilities Debt Total liabilities Net worth 350 400 30 200 230 170 Increase Increase Increase Increase Increase No change Increase Increase No change Increase Operating statement of the Crown 50 170 170 170 Revenues Expenses Operating balance Cash Balance sheet of the Crown IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND 10 CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES Why is GAAP Changing? Over the last five years the Financial Reporting Standards Board of the Institute of Chartered Accountants of New Zealand has been reviewing changes to the Statement of Standard Accounting Practice 8 in line with developments locally and internationally. A draft new standard was issued (in 1998) and discussed in the form of Exposure Draft – 84 Consolidating Investments in Subsidiaries (ED84). A key feature of ED-84 is that the Crown will no longer be exempt from full lineby-line consolidation for SOEs and CEs. Accordingly, the Crown will need to produce all financial statements (including budgets, budget updates, actual annual financial statements and all monthly financial statements) on a full lineby-line basis. Accounting standard setters have continued to hold the view that there is sufficient information value in consolidated financial statements to outweigh the costs of their preparation. They concluded (in line with the international view) that consolidated financial statements are worthwhile as: • • • understanding of overall performance requires a comprehensive aggregation of the results of operations; provision of a single overall picture is more accessible, allowing a better assessment of stewardship of all resources; and they are more likely to reflect economic substance than legal form. Effectively, the rationale is that consolidated financial statements need to consolidate the Government’s sub-entities (i.e. SOEs and CEs), controlled through effective ownership mechanisms, with directly owned items (i.e. current Crown and departmental items), so as to provide a clear view of the whole-ofgovernment position. There is not sufficient distinction between public and private sectors to justify a different consolidation approach being adopted between sectors. While the argument in the early 1990’s was that the costs exceeded the benefit of collecting SOE and CE information to enable full line-by-line consolidation for the Crown financial statements, this situation no longer exists. Improvements in accounting technology and collection processes will facilitate collection of the necessary information. The standard setters then moved on to consider the relationship that should be present between the parent entity and its affiliate to require consolidation. Alternatives included effective control through ownership mechanisms (i.e. through the use of powers/mechanisms normally associated with ownership such as appointment of the governing body), effective control generally (including by purchase or regulation), control as defined by legislation, accountability or financial interdependence (e.g. cross guarantees). Financial statements principally report on the ownership interest. The standard setters have therefore proposed that the best information will be provided to the IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 11 “owners” of the government reporting entity (e.g. citizens of New Zealand) by requiring the consolidated financial statements to fully include all items that are owned and controlled by the government. Generally both power and benefit elements must exist to establish control. Power and benefit elements refer to whether an entity has both the ability to control/direct the operations of another entity and thereby obtain benefits from the activities of that entity. If both these circumstances exist, consolidation is necessary. To the extent that the Exposure Draft specifically addresses the Crown’s situation, it clearly requires line-by-line consolidation for SOEs and CEs. It needs to be emphasised that ED-84 primarily sets the accounting rules for presentation of subsidiary information in externally published consolidated financial statements, such as the Crown Financial Statements. In itself, ED-84 does not affect the relationship between the Crown and SOEs and CEs. In particular, the change in accounting policy does not affect the established accountability relationships, and implementation of the forthcoming standard is not a signal of any shift in responsibilities between SOEs and CEs and the Government. This fact has influenced the proposed changes to the fiscal objectives (discussed in section four). When is GAAP Changing? – Timing of Implementation The Minister of Finance has decided that the Treasury should commence consolidating the Crown Financial Statements and forecasts on a line-by-line basis in 2002. It is proposed that the first product will be the 2002/03 Budget. Based on recent timetables, it is likely that this Budget would be published in May/June 2002. Audited Crown Financial Statements will be prepared on a full line-by-line basis from 1 July 2002 onwards. The first actual financial statements produced on this basis will be for the three-month period ended 30 September 20024. Other Consequential Disclosure Changes to the Crown Financial Statements Full line-by-line consolidation of all SOEs and CEs will provide the opportunity to disclose additional information to users of the Crown financial statements and forecasts – for example, the financial statements will be able to answer the question of what is the total public sector wage bill. Examples of the proposed disclosure changes to the new Crown financial statements and forecasts are outlined in section five. A key addition will be the provision of segmental information (segments based on the “core Crown” (status quo excluding SOEs and CEs), SOEs and CEs). Feedback on the suggestions and other information requirements is sought in section five. 4 The Treasury will also prepare a backdated set of consolidated results on the main fiscal aggregates to provide a five-year trend for analysis purposes. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND 12 CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES How will Fiscal Indicators and Objectives Change? The introduction of full line-by-line consolidation will increase the range of indicators available and will therefore increase transparency. All of the existing key indicators will continue to be published in the Crown financial statements and forecasts. With the introduction of full line-by-line consolidation of SOEs and CEs, the Government will be able to use a mixture of fiscal aggregates for either “core Crown” (status quo excluding the line-by-line consolidation of SOEs and CEs) or “total Crown” (including SOEs and CEs), depending on the most relevant indicator in a given situation. Core Crown indicators are useful for different reasons than total Crown indicators, because they contain different information. Under full line-by-line consolidation of SOEs and CEs, each line of the Crown financial statements and forecasts will apply to the total Crown, and so the fiscal aggregates will change, as outlined in table 1. This raises the question of whether the expense, revenue and debt objectives and intentions should be set for the total Crown, rather than the core Crown. There will be no impact on the net worth and operating balance objectives or intentions. Treasury’s proposed change to the entity that the fiscal objectives and principles of responsible fiscal management should apply to is discussed in section 4. Your feedback is sought on the proposed changes in section 4. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 13 4 PROPOSED CHANGES TO FISCAL OBJECTIVES Proposal Treasury’s proposal for changes to the entity that the fiscal objectives, intentions, and principles of responsible fiscal management apply to, is as follows: Principles of Responsible Fiscal Management • All principles of responsible fiscal management should relate to total Crown, which will now include SOEs and CEs. Long-term Fiscal Objectives • • All of the fiscal objectives should refer to the total Crown. Therefore the expense, revenue and debt objectives will also include SOEs and CEs. The Government should continue to set a numerical component of the expense and debt objectives for the core Crown (i.e. expenses and debt excluding SOEs and CEs). Therefore, both the expense and debt objectives would contain a reference to the total Crown as well as a more specific numerical objective for the core Crown. Short-term Fiscal Intentions • • All of the fiscal intentions should be set for the total Crown, which will now include SOEs and CEs. The short-term expense, revenue and debt intentions should be set for both the total Crown and the core Crown. The proposed changes to the long-term fiscal objectives are illustrated in table 3. Table 3: Proposed changes to long-term fiscal objectives Objective Operating balance Net worth Expenses Revenue Debt Proposed change No change No change Refer to total Crown expenses, which will now include SOEs and CEs, as well as the existing numerical objective for core Crown expenses Refer to total Crown revenue, as well as core Crown revenue Refer to total Crown debt, which will now include SOEs and CEs, as well as the existing numerical objective for core Crown debt This proposal will not affect the fiscal indicators that are available to assess the impact of government decisions on the Crown financial statements and IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND 14 CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES forecasts. As noted in section 3, fiscal indicators will be available for both the total Crown and core Crown for the main fiscal aggregates, e.g. debt. These proposed changes would be technical changes in response to accounting developments, and not a response to government policy. They need to be consistent with the letter and spirit of the FRA, and robust across governments with differing policy settings. Advantages of all Objectives Based on Total Crown Whether the principles of responsible fiscal management and the fiscal objectives and intentions should relate to total Crown or core Crown is not clearcut. The proposal has attempted to capture as many benefits of the FRA as possible. Setting all of the objectives for total Crown means that all of the objectives would be set for the same entity based on GAAP. Requiring a government to follow a set of transparent, independent rules increases credibility, and it would be beneficial to maintain this requirement under full line-by-line consolidation. Objectives based on the total Crown would be more robust to changing institutional forms. For example, any change in status between government departments, SOEs and CEs would not affect the fiscal objectives. Objectives focusing on total Crown expenses (for example) would provide a rich picture of intentions about the size of government. Advantages of Numerical Objectives Based on Core Crown Expense Objective Referring to total Crown in the expense objective would better reflect government ownership, and the total influence and size of government activities in the economy. This would make the government more accountable for its total spending in the economy over the long term. However, there are a number of reasons why it is desirable that any numerical expense objective should be set for the core Crown along existing practices (in addition to an objective for the total Crown). A numerical objective for the core Crown: • increases the control of the Government over achieving that objective. Because SOEs and CEs are established to operate with some independence, it would be more difficult to hold the Government accountable for achieving its objective if these entities were included. reduces any incentive on Ministers to encourage poor performance by SOEs and CEs that could occur with total Crown objectives. This could occur if Ministers wanted lower spending by SOEs or CEs in order to meet the total Crown’s expense objective. • IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 15 • places the focus on what is really important for short-term decisionmaking. There are good reasons why SOEs and CEs are legally separate from the Crown, such as to increase their operational independence and separate them from the executive. provides useful information in some cases. In general, core Crown expenses are funded by taxation. Taxes place a burden on the economy, and so the Government should be more concerned about expenses funded by taxes than expenses funded by commercial revenue. • Although the proposal excludes both SOEs and CEs from the numerical expense objective, there are arguments for only excluding SOEs from that objective. Some of the important characteristics of CEs that differ from SOEs are: • • • many CEs are the delivery arm of government policy CEs are mostly funded by tax revenue or levies generally, the government does have significant control over the revenue, and therefore the expenses, of CEs. On balance, the proposal excludes CEs from the numerical objective for the reasons outlined above. Debt Objective It is proposed that the debt objective refer to total Crown debt to fully capture the risks facing the total Crown. However, there are a number of reasons why any numerical debt objective should be set for debt issued by the Crown (along existing practices): • as with expenses, a numerical objective for core Crown (i.e. Crownissued debt) increases the control of the government in achieving the debt objective, and reduces any potential impact on decision-making. debt of SOEs and CEs is generally not government-guaranteed (there are only very limited situations where it is government-guaranteed, for example the debt of ECNZ of around $700 million is currently government guaranteed)). • There are some arguments for setting the numerical debt objective for government-guaranteed debt. However, it is considered simpler to have the numerical debt objective specified for the same basis as the numerical expense objective (and the status quo) rather than introduce a further breakdown based on a different basis. However, information on government-guaranteed debt will still be disclosed in the Crown financial statements and forecasts. There are arguments for including CEs in the numerical debt objective. In addition to the arguments outlined with respect to expenses, most CEs cannot borrow without approval. Again, it is recommended that CE debt be excluded along with SOE debt, to be consistent with the expense objective and to avoid any potential impact on short-term decision-making. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND 16 CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES When the Government decides on the wording for its new debt objective, it will also be considering specifying its objective in terms of gross debt, rather than both net and gross debt. This was signalled in the Fiscal Strategy Report 2000 and the Budget Policy Statement 2001. Consistency of Proposal with the Fiscal Responsibility Act It is useful to look at whether the proposal is consistent with the intent or spirit of the Act. Key benefits of the FRA include sustainability, credibility and transparency. Sustainable fiscal policy is critical for a government to achieve its economic and social objectives. Sustainable fiscal policy increases the predictability about, and stability in, fiscal policy settings, which helps promote high levels of business and household confidence, stability, and economic growth. It also gives people a degree of certainty about the on-going provision of government services and transfers. The FRA encourages sustainability by requiring a government to specify long-term objectives and short-term intentions, and therefore its fiscal policy plans, consistent with the principles of responsible fiscal management. This will not change under the proposal. The FRA also recognises that transparent, rules-based fiscal reporting (i.e. GAAP) is important for accountability for outcomes, and is therefore necessary to achieve credibility and the other benefits of good fiscal management. The proposal maintains this credibility by ensuring that the fiscal objectives are based on GAAP. The proposed changes to disclosure are consistent with increasing transparency, because there will be a greater range of information available in the Crown financial statements, and therefore more fiscal indicators available for use. The FRA has other economic benefits. By trying to get a focus on how the individual spending decisions in the budget add up, it tries to minimise the economic costs of uncontrolled spending, and encourages tradeoffs to be made between the benefits of different individual spending priorities and the costs of taxation. A numerical expense objective based on the core Crown encourages the government to make these tradeoffs. The FRA is also about reducing the Crown’s vulnerability by strengthening the balance sheet and managing the risks facing the Crown. The government can manage its fiscal position in ways that reduce the risk that it may have to cut expenses or increase taxes. A numerical objective for core Crown debt helps reduce these risks. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 17 Specific Feedback Sought Treasury is seeking your specific feedback to three questions, particularly the reasons if you are disagreeing with the proposals outlined below. Any other general feedback is also welcome. 1 All of the fiscal objectives and intentions, and therefore the principles of responsible fiscal management, should relate to total Crown, and therefore include SOEs and CEs. If not, why not? Agree / Disagree 1a Please provide reasons if disagreeing Agree / Disagree 2 The numerical component of the expense objective should relate to core Crown, and therefore exclude both SOEs and CEs. If not, why not? 2a Please provide reasons if disagreeing Agree / Disagree 3 The numerical debt objective should relate to core Crown, and therefore exclude both SOEs and CEs. If not, why not? 3a Please provide reasons if disagreeing IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND 18 CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 5 PROPOSED DISCLOSURE WITHIN THE CROWN FINANCIAL STATEMENTS As the nature of the consolidation of SOEs and CEs is changing, the format of the Crown financial statements and forecasts will also change. The information that is currently provided in the detailed Note 9 of the annual Crown financial statements (i.e. revenues, operating balances, and summary balance sheets of material SOEs and CEs) will now be aggregated as part of the Crown financial statements. Disclosure changes of note are likely to include: • Continuing to present the main statements (operating balance, balance sheet, cash flows, and borrowings statements) along similar lines to present disclosures – however they will be inclusive of activity of the SOEs and CEs. Additional note disclosure on new material items. For example, the annual financial statements may include notes on sources of levy income, sale of goods and services, investment portfolio compositions, etc. Examples could include: 30 June 20x1 $m 1,400 140 160 300 2,000 30 June 20x1 $m 30 June 20x0 $m 1,450 145 165 310 2,070 30 June 20x0 $m • Note 3: Compulsory fees, fines, penalties and levies (illustrative numbers only) ACC levies Fire Service levies Other levies (e.g. EQC, HSE, etc.) Other items (generally smaller items such as police fines, courts fines, etc.) Total compulsory fees, fines, penalties and levies Note 4: Sale of goods and services (illustrative numbers only) Electricity sales (ECNZ, Trans Power, Meridian, Genesis, etc.) Transport and communications sector (Airways, TVNZ, NZ Post, etc) Agriculture, farming and forestry charges (Agriquality, Asure, Land Corp, CRI’s, etc) Education fees and contributions (Tertiaries and Schools) Lotteries revenue Rental revenue (HNZ, etc) Departmental sales (or could also split on type of revenue source) Other cost recoveries, misc. items Total sales of goods and services 2,100 1,650 500 1,700 650 500 660 700 8,460 2,150 1,500 450 1,650 700 530 650 600 8,230 IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 19 Note 7: Financial assets (marketable securities and deposits, equity investments, etc) (illustrative numbers only) DMO and Reserve Bank reserves Marketable securities held for trading purposes Marketable securities held for investing purposes Foreign-currency deposits New Zealand-dollar deposits Reserve position at the IMF Other investment portfolio’s NZ Super Fund (possibly include a separate note on this item) ACC portfolio EQC portfolio Other marketable securities and deposits (i.e. held by SOEs and CEs) Total financial assets 30 June 20x1 $m 30 June 20x0 $m 4,070 2,220 1,750 1,600 810 3,280 1,480 2,400 3,060 900 1,900 3,800 4,200 630 3,500 4,000 300 20,650 300 19,550 • To present a picture of “core Crown” (i.e. the status quo) as opposed to the contributions from SOEs and CEs – it is intended that the Crown financial statements include new segmental information based on the distinction of general governance arrangements. This means that information on three segments (i.e. core Crown, SOEs, and CEs) will be presented so that the contribution to the consolidated results of each segment is identifiable. This information will provide the basis for measuring fiscal objectives (established in accordance with the FRA) that relate to the core Crown. It is intended that segment information will be provided for the operating statement, balance sheet and cash flow. • One change to the information currently presented is of reasonable significance that it warrants mention. The current expenses of the Crown are reported inclusive of GST on all spending except departmental spending. There is an offsetting amount of GST revenue recorded in the GST tax revenue item. SNA reporting excludes all GST on Crown expenses. The new financial statements will eliminate ALL GST on Crown expenses – the impact of which will be to reduce expenses and tax revenue by over $1 billion.5 5 This will impact on the calculation of core Crown expenses to GDP, which will not be comparable to the existing core Crown expenses to GDP. Adjustments will need to be made to historical data to ensure a comparable series is provided. IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND 20 CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES The exact disclosures necessary to comply with generally accepted accounting practice (GAAP) and to meet the information needs of users are still to be finalised. Specific Feedback Sought Your thoughts on information requirements would be appreciated as Treasury considers the appropriate disclosures to be included in the Crown financial statements. The following questions are provided as prompts. 1 Considering the nature of the revenue and expenses of the SOEs and CEs – what level and nature of additional note disclosure would assist in your information needs? For example: • • Additional revenue notes on the nature of levies and sale of goods and services (as illustrated above). Using existing Note 5 expense disclosures (see pages 61 and 62 of the Financial Statements of the Government of New Zealand for the year ended 30 June 2000). That is an input type breakdown such as personnel costs, depreciation, operating costs, etc. Information on financial assets and liabilities to indicate the underlying nature of these items (i.e. financial assets as illustrated above). • 2 The existing note 9 disclosures (pages 65-72 of the 30 June 2000 financial statements – detailed revenue, operating balance, summary balance sheet information on all material SOEs and CEs) would no longer be required by GAAP. However, this note has proved informative in the past. Should it be retained or will segment information at a summary level (i.e. SOEs as a group (rather than by individual entity) and CEs as a group (rather than by individual entity)) be sufficient? Note that it would only continue to be provided on an ex post basis. 3 What other information disclosures or means of aggregating information would be useful to you? IMPLICA T IONS O F LI NE- BY- LI NE CONSO LIDA T ION OF ST AT E OWNED ENT ER PRISES A ND CROWN ENT ITIES FOR T HE C ROWN FI NA NCIA L ST A T EMENT S A ND FOR SET T ING FISCA L OBJECT IV ES 21