Policy Study

Reforming Financial Management in the Public Sector

Lessons U.S. Officials Can Learn From New Zealand

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 behavior (for example, 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 governmental 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 are receiving attention in state and local governments in the United States. In response to the inadequacies of traditional government accounting and financial management, the Governmental Accounting Standards Board (GASB), which is charged with setting standards for government financial reporting, proposed major changes in government financial systems. Part of the change includes moving from traditional modified cash accounting (officially called modified accrual) to the business model of accrual accounting.

As U.S. state and local governments begin the transition to new and improved financial and accounting systems, they could find no better model for how to get from the traditional to the new than in New Zealand. New Zealand 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 U.S. 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 U.S. policymakers.