In the early 1980s, New Zealand was on the brink of economic collapse. Two oil price shocks had saddled the country with high inflation, and export barriers to the United Kingdom – which had joined the European Economic Community a decade earlier – had cut off access to an important consumer market.
Successive New Zealand governments have compounded the suffering with a series of poor decisions: handing out subsidies, granting inflationary wage deals, controlling prices by force, keeping interest rates too low and taxes too high. The result was rising unemployment and ever-increasing debt. So it’s no wonder some have dubbed New Zealand “the Albania of the South Pacific.”
However, during the remainder of that decade, New Zealand transformed into one of the most prosperous countries in the world. A new Labor government came to power in 1984 and embarked on a form of shock therapy that became known as “Rogernomics”, in honor of the then Minister of Finance, Roger Douglas.
The government removed exchange controls, cut subsidies, privatized services, and handed responsibility for setting interest rates to a newly independent central bank. The main thing, however, was: New Zealand introduced a different accounting approach throughout public administration.
It is impossible to separate the exact impact of each of these policies. But Ian Ball, a former senior Treasury official and professor of public financial management, argues that the accounting reform was one of the most important. It is well known that accounting is a notoriously dry subject, but the conclusion is important.
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The main change was the adoption of the model that has already been applied for years in the private sector – the so-called “data-based approach”. accruals“. Instead of a cash flow view, as is common in governments around the world looking only at the present moment, the New Zealand government adopted an approach that would bring future expenses to present value. This forced departments to think long-term and maximize the efficient use of assets.
In a system based on “here and now” money, the debt is only recorded when the pension is paid, which could be years in the future. The government has little incentive to make any provision for this.
However, with accounting based on accrualsthe cost of the pension commitment must be recorded as a liability when the benefit is received. This led the New Zealand government in 2001 to create a super fund to pay future pensions. Today, this quasi-sovereign wealth fund is viewed with envy by countries that would like to have something similar.
As the cost passes through annual budgets, there is a strong incentive for governments to increase the value of their assets by managing them efficiently. In a cash-based system there is no such incentive, meaning long-term investment is deferred and future generations are left to foot the bill when buildings fall into disrepair and infrastructure crumbles. Does this remind you of Brazil?
A global debt crisis
With the exception of the four years after the global financial crisis and the devastating 2011 Christchurch earthquake, which caused damage equivalent to 11% of GDP, net worth has grown every year until the pandemic.
What we see is a very significant change. We had two decades of deficits before these reforms, but when they came into effect, around 1994, we basically had a tendency to strengthen the balance sheet and increase net worth. And by strengthening your balance sheet, you also reduce debt.
Ian Ball, former senior New Zealand Treasury official and university professor at Wellington
US public debt is close to 100% of GDP and is projected to rise to 122% by 2034. Many eurozone countries are struggling to control debt and deficits to comply with single currency rules.
The situation in many developing countries is even more serious. Economists at the International Monetary Fund (IMF) have warned that global public debt may be higher than previously known and getting worse, and that countries will have to make much more significant fiscal adjustments to deal with the problem.
According to the latest IMF estimates, global public debt will exceed US$100 trillion by the end of this year, which is equivalent to around 93% of global GDP.
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Against this backdrop, the authors argue that this solution could improve public sector productivity, helping to alleviate pressure on cash-strapped governments.
Cash-based accounting values property based on what you paid for it, minus depreciation, without reference to current market value. However, without up-to-date asset valuations, government decision-making is done in the dark. Should a building be renovated or sold? How much should the State charge for its services?
A road network, for example, is a valuable public asset. But in a cash-based system, there is no incentive to generate money from it, whether through tolls, road prices, or some other mechanism.
From this learning, what can be applied in Brazil?
Many of New Zealand’s reforms in the 1980s followed a broader intellectual trend. As the size of modern states grew in the mid-20th century and their activities became more complex, it became clear that they needed more professional management.
The New Public Management school, which emerged from academia and think tanks, particularly in English-speaking countries, advocated the adoption of customer-focused business approaches for public service institutions similar to those used in the private sector. The accounting of accrual was seen as fundamental to this.
But, according to experts, preparing accounts based on accruals It’s just one step. Accounts also need to be used as a basis for decision-making, otherwise they will have no impact.
This may explain why no country has yet fully adopted the New Zealand model. For politicians, transparent accounting brings with it greater responsibility, as long-term debt pressures become impossible to hide and payoffs harder to avoid.
For civil servants, a change in accounting systems means disruption and the risk that skills that are currently highly valued will become obsolete. An accruals-based national budget would be a valuable tool for honest and transparent government. But which brave politician wants to do that?
