The reform of sovereign debt management has largely escaped attention in the accounting literature on public sector financial management reforms. The application of business thinking to the public sector has meant conceptualising the sovereign debt management function as a corporate-style controller function, applying to sovereign debt management the asset and liability management techniques developed in the banking sector. Accruals-based appropriations and outcomes-focused strategy statements weaken a legislature's power of control over the executive government and divert attention from the control of public finance, which increasingly appears to be delegated to the executive government. Wider application of the asset and liability management techniques adopted for sovereign debt management seems to support an emergent capital market development strategy, facilitated by increasing government participation in capital markets. The New Zealand government's financial statements help to illustrate these developments and show the extent of government participation in capital market activities involving large amounts of public money and leveraging of public assets. Financial control and accountability is not achieved by relying on strategy statements, objectives and ex post review.
This article provides three contributions to the accounting literature on public sector financial management reforms. Firstly, by focusing attention on the reform of sovereign debt management and the techniques involved, and identifying the development phases in New Zealand, this article has drawn attention to the extent of delegated financial powers, which are largely ignored for the purpose of the parliamentary appropriations system, and the way that controversial strategies may be pursued via detailed rules. Appropriations focused predominantly on accruals-based expenses take for granted the financing of those activities, thus allowing a corporate-style Treasury as financial controller to function largely behind the scenes. Unlike corporate systems, however, the financial powers delegated in New Zealand are unlimited. So too is liability unlimited given the nature of sovereign debt. And what may initially have been confined to sovereign debt management has since broadened into extensive governmental participation in financial market activities involving very large amounts of public money. These activities also leverage public assets as funds raised from the government's ongoing borrowing programme are put to use in capital market activities.
Secondly, because these findings relate to New Zealand's Westminster-style parliamentary system, they help to highlight some weaknesses of that system and the potential dangers arising for other countries contemplating following New Zealand's accruals-based appropriations system. This system was accompanied by the development within the Treasury of a corporate-style controller financial management system operating via delegated powers. While the financial management reforms have directed parliamentary (and public) attention to strategy statements, accruals-based budgets of expenses, reported accruals-based surpluses or deficits, and net debt, attention has been deflected from these delegated and ongoing financing activities, which have expanded into more extensive capital market activities. Ex post attention to these activities seems to be confined to aggregate figures, such as net debt, but these aggregate figures give inadequate understanding of the nature or extent of the financial activities exercised. For example, net debt may be reduced simply by converting physical assets into financial assets, and thus by increasing capital market activities. Financial control and accountability is not achieved by relying on strategy statements, objectives and ex post review.
Thirdly, this article has called attention to international public management material drawn partly from international gatherings of sovereign debt managers, and raises several questions about financial management reforms internationally. Admittedly, the Westminster parliamentary constitutional system is weaker than others, but there seems to be little doubt that the sorts of changes identified here have been advocated and pursued in other countries that are not Westminster systems (IMF and World Bank, 2001). To what extent have delegated powers been granted over these financing activities in other countries, and what systems, if any, are in place to scrutinise and control these activities, given that they involve extensive use of public finance in capital market activities?
This international material also identifies changing thinking about the nature and function of sovereign debt management, including broader application of the ALM techniques involved to incorporate a focus on financial reports for government as a whole. Most recently it reveals efforts to bypass remaining constitutional controls over public finance to enable direct access to public funding, especially in times of financial crisis. Admittedly, this information is incomplete, but it does identify aspects of financial management reform developments that have received surprisingly little academic research attention. This material may provide a base for further research to investigate developments in sovereign debt management, the wider application of the techniques involved, and the more recent calls for changes to constitutional arrangements.
