Billion dollar Covid spend forces Treasury accounting change

Finance Minister Grant Robertson arriving for the Financial Statements briefing at the Treasury in Wellington. Photo / Mark Mitchell

The pressures of the Government's multibillion-dollar wave of Covid-19 economic support have prompted a change in the way Treasury calculates some of its key indicators.

Treasury is responsible for running the numbers on two key indicators of government spending, the cyclically adjusted balance (CAB) and the structural balance.

During an economic crisis, these two indicators are designed to help economists step back and get a better view of the state of the government's books by factoring in where the economy is in the economic cycle, and stripping out one-off expenses designed to prop-up the economy, and looking only at the sustainability of existing, structural spending.

But the sheer scale of Covid spending put this under pressure, particularly the $62.1 billion (later topped up to $69.1b) worth of initiatives tagged to the Covid Response and Recovery Fund (CRRF). Some of that support was one-off, but other spending was baked into existing, day-to-day spending, which made it difficult to disentangle Covid money from ordinary spending.

The problem got so bad, that Treasury stopped calculating the cyclically adjusted balance while it worked on a new methodology, which was only published last year.

The most politically significant changes are to the structural balance, which will mean that only the largest "one-off" expenses get included in the structural balance.

Treasury has proposed three changes.

Under the proposal, to be included in the structural balance, spending must have a "significant" impact on the government's operating balance (OBEGAL) of at least 0.5 per cent of GDP across affected years.

At the moment, this would exclude anything smaller than $1.7 billion. The spending must be "individually identifiable" in the Government's accounts, and they must clearly be one-off expenses.

A Treasury paper said the old methodology relied on "ad hoc judgements when identifying one-off items".

"This leads to inconsistent judgements over time."

The paper said that this had come to a head with the Government's Covid fund.

At the onset of the pandemic, the initial Covid support package and CRRF spending had been excluded from the structural balance.

However, the kind of spending coming out of the Covid fund changed this.

A lot of the Covid fund was spent on already-existing lines of government spending, meaning it was difficult to work out what was one-off economic stimulus, and what was a longer-term increase to a line of spending.

"... because a large quantity of CRRF spending was allocated to existing appropriations, we are no longer able to specifically identify it in the Crown accounts," the Treasury paper said.

"Further, the treatment of the CRRF at the HYEFU 2020 was inconsistent with some historic events that also had a one-off impact, such as accounting treatment revaluations,"

Spending on the Covid fund has caused headaches across Government. The Auditor–General, the Parliamentary spending watchdog, looked into the Government's Covid-19 spending, and - for a number of reasons - found it was "unable to readily or conclusively determine how much expenditure the Government has decided to approve for the Covid-19 response so far".

This was mainly due to it being difficult to disentangle Covid-related spending from ordinary spending that just happened to rise or fall in response to Covid.

The Auditor-General recommended the Government provide "regular, easy-to-access report summarising how much of the Covid-19 funding has been allocated, how much of the available funding remains unallocated, the actual amount of spending to date on main initiatives and, ultimately, what has been achieved".

Another change from Treasury is to look at the was sole parent support (SPS) benefits rise and fall with the economic cycle.

Already, Treasury forecasts and considers how much the government will spend on jobseeker benefits as the economy grows or shrinks and unemployment rises and falls.

Treasury now recognises that the number of people claiming sole parent support - designed to help struggling single parents as they look for work - rises and falls with the economic cycle.

Treasury's paper on the changes said "SPS numbers have historically shown some cyclical behaviour because sole parents have some attachment to the labour market:

"Removing these cyclical effects from the CAB and structural balance provides a more accurate picture of the government's underlying fiscal performance."