Should Grant Robertson be able to bankrupt New Zealand?

Of course not.  And nor should have Michael Cullen, Bill English or Steven Joyce, the other people who have held the office of Minister of Finance this century.

And yet, by law, he can.  Anyone who holds the office of Minister of Finance can.   Without any further involvement in the matter by Parliament.

A basic principle of our form of government has long been that public spending can only occur if there is an appropriation voted by Parliament to authorise such spending.  Without that basic protection, Parliament loses much of its protection over the executive –  and protecting citizens against the executive was a significant part of the rise of democratic systems over government over hundreds of years.

There are some exceptions to that rule (eg  –  and at the sensible end – permanent legislative authorities for judicial salaries), some of which should be a little worrying, but the one I want to focus on here is section 65ZD of the Public Finance Act.

65ZD Minister may give guarantee or indemnity if in public interest

(1) The Minister, on behalf of the Crown, may give, in writing, a guarantee or indemnity to a person, organisation, or government if it appears to the Minister to be necessary or expedient in the public interest to do so.

(2)  The Minister may—

(a) give the guarantee or indemnity on any terms and conditions that the Minister thinks fit; and

(b) in the case of a guarantee, give the guarantee in respect of the performance or non-performance of any duties or obligations by a person, organisation, or government.

(3) If the contingent liability of the Crown under a guarantee or an indemnity given by the Minister under subsection (1) exceeds $10 million, the Minister must, as soon as practicable after giving the guarantee or indemnity, present a statement to the House of Representatives that the guarantee or indemnity has been given.

(4) The statement may contain any details about the guarantee or indemnity that the Minister considers appropriate.

Under this provision, a Minister of Finance can guarantee anything.   He doesn’t need the approval of Cabinet to do so, he doesn’t need the approval of Parliament, there are no specific criteria he is required to take account of (only his own assessment of “the public interest”), there are no limits on how large the guarantee can be, and even the reporting requirements –  added in recent years –  are weak in the extreme (the Minister must tell Parliament, after the event, that a guarantee has been given, but there is no mandated disclosure of the terms of any guarantee, the case for the guarantee, or documents related to the giving of the guarantee).

It is a shockingly broad power.  It isn’t clear that –  to take a deliberately overstated extreme example –  there is anything to stop a New Zealand Minister of Finance guaranteeing, say, the entire public debt of the United States –  or all the liabilities of Lehmans – provided the Minister concluded that, in his sole view, doing so was in the public interest of New Zealand (“I was worried the world financial system might fail, and New Zealanders would have suffered in the backwash”).   There are no effective ex ante checks and balances.  The Prime Minister might be able to sack the Minister of Finance, or the public might toss the governing party out at the next election, but that would small comfort if trillions of dollars of guarantees had been given out in respect of shonky activities.   A corrupt minister – and fortunately we haven’t had much of a problem with them so far –  could vastly enrich favoured people and entities in the process.  We supposedly build institutions around the realities of human fallibility, not an assumption that humans are angels.

As for settling the obligations taken on under a ministerial guarantee –  committing the full faith and credit of the New Zealand government –  there is an explicit statutory provision governing that too

65ZG Payments in respect of guarantees or indemnities
Any money paid by the Crown under a guarantee or indemnity given under section 65ZD and any expenses incurred by the Crown in relation to the guarantee or indemnity may be incurred without further appropriation, and must be paid without further authority, than this section.

Parliament gets no say at this point either (which makes sense –  a guarantee is worthless, and non-credible, if the person giving it doesn’t have the ability to ensure the obligation is honoured.

Perhaps a government could choose to default on its guarantee obligations, and so long as the guarantees were not given as part of any contract under some foreign jurisdiction there might be nothing anyone could do about it.  Defaults do happen, even in advanced countries, and perhaps markets would excuse default on the guarantee given by a corrupt minister for a huge and shonky deal, but it isn’t a situation we should ever risk finding our country in.

I’m not sure how other countries handle this issue, or constrain the ability of the executive to issue guarantees (I looked and couldn’t readily find a suitable reference source or comparative study).  But whatever they do –  and I’d be astonished if, for example, there was such flexibility in US legislation (where they have statutory debt ceilings, and all the perceived constraints around TARP or bailing out Lehmans) –  these provisions of New Zealand legislation seem far too broad, and should be reined in.

I don’t have a particular problem with some guarantee powers, but if they exist they should be tightly constrained.  The amounts the Minister can authorise himself should be capped (perhaps $100 million –  anything more requiring the approval of Cabinet (up to perhaps $10 billion) or of Parliament itself.  And the terms of such guarantees should be disclosed, as should the supporting documentation.

The counter-argument is probably about the ability to act swiftly.  And yet we know from bitter experience that governments can, when necessary (or when it simply suits them) ram legislation through Parliament in a day.   That doesn’t provide much scrutiny, but it is much more than we have at present, and Parliament is ultimately protection, and source of legitimisation of executive actions and commitments.

I’m pretty sure the guarantee sections  of the Public Finance Act aren’t the only way in which unconstrained individuals –  sometimes even unelected ones –  could gut the public finances, with little effective comeback, and no protections for citizens.  The hypothetical one that used to bother me –  and not because of any distrust of particular individuals, but because I had run the financial markets side of the Bank and was conscious of our powers –  was the Reserve Bank, which has almost totally unconstrained powers to enter into financial contracts, and which will be regarded by counterparties as highly creditworthy precisely because it is the central bank (too central to fail).  It trades on the underlying fiscal position of the Crown, and yet the Crown and Parliament have very little effective control over transactions initiated by the Bank.  In principle, a corrupt or seriously incompetent Reserve Bank Governor –  one unelected individual –  could enter highly leveraged large scale derivatives contracts and, if things went wrong leave the New Zealand taxpayer on the hook of tens of billions of dollars of losses.

Why am I writing about this issue now?  Because it is 10 years this week since I first really became conscious of section 65ZD of the Public Finance Act –  10 years since we were working on preparations for the Deposit Guarantee Scheme, in which  –  with Parliament dissolved for the election –  the Minister of Finance, on his sole authority, offered to guarantee hundreds of billions of dollar of financial institution liabilities.    I’ll write more about that specific intervention later in the week, but for now I wanted to shine a light on these statutory powers –  and their frightening extent in the wrong hands.    We need better protections, with less discretion for a single minister.  We can’t simply rely on the integrity and good judgement of those who hold office, in this or any other area.

6 thoughts on “Should Grant Robertson be able to bankrupt New Zealand?

  1. Michael
    The guarantee provided, by Michael Cullen, to South Canterbury Finance was a total debacle on every level (unless you were one of the lucky folk who got rewarded and repaid c/o tax payers).
    What became apparent was that government saw contingent liabilities as a paper problem were postponement = averted.
    I had a meeting with a couple of Nat MPs not long after they became Government and the conversation came around to the topic of SCF and they made it clear that they had zero interest in “ownership” of the liabilities.
    Unfortunately the SCF story has died and its problematic whether anyone in government learnt any lessons.
    Tim

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  2. Thanks Tim. I have a more ambivalent – “there were no very good options – view of the SCF guarantee, which I will elaborate on a bit in a later post. My perspective may well be coloured by the fact that I was among those designing the scheme who argued for the inclusion of SCF, but with the same information today I’m not sure I’d recommend something very different, at least at the initiation of the scheme.

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  3. I will be interested to see your case for a government guarantee for finance companies at the time Michael, when they posed no obvious systemic risk. But the other aspects of concern, as I recall, were the government’s rejection of Treasury’s advice, on the Sunday, to charge a premium for the provision of the guarantee (which should have been risk related) and the Auditor-General’s report on it that turned a blind eye to this crucial aspect and instead castigated Treasury for the subsequent cost to taxpayers. If I recall correctly, Treasury had warned that the cost to taxpayers could be around $1.5 billion, and ended up being less, at a bit over $1 billion.
    As you are no doubt going to write, Cullen never had to account to Parliament for these costly decisions because that burden was passed to his successor – Bill English.
    So I agree, accountability and checks and balances are a real issue.

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  4. Bryce/Michael
    While I believe government should not provide guarantees for financial institutions, a large part of the cost of the SCF fiasco arose because they didn’t manage the liability once it was created.
    It’s one thing to assume a contingent liability, quite another to proactively management it.
    Tim

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  5. I largely agree, and you’ll note that in my earlier comment I referred to the policy recommendations at the point of initiation, rather than to the way the scheme was subsequently run (I had only fairly peripheral involvement in that later stage),

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  6. There is (at least) one foreign spy from the largest dictatorship on the planet in “our” parliament… why would this then be any kind of surprise or news of any sort? Can foreigners vote in “our” elections? Yes, they can. I would suggest that just as (if not more) alarming is the bankrupting of “our” society and the brutal, widespread and daily violence that is going to be the result (or do you have a razor wire fence, bars on your windows and a helipad already?)…

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