Chapter 1: Discussion paper on Reforming Victoria's public finance legislation

1. Victoria’s current public finance system

This chapter describes the key participants in Victoria’s public finance system and its current legislative, policy and management frameworks. It also provides a high-level overview of the history of financial reform in Victoria.

1.1 Key participants in the public finance system

Any system of public finance features a range of participants with specific roles, responsibilities and relationships. An overview of these roles in Victoria is provided below.

Parliament

Parliament is central to Victoria’s system of government, which is based on the Westminster system.
In this system, people elect members of parliament to represent them and the government is formed by the political party or parties who form a majority in the lower House of parliament, the Assembly. The government is accountable, through its ministers, to parliament.

Parliament acts as a primary forum for public debate about matters of public importance generally, and about the programs and priorities of the government. In addition, parliament makes rules for financial governance and administration, and authorises the appropriation of funds to the executive.

Parliament puts the government’s performance on the public record. The Victorian Parliament generally applies this scrutiny through the Public Accounts and Estimates Committee (PAEC) and the Auditor-General.

Public Accounts and Estimates Committee

The PAEC is a joint House investigatory committee of the Victorian Parliament. The committee is responsible for scrutinising both the public accounts and the budget estimates. The committee has a range of functions. These include inquiring into, considering and reporting to parliament on matters of public administration or public sector finances, the annual estimates or receipts and payments, and other budget papers.

Auditor-General

The principal role of the Auditor-General is to provide assurance to parliament on the accountability and performance of the government. As an independent officer of the Victorian Parliament, established under Victoria’s Constitution Act, the Auditor-General is responsible for the audit of around 650 public sector organisations. Audit findings and recommendations address, among other things:

• the degree to which value-for-money has been achieved
• the effectiveness of organisations in meeting government objectives
• the fair presentation of annual financial statements.

Executive government

The Victorian Constitution states that the role of executive government is ‘to govern for and on behalf of the people of Victoria’. In the context of this review, this role includes achieving outcomes through the delivery of goods and services, and ensuring that all parts of the public sector follow sound governance and financial management principles. The relationship of executive government and parliament is embodied in rules relating to taxation, appropriation, reporting and broader accountability.

Public finance ministers

The Treasurer and the Minister for Finance have specific roles in relation to the management of the state’s finances. Together, they are responsible for:

• the preparation and delivery of the annual state Budget
• revenue collection, borrowing, investment and financial arrangements to hedge, protect or manage the state’s financial interests
• promoting economic growth across the State of Victoria
• providing investment and fund management services to the state and its statutory authorities
• overseeing the net assets, total revenues and expenses of consolidated reporting entities
• the state’s financial reporting and accountability framework
• administering and coordinating certain Victorian Government land and property
• purchasing and procurement arrangements for the Victorian Government
• overseeing policy in relation to statutory insurance and public sector superannuation.

Departments

Department is the term used in Victoria to describe the administrative units allocated to the operations of government. Departments differ in the type of functions and activities they undertake. For example, some departments deliver programs and services, others are more administrative in nature, while some perform a central coordinating role across the whole of government.

Entities

For the purpose of this paper, entity refers to all units of the state government in Victoria that are not departments. The consistency of definitions for entities across Victorian legislation is a key issue discussed later in this paper.

1.2 Legislative framework

Victoria’s public finances are founded on a number of key pieces of legislation – the Constitution Act, appropriation Acts, the Public Administration Act, the Administrative Arrangements Act, the Financial Management Act and the Audit Act 1994. Each of these Acts, in the context of financial management, is detailed below.

Constitution Act 1975

The Constitution Act establishes democratic government in Victoria and defines many of the roles and responsibilities of parliament and executive government. It sets out the broad powers for government to use public money and collect revenue. Parliament appropriates this revenue for specific purposes, but only on the initiative of executive government (see annual appropriation Acts below).

The Constitution Act also sets out a requirement for ‘warrants’. A warrant is a written authority to spend specified sums during the financial year from the consolidated fund, the government’s bank account. A warrant must be signed by the Treasurer, the Auditor-General and the Governor. Conceptually, a warrant is similar to an approval to draw cheques on a bank account.

Appropriation Acts

The annual appropriation Acts are one of the instruments through which the Parliament authorises executive government to disburse public money. They provide the legal authority for the government to make payments from the consolidated fund.

In Victoria, all appropriation Bills must originate in the Legislative Assembly (lower House) and annual appropriation Bills may become law without the support of the Legislative Council (upper House).

The Financial Management Act requires the annual appropriation Bills to be accompanied and supported by supplementary information in the budget papers.

In addition to the authority provided under annual appropriation Acts, parliament authorises various special (standing) appropriations. Special appropriations represent a standing authority and do not lapse each year as annual appropriations do. They may be established in any legislation and remain in force until the legislation is amended or repealed by parliament. Special appropriations are generally used for ongoing payments which need to be made independently of the government’s annual resource allocation process, such as the salaries of the judiciary and the costs of parliament. They can also be used for one-off payments.

Public Administration Act 2004

The Public Administration Act provides a framework for good governance in the Victorian public sector and in public administration generally in Victoria. The Public Administration Act defines the organisations that comprise the Victorian public sector: public service bodies, special bodies and public entities. The Act also dictates the responsibilities of department and administrative heads, duties of public entities and accountability requirements.

Administrative Arrangements Act 1983

The Administrative Arrangements Act provides for the transfer of the administration of an Act or of a function of government between ministers and departments. This is called an administrative or a machinery of government change.

Financial Management Act 1994

The Financial Management Act is the primary focus of this review. It governs the use of public money, and the accountability processes and subordinate legislation with which government is obliged to comply. Specifically, it:

• prescribes the collection, expenditure and management of public money and other public resources (including public and other property)
• sets out the subsequent accounting and reporting for this public money and resources
• establishes and defines the scope of the consolidated fund and the trust fund
• establishes financial responsibility and budget management provisions associated with these functions.

The Financial Management Act authorises the Governor in Council (through regulation) or the Minister for Finance (through ministerial directions) to set and administer detailed rules for public financial management.

Audit Act 1994

The Audit Act prescribes the auditing and reporting powers of the Auditor-General. The Act empowers the Auditor-General to audit the state’s consolidated financial report, and the financial reports of individual departments and other public sector organisations. The Act also authorises the Auditor-General to conduct performance audits and review the government’s estimated financial statements published in the budget papers.

1.3 Management frameworks

In addition to the legislative framework set out above, there are a number of management frameworks that operate in Victoria.

Integrated Management Cycle

The Victorian Government follows an annual cycle, the Integrated Management Cycle (IMC), which aligns its resource management, planning, decision making, monitoring and reporting processes. In essence the IMC comprises four elements which, taken together, form a continuous cycle of planning, resource allocation, service delivery and accountability.

• Planning processes articulate the government’s desired outcomes and strategic priorities, and provide the foundation for planning by departments and entities.
• Resource allocation matches resources to the goods and services that will contribute to the government’s desired outcomes. These should be consistent with the strategic priorities that were formulated and agreed during the planning phase. At the whole-of-government level, this phase mainly occurs through the annual budget process.
• Service delivery by departments delivers agreed goods and services, to agreed performance standards, consistent with decisions made in the planning and resource allocation phases.
• Accountability processes evaluate, review and report on performance at the whole-of-government, department and entity level. They include both internal and external evaluation and reporting processes.

Output Management Framework

Victoria’s public finance system is based on an ‘output’ management framework. Outputs are goods or services produced or delivered by, or on behalf of, a department or entity. Under this model, resource allocation decisions about the nature and mix of outputs should be based on each output’s expected contribution to government outcomes.

The delivery of outputs is a key indicator of Victorian Government performance. Output performance measures (stated in terms of quality, quantity, timeliness and cost) describe each department’s agreed service delivery performance. Performance against these measures is reported annually in the budget papers and in departmental annual reports. Reporting results against performance measures demonstrates the extent to which the goods and services paid for by government have been delivered.

Asset Management Framework

The Asset Management Framework aims to ensure Victoria’s asset base best supports the government’s service delivery requirements. The framework includes a series of strategies and planning tools that assist government to manage the state’s assets over the longer term. The framework allows government to agree with departments on the services they need to deliver in the medium-to-long term. They then develop strategies to make sure the necessary assets are available to support the delivery of these services.

Financial Management Compliance Framework

The Financial Management Compliance Framework is a mechanism to satisfy the government that departments and entities have fulfilled their financial management obligations under the Financial Management Act, and ministerial directions. The framework is based on best practice in financial management such as the requirement for each entity to establish an audit committee and an internal audit function. The central assurance mechanism is an annual certification process. Entities must provide their relevant minister with letters certifying that they are complying with the standing directions, and departments provide to the Minister for Finance corresponding portfolio summaries.

Victorian Government Risk Management Framework

The Victorian Government Risk Management Framework supports good public sector risk management by providing information on governance policies, accountabilities and role and responsibilities for all those involved in risk management. The framework also provides for a minimum standard of risk management for public sector entities. This requirement is built into annual corporate planning and reporting processes: each accountable officer must attest in their annual report that the standards have been met. It also promotes awareness of risk management not only for a specific department or entity, but at inter-agency and whole-of-government levels.

Other rules and guidance material

The government also issues rules and various guidance materials including budget and financial management guidances, Treasury management guidelines and investment lifecycle guidelines.

As required by the Financial Management Act, financial reports are prepared using the latest, relevant accounting standards issued by the Australian Accounting Standards Board.

1.4 History of financial reform in Victoria

The evolution of Victoria’s financial management practices should be considered in the broader context of wide-ranging reforms in public management, the most significant taking place over the last thirty years.

The 1980s and 1990s was a period of reflection about the effectiveness of the public service in carrying out its core functions. Reforms of this period aimed to make the public service more flexible and efficient, and more responsive to government direction.

Modern public service became characterised by a stronger focus on objectives, with performance being assessed on the basis of results. Private sector management and employment practices were commonly adopted in the public sector; for example, the concept of contestability was introduced.

These broader reforms gave rise to new forms of financial management and planning. In Victoria, program budgeting was introduced in the 1980s. However, program budgeting continued to focus on inputs (such as staffing requirements) rather than outputs.

The Financial Management Act and Audit Act were introduced in 1994, following a Victorian Commission of Audit review of Victoria’s public sector finances. This review recommended fundamental changes to governance structures, and transformed public sector accounting and accountability techniques. Consequential changes included the introduction of three-year forward estimates, and budget flexibility measures (including global appropriations), and corresponding accountability measures, such as more timely reporting, and auditing of departments and entities.

Reform continued throughout the 1990s, aiming to more closely align departmental activities and services with government priorities, and to improve value for money. This resulted in amendments to the Financial Management Act in 1998, including:

• a shift in focus from inputs to output budgeting and reporting for performance
• a shift in focus from cash-based accounting to a mix of cash and accrual accounting
• allocation of funds based on the full cost of services agreed to be delivered.

These reforms provided a framework for longer term thinking and planning about resource allocation issues. Although the framework maintained an annual financial focus, it anticipated that longer term considerations such as the role of assets in service delivery, modes of service delivery and desired outcomes would evolve over time. Unlike some other jurisdictions, the Victorian model did not emphasise outcomes. In the first instance, the framework concentrated on outputs. This was part of a deliberate incremental strategy to emphasise outcomes once the output management framework was in place.

Further amendments to the Financial Management Act in 2000 were founded on a platform of sound economic management, transparency and accountability. The Financial Management (Financial Responsibility) Act 2000 introduced principles of sound financial management and required the government to publish longer term financial policies and objectives. The amendments also enhanced accountability by incorporating a detailed and consistent whole-of-government reporting framework.

While the legislation does not require the specification of outcomes, in 2001 the Victorian Government released Growing Victoria Together, its ten-year vision for Victoria. Growing Victoria Together sets out long-term goals (or outcomes), including performance measures, for social, environmental and economic progress. Progress against these performance measures is reported annually in the Growing Victoria Together Progress Report published in the budget papers. Growing Victoria Together was revised in 2005.

View other sections of this Discussion Paper:

Foreword
Introduction
1. Victoria’s current public finance system
2. The case for change
3. Possible directions for reform
4. Next steps
Appendix A: Extract from Public Administration Act 2004, Part 1, s. 5
Appendix B: Extract from Public Administration Act 2004, Part 5, s. 81
List of shortened forms
Glossary of terms