MANAGING PUBLIC FINANCES

The Commonwealth’s legal framework for managing public finances is based on many sources, including:

the Constitution
the Financial Management and Accountability Act 1997
the Financial Management and Accountability Regulations 1997
the Financial Management and Accountability Orders 1997 (Finance Minister’s Orders)
agency Chief Executive’s Instructions
other documents.

Constitution

The Australian Constitution provides that money received by the Executive Government forms a single Consolidated Revenue Fund. Money may be withdrawn from this fund and spent only with the authorisation of Parliament via an appropriation. The relevant provisions are sections 81 and 83 of the Constitution.

Section 81

Section 81 states:

All revenues or moneys raised or received by the Executive Government of the Commonwealth shall form one Consolidated Revenue Fund, to be appropriated for the purposes of the Commonwealth in the manner and subject to the charges and liabilities imposed by this Constitution.

All money received by the Commonwealth, whether revenue or loans, and all pecuniary penalties imposed by Commonwealth legislation form part of the Consolidated Revenue Fund.

Fees payable to a Commonwealth statutory corporation for services it renders are not part of the fund if the corporation is empowered to operate its own bank accounts. The corporation can treat the money received as its own, and there is no need for a corresponding amount to be appropriated in favour of the corporation.

Section 83

Section 83 states:

No money shall be drawn from the Treasury of the Commonwealth except under appropriation made by law.

The need to gain parliamentary approval for expenditure is one way in which Parliament retains control over government spending from the public purse. It is also a key element in the Westminster system. Parliament has various ways to appropriate money for expenditure by the Executive Government. These include:

annual Appropriation Acts
standing appropriations
special accounts (see sections 20 and 21 of the Financial Management and Accountability Act)
net appropriation agreements, also known as section 31 agreements (see section 31 of the Financial Management and Accountability Act).

Obviously, the annual Appropriation Acts appropriate large amounts of money for expenditure by the Commonwealth. A constitutionally valid appropriation needs to contain a sufficient statement of the purpose for which expenditure is authorised, although the purpose can be stated in general terms. For ‘departmental items’ the purpose of the appropriation is the ‘departmental expenditure of the entity’. For ‘administered items’, the purpose of the expenditure is expressed in the outcome standards.

Financial Management and Accountability Act

The Financial Management and Accountability Act regulates the control and management of both public money and public property, although here we discuss public money only.

The Act regulates, to some extent, all steps in the gathering and spending of public money. As Acts go, this one is a small volume, with other important aspects of the legislative scheme set out in subordinate instruments, such as regulations and Finance Minister’s Orders.

Before considering any of the rules imposed by the Act, it is important to understand the Act’s concepts of agency, public money and officials.

Agency

Very generally, the Financial Management and Accountability Act applies to agencies that are not legally separate from the Commonwealth. These include departments of state and departments of the Parliament. The term also includes some bodies ‘carved out’ of departments, and some established by legislation. Bodies, other than departments, are covered by the Act in their own right if they are listed as ‘prescribed agencies’ in Schedule 1 to the Financial Management and Accountability Regulations. There are more than 50 prescribed agencies.

For the purposes of the Act, each agency is treated as a separate entity, even though all agencies under the Act are generally part of the Commonwealth for other legal purposes. Each agency must have a chief executive. This is important because the Act imposes duties on this person.

Public money

Public money is probably the central concept for the purposes of the Act, given that one of the Act’s main functions is to regulate the way it is handled. Section 5 of the Act says public money means:

money in the custody or under the control of the Commonwealth
money in the custody or under the control of any person acting for or on behalf of the Commonwealth in respect of the custody or control of the money
money that is held on trust for, or otherwise for the benefit of, a person other than the Commonwealth.

Officials

According to section 5 of the Act, an official is a person who is in an agency or is part of an agency. Obviously, this includes public servants generally.

In some situations, non public servants are deemed officials subject to the Act. The legislative trail works like this. A department of state (or of the Parliament) includes ‘persons who are allocated to the Department (for the purposes of this Act) by regulations made for the purposes of this paragraph’. The Financial Management and Accountability Regulations then provide that a person who performs a ‘financial task’ for a department or prescribed agency is ‘allocated to’ that department or agency. A ‘financial task’ is a task or procedure relating to the commitment, spending, management or control of public money. Merely receiving public money is not a ‘financial task’.

Under these provisions, a person contracted to manage the payroll of an agency could, for example, be an official, subject to the Act. In this case, the contractor may hold financial delegations and authorisations as an official.

Alternatively, non public servants who receive public money and merely pass it on to the Commonwealth are unlikely to be officials.

How public money should be handled

Having explained the central concepts we can move on to how public money should be managed.

The chief executive of every agency under the Financial Management and Accountability Act has a duty to manage the resources of the agency efficiently, effectively and ethically. This requirement is imposed by section 44 of the Act.

Aspects of properly managing public money include receipt, custody and expenditure.

Receipt

An official who receives public money must pay it into an official bank account not later than the next banking day. These requirements are set out in sections 10 and 11 of the Act and order 3.1 of the Finance Minister’s Orders.

Custody

Once public money is received, its custody is also regulated by legislation. All agencies under the Act now operate their own bank accounts. They do this under delegations of the Finance Minister’s banking powers under the Act. Operation of these accounts must be in accordance with the ‘banking core protocols’.

These protocols are included in the Finance Minister’s banking delegations (see www.finance.gov.au for the delegations and Agency Banking Framework—Guidance Manual, which explains how agency banking works).

Section 12 of the Act prohibits a minister or an official from entering into an agreement or arrangement for the receipt or custody of public money by an outsider unless the Finance Minister has first given written authority for the arrangement or the arrangement is expressly authorised by the Financial Management and Accountability Act or another Act.

Expenditure

The Act also regulates expenditure. We have already noted the requirement for all Commonwealth spending to be authorised by an appropriation. However, there is much more to this than getting the appropriation.

An official cannot withdraw money from an official account except as authorised by the Finance Minister’s Orders (section 13 of the Act). An official may not make a payment of public money without a drawing right (section 26 of the Act).

The Financial Management and Accountability Regulations contain other important aspects of the public finance framework. An official in an agency under the Act must not enter into a contract, agreement or arrangement under which public money may become payable unless a proposal to spend public money for the proposed contract, agreement or arrangement has been approved under regulation 9 and, if necessary, in accordance with regulation 10.

Before discussing regulation 10, which relates to spending proposals not covered by a current or proposed appropriation, we will look at regulation 9, the general approval requirement.

Regulation 9

Regulation 9 states:

(1) An approver must not approve a proposal to spend public money (including a notional payment within the meaning of section 6 of the Act) unless the approver is satisfied, after making such inquiries as are reasonable, that the proposed expenditure:

(a) is in accordance with the policies of the Commonwealth; and

(b) will make efficient and effective use of the public money; and

(c) if the proposal is one to spend special public money, is consistent with the terms under which the money is held by the Commonwealth.

For regulation 9, an approver is a minister, a chief executive or a person authorised by or under an act to perform a function of approving proposals to spend public money (see regulations 3 and 11).

Clearly, not all proposals to spend public money can be approved by a minister, a chief executive or a person expressly empowered to do so by an Act.

A chief executive may delegate his or her power to approve proposals to spend public money under the express power of delegation in the Regulations.

Many agencies have extensive financial delegations based on these provisions.

Regulation 10

Regulation 10 applies when expenditure under a spending proposal is not authorised by the provisions of an existing law or a Bill before Parliament. In these situations, the Finance Minister, or the Finance Minister’s delegate, must give written authorisation before the proposal can be approved.

Even with regulation 10, agencies should be very cautious about committing to expenditure if they are unable to identify an appropriation that will be available to meet the expenditure when it falls due for payment.

Special accounts and net appropriation agreements

Special accounts and net appropriation agreements are mechanisms that allow agencies to retain money they collect. Such revenue could derive from fees for services provided, or perhaps taxes or levies imposed by legislation that the agency administers.

Special accounts

Special accounts are a way to assign specific revenue to specific items of expenditure. The legislative basis for these is in sections 20 and 21 of the Financial Management and Accountability Act.

Essentially, a special account allows a particular amount of money to be earmarked, or ‘hypothecated’, for a particular purpose.

This can be useful if it is necessary to have a formal mechanism to demonstrate that money from a particular source is only to be used for a particular purpose. For example, a special account could be used to set aside all money collected by a levy on a particular industry, and ensure that that money was spent only for the purposes of that industry.

In spite of its name, a special account is not, for example, a particular bank account that is separate from the Consolidated Revenue Fund. It is really no more than an accounting component of the Fund. There is no legal requirement that a particular sum of money be held in a particular bank account. So really, a special account is a theoretical ‘account’; a way to keep a running tally of certain amounts collected, certain amounts spent, and any residue already collected but not yet spent.

Special accounts can be established by an Act or a written determination made by the Finance Minister. A written determination establishing a special account is subject to disallowance by either House of Parliament. The Act or written determination establishing the account determines which money goes into or out of the account.

The Act has standing appropriations that authorise the expenditure of amounts credited to the special account for the purposes of the account.

Net appropriation agreements (section 31 agreements)

Agencies can also earmark revenue they collect by entering into a net appropriation agreement. The legislative basis for this arrangement is in section 31 of the Financial Management and Accountability Act.

While these are like special accounts in that receipts covered by the agreement are effectively appropriated for use by the agency, they do not operate in the same manner.

Essentially, a net appropriation agreement allows an agency’s appropriations in annual Appropriation Act to be increased by amounts equal to receipts covered by the agreement. The amounts covered by such agreements can only be spent on the purposes of the relevant appropriations in the Appropriation Act.

Act of grace payments and waiver of debts

The Financial Management and Accountability Act also covers act of grace payments and waiver of debts in certain circumstances.

Section 33 confers on the Finance Minister a broad power to make act of grace payments. These can be made in cases where it is proper for the Commonwealth to make the payment even though the payment would not otherwise be authorised by law or required to meet a legal liability. If a proposed payment exceeds $100 000, the Finance Minister must consider a report of an Advisory Committee.

Section 34 authorises the Finance Minister to waive debt owing to the Commonwealth.

More information

For more information on managing public finances, contact our public spending and finance leaders:

Guy Aitken (government finances)
T 02 6253 7084 | F 02 6253 7304

Kathryn Graham (government finances)
T 02 6253 7167 | F 02 6253 7304

Paul Lang (grants and funding agreements)
T 03 9242 1322 | F 03 9242 1481

Leah West (grants and funding agreements)
T 02 6253 7006 | F 02 6253 7316