The UK has an enviable record of government financial reporting. Whole of Government Accounts (WGA) conform to independent international standards, which means that we don’t just report cash in and payments out every year but also the longer-term assets and liabilities. This ensures that we have a truer accruals accounting picture of our national finances and net worth.
If Greece adopted the same accounting standards as Britain, it would report government debt at circa 50% of GDP rather than 180% – lower than the UK’s position. Their quoted figures under EU convention instead give the nominal purchase value. It’s perverse that while many developing nations are following countries such as the UK, Canada, Australia and New Zealand in adopting balance sheets, major EU economies such as Germany account for their public sector on a cash basis that does not match transactions to year.
Commonly, finance ministries are economics-focused and not accounting-focused. They are happy to work on the basis of national statistics rather than proper accounts with sound valuations showing true and fair value according to independent standards. You couldn’t run John Lewis or British Aerospace on a statistical basis, and you can’t properly run a country’s public finances on just national statistics either.
But our system is far from perfect and in need of further reform. We have exceptionally strong accounts to report what we have done in previous years, but we do not use this high quality information sufficiently to inform and plan government’s future finances. Last year, for example, NHS staff pension liabilities – to be met by future taxpayers –rose by 20% on our nation’s balance sheet. In future years this will have a material impact on NHS budgets greater than the headline £8bn cash gap.
Interestingly, state pension liabilities should properly be included in WGA too but are excluded. Greater transparency about the long-term implications of present policy choices, such as the pensions “triple lock”, would mean a better-informed debate about our long-term finances. The weakness we have at the moment is that we describe the past in accounting terms, but the future in terms of policy direction and likely fiscal impact, underpinned by statistics and not accounts-grade information.
If there is no policy change under review, we ignore the problem rather than use WGA to guide the material organisational issues that require interventions – as would a company or a local authority. Government is unique is that makes laws and policy affecting everyone else, but this can prevent it from acting like an ordinary organisation to manage its future finances based on the accounts. Services feeling the pinch are often sitting on considerable balance sheets without restructuring their finances.
A barrier to greater financial literacy is that centralised financial management goes too far. Worryingly, central government departments and managers are not incentivised to manage their budgets well. Disempowered budget holders in these narrow confines feel they need more money to increase outputs, or that savings mean they must reduce outputs rather than improve productivity over the medium term. When the centre mops up departments’ under-spends it is setting the culture that it manages all budgets, which encourages old-fashioned year-end “spend ups” of the worst sort.
In contrast, outside of the Whitehall system, many budget holders can plan to underspend and reserve sums to support future revenue and capital plans. And with freedom comes accountability, with clearer internal sanctions against over-spending.
The present state of play also makes it hard for new recruits or non-executive directors to harness their enthusiasm to move departments forward. If they are used to pacier decisions and more direct financial accountability, they rightly expect to pull the levers from their resource base to achieve transformation. Such an environment means accountants are not only stewards, but also business partners in achieving change, innovating, and overcoming risks.
Public financial management is often more sophisticated than the private sector. We evaluate decisions on impact that are broader than straight financial return, and taxpayers demand the strongest possible transparency, ethics and governance. But there is no excuse for government to managerially fly in the face of best practice outside Whitehall, in the corporate sector and other parts of the public sector. Investing in specialist skills – whether in accountancy, risk management, procurement, internal audit, programme management or external public audit through NAO – is invaluable.
Most of all, we must invest in and empower organisational leaders to manage public finances rather than the experts. Far beyond the monthly budget tab/monitor, we should empower and build organisational capability to manage longer-term assets and liabilities through effective medium term planning.
Culture eats strategy for breakfast and, despite many fine words, in reality we’re seeing little real change in rigid micro-management by the centre that dates back to the days of Gladstone.