Accrual Budgeting: What Does it Mean for Fiscal Discipline?
Posted by Mr. Marc Robinson
Is accrual budgeting a good idea? This is an highly controversial question in budgeting circles today. Many budgeting experts agree that accrual accounting for fiscal reporting is a good idea, at least for those countries which can afford the costs of running a more sophisticated accounting system. But on the question of whether the budget itself should be moved onto an accrual basis, there is absolutely no consensus. On one side of the boxing ring, there are those who think that the real benefits of accruals can only be realized by putting the budget on an accrual basis. They believe for example, that unless the full costs of programs and inputs are charged to ministry budgets, decisions about program priorities, the input mix and investment vs. maintenance will always be seriously distorted because under cash budgeting they are always based on the wrong “price signals”. Opponents of accrual budgeting, on the other hand, argue that it is unduly complex, confusing, potentially risky to fiscal discipline. They also argue that the efficiency benefits of accrual budgeting have been greatly exaggerated, and point – for example – to the abandonment by countries like Australia and the UK of the “capital charging” regimes as a recent example of the failure of the much-heralded benefits of accrual budgeting systems to become reality.
In a forthcoming paper which I’ll be presenting at the OECD Public Sector Accrual Symposium in Paris in March, I look at one important, but neglected, aspect of this debate: the question of whether accrual budgeting can serve the needs of good aggregate fiscal policy. Some of the key points which this paper will make are:
· No budgeting system will work to manage fiscal sustainability unless it imposes limits over line ministry capital expenditure. If you don’t limit the amount of capital expenditure, you can’t manage the level of debt. An accrual budgeting system which imposed budget limits only on the expenses incurred by ministries could therefore never work. Accrual budgeting systems differ in how they limit capital expenditure. The best approach is to do what the UK and New Zealand do, which is to give ministries explicit capital expenditure appropriations as well as expenses budgets.
· There is strong case in many countries for formulating fiscal policy with reference to accrual rather than cash fiscal aggregates. Accrual accounting provides a broader debt measure (net financial debt) and a matching deficit concept (net lending) which captures financial assets and liabilities which are highly relevant to fiscal sustainability but are ignored under cash accounting. This is why, for example, the deficit measure used to define the deficit limit under the EU Stability and Growth Pact (SGP) is an accrual measure (net lending). These broader accrual measures will be particularly useful in the coming years when the impact on public finances of acquired “toxic assets” and equity in troubled banks will be of enormous importance.
· However, while accrual budgeting is particularly suited to a fiscal policy which targets accrual aggregates, it is possibly to target these while sticking with a cash budgeting system. Most EU countries do precisely this.
· The most serious potential problem that an accrual budgeting system creates for fiscal discipline arises from its complexity and the fact that under accrual budgeting the Ministry of Finance can no longer use a budgetary ceiling on cash payments as a tool for enforcing the budget. Under accrual budgeting, the cash used by spending ministries become a dependent variable – determined by what they need to execute their accrual budgets. You can’t set limits for both cash and expenses. (Superficially, it might be look as if the UK system does exactly that, but superficial impressions are misleading). In advanced countries, this may not be a problem. However, for many low and even middle income countries, any move to accrual budgeting would run a serious risk of compromising discipline over budget execution.
I plan to return to a few of these points in greater detail on the PFM blog once the paper is released in a few weeks’ time.