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July 22, 2011

Whole of Government Accounts, Batman!

By Richard Hughes

After 10 years of preparation, pilots and dry-run processes, last week the UK Treasury finally published the first set of Whole of Government Accounts (WGA) for financial year 2009-10. While a long-time in the making, the publication of Britain’s first ever consolidated government income statement and balance sheet represents a major milestone in UK fiscal reporting and public sector accounting practice in general.

From the Bottom to the Top of the Accounting Class

While the UK Office of National Statistics (ONS) has published consolidated fiscal statistics for the whole public sector for decades, the UK has lagged behind most countries in the world in the preparation of consolidated end-of-year accounts. Indeed, up until last week, the UK did not even produce consolidated, audited accounts for central government. The only audited government financial statements that existed were for individual government departments, local governments, and other public entities.

With the publication of WGA, the UK has leapfrogged from the bottom to the top of the government accounting class in four respects:

First, WGA have some of the broadest coverage of any government financial statements in the world.  WGA consolidate over 1,500 public sector entities including central government departments, non-departmental public bodies, independent government agencies, local and regional governments, hospitals, and public corporations. Even the “accounting swots” in the Australian and New Zealand treasuries don’t produce accounts with this degree of comprehensiveness.

Second, WGA are prepared using fully accrual-based International Financial Reporting Standards (IFRS) adapted for the public sector by the UK authorities drawing on International Public Sector Accounting Standards (IPSAS). By contrast, the public sector fiscal statistics produced by the ONS have been prepared according to the National Accounts standard which combines both cash and accrual concepts.

Third, WGA are the first to combine all of the government’s fixed and financial assets and liabilities into a full “sovereign balance sheet” for the UK. While past ONS data on public sector net debt has incorporated the value of liquid financial assets, the WGA balance sheet also reflects the current value of physical assets from the motorway network to the 2012 Olympic Stadium to Stonehenge.

Fourth, WGA include many of the more “exotic” assets and liabilities that have so far been excluded from public accounts in the UK and elsewhere. These include the present value of government liabilities arising from civil service pensions, public private partnerships (known as the Private Finance Initiative in the UK), provisions (including for the future costs of decommission nuclear reactors),  and contingent liabilities (including those related to recent government interventions in the financial sector.)

So while the annual production of WGA requires a major resource commitment from the UK’s public accounting community, most would say that it is worth the effort.

A Promising Future?

As for what they reveal about the current state of the UK public finances, the Statement of Revenue and Expenditure contains few surprises. The total net deficit of £164.1bn (11.7 percent of GDP) for 2009-10 on and IFRS basis was almost identical to the National Accounts estimate of public sector net borrowing for the same year.

However, the UK’s first public sector balance sheet revealed some new and stark facts about the government’s overall financial position.  Specifically it showed that the UK public sector liabilities exceeded its assets by a ratio of 2:1 leaving the government with a negative net worth of around £1.2 trillion (84.5 percent of GDP) at the end of 2009-10. Of the UK government’s £2.4 trillion in liabilities, nearly half (£1.1 trillion) was the net present value of the government’s pension liabilities to current and retired public servants. This exceeded the government’s £804 billion in debt and dwarfed the few tens of billions of liabilities arising from PPP contracts. UK Treasury officials hasten to point out that the WGA balance sheet does not include the government single biggest asset, the power to tax. But this may offer less comfort to British taxpayers and public servants.  

Could Do Better

While WGA represent an impressive achievement, accountants are hard people to please, and public sector finance boffins have pointed to a number of “areas for development” for future iterations of WGA.

First, the document published last week was merely an unaudited summary of the WGA for 2009-10. The full, detailed, audited set of accounts will not be published until later in the year.

Second, the institutional coverage of WGA still falls short of the whole public sector. Some entities that are classified to the public sector by the ONS like the Bank of England, Parliament, the Supreme Court, and (depending on the month) Network Rail are excluded from WGA on constitutional grounds.

Third, while the government’s equity stake in or guarantees to the UK’s fragile banking sector are included in the WGA balance sheet, the banks’ own revenue, expenditure, assets and liabilities are not consolidated even where they are government owned or controlled. The reason given is that doing would “distort the accounts and make it difficult to determine trends,” but no explanation is given for what the summary accounts could not be presented on both a “including banks” and “excluding banks” basis.

But, all thing considered, this first set of Whole of Government Accounts embodies a great leap forward for fiscal transparency in the UK and a new standard to which the public finance profession can repair in these challenging times.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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