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October 26, 2011

Whole of Government Accounts – What’s the Big Deal, Robin!

Posted by Andy Wynne

In a recent blog post (Whole of Government Accounts, Batman!), Richard Hughes declares that the  publication of what are called Whole of Government Accounts “represents a major milestone in UK fiscal reporting and public sector accounting practice in general”. The article suggests that this is the Olympics of accounting and the UK has just set new world records in the consolidation and accrual events. The UK seems to have “leapfrogged from the bottom to the top of the government accounting class”.

There is, however, no reason for the UK to be self-congratulatory. In my view government accountants should provide useful information on government finances to facilitate the budget process and provide accountability for the use of public resources; this information needs to be produced as efficiently as possible and presented in line with the budget presentation. On both counts the Whole of Government Accounts exercise scores rather badly. What useful additional information is really provided by this consolidation exercise and from the accrual accounting approach itself? Importantly, what are the costs involved of this “whole of government” operation.

The article concedes that the new accounts merely confirm the overall level of the UK government deficit. However, the net liabilities shown in the Whole of Government Accounts are substantially different from the gross public debt reported by statisticians. The net liabilities measure is not that easy to understand, as it includes a host of assets whose valuation is not straightforward, nor market determined, such as government infrastructure. Is it really important to put Stonehenge (an ancient monument dating from the Stone Age) on the national balance sheet? And if so how does that influence fiscal or budgetary policy? On the liability side, civil servant pension liabilities, which make up nearly half the total gross liability of government are included. The main pension scheme is, however, unfunded and so the associated assets are not separately identified – one of the more efficient types of pension scheme with minimal administrative costs. Of course ideally these liabilities will have to be honored, but so will a host of other government entitlement programs. Civil servants will learn in the coming decades whether their pension entitlements really have the same status as public debt – in the UK these entitlements are currently subject to a major dispute with the civil service unions. In many OECD countries these liabilities are presently being cut back. Like other entitlements they are subject to policy change. For example, the pensionable age may be simply extended by law limiting the size of these liabilities considerably.

Also, despite their description, the UK Whole of Government Accounts (WGA) are even now not complete. For example, they do not include the Bank of England, the UK’s central bank, Parliament, and the Supreme Court”, but they also do not include a range of other public, or publically funded institutions, for example, universities and housing associations (social housing). Excluding the central bank, especially one engaged in quantitative easing, is not a trivial exception.

The author admits that the “the WGA balance sheet does not include the government’s single biggest asset, the power to tax” nor the assets and liabilities of the state owned banks. If we want to broaden the concept, other assets are also excluded, for example, the healthy and educated workforce in the UK. A full “sovereign balance sheet” should be balanced and provide both the liabilities and the associated assets.

The article does explain that the Whole of Government Accounts balance sheet includes the values of such assets as the UK’s motorway network and Stonehenge, but does not explain how this information may be useful. I am not aware that even the Greek Government is considering selling off its road network nor the Acropolis (in the centre of Athens) in an effort to pay off its national debt.

The consolidation efforts of other countries also seem somewhat exaggerated: “the UK has lagged behind most countries in the world in the preparation of consolidated end-of-year accounts”, the article states. It would be more honest to acknowledge that not a single government in the world has adopted Cash Basis International Public Sector Accounting Standards in full, mainly due to its core requirement to produce fully consolidated public sector accounts. Many countries rightly do not see the benefit of consolidating state owned enterprises with central government ministries. It is like adding apples and oranges. As the article acknowledges even countries like Australia and New Zealand do not “produce accounts with this degree of comprehensiveness”.

The UK Government may have set new world records in consolidation and accrual accounting, but its achievement in the timing of the event was quite poor. The Whole of Government Accounts were only produced over 15 months after the end of the financial year and are yet to be audited – to score an ‘A’ in a PEFA assessment requires their production within six months. In addition, many governments publish their audited financial statements within nine months of the year-end for example, Burkina Faso, Mauritius, Tanzania, Uganda and South Africa. The audited Whole of Government Accounts are not expected until “later in the year” – perhaps 21 months after the year end.

Finally, as the author admits the production of even these accounts required “10 years of preparation, pilots and dry-run processes” and “a major resource commitment” without explaining why it was “worth the effort”. For most countries in the world many people might think that the provision of decent education and health services were a greater priority. Even in the UK, it is strange that those who are fixated on the size of the Government deficit think that spending more money on government accounting is more important than actually reducing the deficit itself!

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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Comments

WGA is an excellent idea, conceptually and for information purposes. IPSAS also attempts to WGA position and provides good information for the policy managers and academia. Hopefully WGA bugs will be sorted out in times to come, for giving a complete picture of the countries and their resource utilization through accounting feed backs! Amen!

My point is that no government in the world currently produces fully consolidated financial statements (and this is the main reason why not a single government has been able to implement the cash basis IPSAS). In this situation what are the real benefits of such consolidated accounts? What specific information do they provide that is not available more economically by another route?

We cannot just say WGA is great because it provides 'good information' or a 'complete picture'. We have to make a detailed cost benefit analysis for developing countries spending money on employing more accountants (and so less nurses or teachers). Without this clear case, we could be accused of just joining IFAC in promoting jobs for the boys (and a few girls) in the accountancy profession.

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