The COVID-19 pandemic means government spending has increased immensely, with the IMF calculating it to be a staggering US$9 trillion. For ACCA, the World Bank and IFAC, the concern is that public sector fiscal commitment and interventions are not being captured accurately by governments due to the way they account for this.
In a new report published today, Sustainable public finances through Covid-19, the three organisations are calling for governments to use public sector balance sheets to properly manage their finances through the pandemic, paying attention to their public sector net worth. For some, this means a change in accounting methods from cash to accrual accounting.
Alex Metcalfe, author of the report and head of public sector policy at ACCA says: ‘This global pandemic crisis could be a catalyst for more governments to adopt this approach, which can improve decision-making, act as the benchmark for new fiscal targets, and support governments to rebuild economies for a more inclusive and greener future.’
By implementing a balance sheet approach, governments will benefit from:
- Increased clarity on the true position of the public finances, with an understanding of the fiscal room available for further government action;
- Improved value for money and financially sustainable decision-making; and
- Enhanced public sector resilience and better adoption of key financial metrics to drive performance management.
The report asserts that governments need to avoid poor-value privatisations, which provide immediate cash but reduce public sector net worth. Governments also can minimise reliance on tax increases or austerity by taking a balance sheet approach to foster sustainable public finances.
Ed Olowo-Okere, Director, Governance Global Practice, World Bank Group says: ‘The pandemic requires that governments strike a balance between the standard fiscal discipline and control on the one hand, and speed and flexibility in public financial management on the other. To build back better, Ministries of Finance need a variety of tools for better management of public money to sustain the wellbeing of citizens.’
Alta Prinsloo, IFAC Executive Director, adds: ‘This is about global best practice. No one government can go it alone – the global nature of the pandemic makes this apparent. Part of this drive toward global best practice is to ensure that, as a profession, we discuss with colleagues and policymakers the future of financial reporting in the public sector. Professional accountants need to be giving non-finance expert decision makers a clear and trusted view of the sector’s unfolding financial position.’
Fazeela Gopalani, Head of ACCA Middle East adds: ‘The severity of the current crisis means poor quality accounting data in the public sector is no longer an option. Now is the time to reset current economic frameworks and consider what fiscal rules will guide government decision-making during the recovery phase. The privatisation of any public assets and services needs to be carefully considered so that they provide value for money and improve government financial sustainability. And we also need to invest in skills and training as they are an important part of the economic multiplier.’
Other recommendations for governments include:
· the need to either reference or use full-accrual International Public Sector Accounting Standards (IPSAS), the only globally accepted accounting standards for the public sector, in the production of their general purpose financial reports.
· directing independent fiscal policy institutions to begin fiscal sustainability reporting or to increase its frequency. Central finance departments should also be required to respond publicly to these reports in a timely manner.
· provide Supreme Audit Institutions with the independence and necessary resources to conduct performance audits, which may identify cases where public money was not used effectively, efficiently or economically in combatting the COVID-19 crisis.
And for finance professionals, ACCA, the World Bank and IFAC recommends:
· Consider how any redirection of resource to combat COVID-19 impacts broader metrics of societal wellbeing and sustainability.
· Conduct frequent fiscal stress testing, which forecasts the impact of negative scenarios on public sector balance sheets. This could include the impacts of a second wave of a coronavirus or an extended economic downturn.
· Produce accessible summary material, and appropriate narrative and notes within the financial statements. The accompanying narrative in financial statements helps users make sense of the figures and should not be too biased or avoid critical issues.
Sustainable public finances through Covid-19 includes case studies that analyse the impact of fiscal policies introduced as a result of COVID-19 on the public sector balance sheets in 10 countries: Brazil, Canada, Indonesia, Italy, Japan, New Zealand, South Africa, United Kingdom, and the United States. These show that New Zealand is the most fiscally sound country out of those analysed in the report, with a net worth of 53% of GDP in 2019, compared to the UK government’s net worth of negative 49% of GDP in 2019.
This report builds on an ACCA and IFAC report from February 2020 Is Cash Still King? which offers lessons learned from jurisdictions that have implemented accruals, with the intention that the current global transition to accruals creates real value and is more than a ‘compliance exercise’.