DEVOLVED FUNDING - POLITICIANS DON'T FIND THE WAY

The Scottish independence saga has provoked urgency to the English devolution question. Centralised government breakdown calls for decentralisation. Politicians know what they want to achieve but are not good at doing it according to published evidence of costly implementation blunders (King and Crewe). There is “dissatisfaction with politicians, political parties and UK politics”.  

Local funding is high on the list of blundering failure over decades of wasted inquiry, change, implementation and operational failure. For decentralisation to work new insights and ways of working must be found if the public finances are not to finally drain away along with political competence.

At present all local spending and ‘local’ tax is part of the totality of public finance  and recorded as such. This requires central management from the top. Yet is only very recently that consolidated accounting has been introduced WGAs (Whole of Government Accounts). These are defective for the same reason that the European Accounts have failed their audit for 19 years to date and are so late as to be unhelpful to the OBR (Office of Budget Responsibility). For example: funds voted are left to be managed by recipients without feedback to the centre which control requires. Controlled decentralisation does not however require detailed centralised control of local decisions and activities.

It is said that local people must contribute to their local area with local’ taxes. They already do with council tax, business rates, VAT and income tax. It is said that people ought to be able to identify ‘local’ council tax payment with local needs and spending but mixed revenue flows prevent this allowing the unaccountable ‘loony left’ to ignite a general  explosion in spending over recent years. The corresponding explosion in council tax around 2003, when raised with councillors, produced the ‘nothing to do with me guv’ syndrome. Over-riding central reaction had to be the council tax ‘cap’ which in its various forms continues but now accompanied by reducing central funding.

It is said that under those conditions there is local accountability. That is self-evidently false and efforts in the future to go down that route with local income taxes, sales taxes and so on will decentralise bureaucracy at great operating cost without achieving anything like the desired result. The present hybrid system is a perfect demonstration of a compromise too far. In reality the local unit is accountable for its performance, with public funds, not its tax calculation.

The main method flaw causing the muddle is “equalisation”. This is redistribution as a secondary process to cross-subsidise regions according to formulaic grant calculations of needs and differences not locally determined nor catered for in the primary taxation system. There is the suggestion, by the LGA (Local Government Authority) who badly want the present arrangements changed, that this should be replaced by another, supposedly ‘independent’ central body, again detached from local needs. That would change nothing and would still not allow for genuine inter-area transfers which are a necessary part of any sovereign state arrangements. It incidentally also seems from information received that the LGA is also still wedded to ‘no representation without taxation’.

There is only one way that wished-for local autonomy can be provided so as to go ‘off balance sheet’ or privatise - call it what you will. A constituted body run by elected representatives must raise its own revenue and be allowed to borrow only on the guarantee of its own people. There are ‘off the shelf’ pricing/subscription methods and existing ‘tax bases’ in the form of electoral registers and residencies. There is also on government record a simple to administer ‘automatic’ method given to Sir Michael Lyons for his Inquiry for drawing from central taxation which would work well, and indeed become necessary, once WGBs (Whole of Government Budgets) are operated as intended.

In any case there needs to be clear organisation and flow charts both for decision-levels and accountability. For example a Police Authority can source  funds from and be accountable to EITHER a central government specified place or a local authority which in turn can EITHER be accountable upwards (as in the NHS) or to local electors. LEPs (Local Enterprise Partnerships) are not accountable anywhere. The form of routine accountability to owners is specified in legislation and best practice but not ‘delivered’ by government. It is also necessary for devolved bodies to have the right to either refuse to observe central dictats or negotiate a price for carrying out activities not necessary to meet their own objectives. Conversely a central government body should be able to charge a local body for such as standard-setting advice.

The ‘joker in the pack’ in this and failure to solve the problem before now can be laid at the door of hidebound politicians, political scientists and economists and more specifically the Treasury which is out of date and has not evolved as in Industry to a position of influence in ‘how to do’ management infrastructure and systems. 

Government isn’t very good at balancing the books

If you want to show your ignorance and upset his feelings call an accountant  a bean counter. Then, as government does, turn to the  economist.

Governments favour economists for their magic with statistics. Apparently skirt length is correlated with the incidence of breast cancer, or on a much more dangerous level tax and benefit policy is correlated with conveniently optimistic forecasts of the “economy” or GDP (defined in note 1).

And what do you get ?…  not only   “is government’s view of its operations obscured” (Economy and Efficiency Board member) but the ‘enterprise’  is loss-making requiring borrowing increasingly from outside the country. Each in-year deficit adds to the accumulating debt. Interest on this debt threatens to engulf spending departments. Moreover the ease with which tax can be taken, money borrowed and money printed leads to “moral hazard” and sloppy administration …which is what we have got: waste, poor decision-making and antiquated systems,  compounded  by ‘limited liability’ on a change of government.  There is unrest under the weight of the Westminster/Whitehall government machinery which 8 years ago was said by a civil servant whistleblower to be breaking down “and no-one knows what to do about it”. No-one at the top in Whitehall seems to be telling our leaders what it is that they should be asking for to correct this. No-one seems to understand that financial control is about KNOWING what is happening.  

Accountancy is not about keeping a tally, or just record-keeping. The evolutionary steps have been: notches on a stick led to a shortage of firewood and resort to quill and single column ledger. In 1492 came what many historians agree as a milestone in human history: Luca Paciola invented the beautifully simple double-entry book-keeping. It provides self-checking (the total of the column on the window side must equal that of the column on the door side) – not only what have I paid but who do I owe. The balance sheet was born. Readers of Hilary Mantel’s Wolf Hall set in the XVIth century  have met Thomas Cromwell’s accountant experiencing the joy of balancing the books. Our government does’nt balance the books and is so ill-equipped believes it easier to go “off balance sheet” with PFI contracts. We all feel the pain of those, both in cost consequences and later as part of the newly accounted for total debt !

Next came a shortage of candles for the nocturnal shift and burning at both ends (even then). It was insufficient to keep the ‘book’ as for the ‘guvnor’ King alone. With the rise of credit the employment of other peoples’ money, required stewardship accounting. With credit came larger enterprises with owners needing managerial tools. Money becomes a very convenient unit of measurement as well as a resource. Delegation of responsibility required planning/budgetary control. ‘What has happened’ becomes basis the for modelling ‘what will happen if ?’ Accountancy joined  other numerate disciplines eg Operational Research (project management techniques, common sense and mathematical solutions for resource deployment and optimization) and other aids to purposeful thought for example MBO (Management by Objectives).

The resulting Total System concept aided by IT reflects the merging of the dynamics of time and events with action and feedback, like the moving pointer on a dial in a vehicle dashboard. Transactions and simulations add up to the continuous total system. It is the basis for all or any information reports as by-products to interested parties eg decision-makers and  taxpayers (eventually). It needs the rotation of data and reaction to become as close together in time as possible.

The evidence of the cinderella status of financial discipline in government is clear. There is a flaw at the heart of UK government: feedback is missing from ‘feedback and control’. It is the same flaw which for 19 years has caused the European accounts to fail their audit because, as identified by an MEP, money voted to recipients is left to be managed only by recipients.  In UK Whole of Government Accounts (WGAs), or ‘proper accounts’ were only started 4 years ago, have been audit qualified and material omissions noted. In UK both in Treasury staffing and basic philosophy economics have held sway at the expense of accountancy. If economics is theoretical and statistics based, accountancy is factual and operations orientated. Management accounting is only slowly being adopted. It is the tool which organises data for decision-making, and for financial control in large decentralised organisations.

It is truly astonishing that the  Comptroller & Auditor General (National Audit Office)  should in the 21^st century have to “call on the government to help fully realize the potential benefits of WGA  in the running of government and use them to inform policy making and assist in medium term financial management.” The same applies to the CIPFA (Chartered Institute of Public Finance and Accountancy) hope that “the treasury will start to lead the way in this by using WGA in the presentation of fiscal events such as the budget and the autumn statement, including by reporting outturn against budget for the whole public sector, and publishing forward balance sheet forecasts.” The ICAEW (Chartered Accountants) have pointed out the lack of a Chief Finance Officer at the cabinet table. Heaven help the OBR and the Chancellor for his Autumn statement.

There are many ‘side effects’ of all this. Topically, with the fallout from the Scottish desire for independence, is the constitutional. It is now being more widely understood that there is a stress point between the need and desire for decentralisation and the need for central control over the money supply, currency stability, and regional monetary cross-fertilisation. The eurozone is learning the painful lesson. But what is not realised is that there are conceptually simple ‘accounting’ solutions for this which, for example, extend into the possibility of new thinking on such as local taxation. Conventional accounting to taxpayers as owners has yet to happen.

To take just one side effect, right now the statistic called GDP  in ratio with debt is much talked of (Gross domestic product – see note 1). There is no absolute relationship but if debt rises and GDP falls that is bad news for politicians and “hard-working taxpayers”. It is now thought important to make sure that GDP is inclusive of ‘gross income’. This means finding out and adding in such as the national sex and gambling industry income. However accountants will tell you that in comparisons and trends consistency is better than spurious precision.

Someone in the treasury right now is debating how to treat the cost of the new aircraft carrier Queen Elizabeth. Should it be ‘written off’ as money spent (good news – GDP goes up)? Talking up GDP doesn’t fatten the pig for market. Should the cost  be amortised over the life of the asset (bad news - in-year GDP goes down), and if it gets sunk does that mean a terminal ‘write-off’ or should  the unexpired life remain on the books ? Again accountants coped long ago with such questions in serving industry.

Another symptom: just the other day realisation began to dawn that taxpayers have a right to know where their money goes. Solution: place online a pre-1492 simple tally of payments over £500!  Why? Do we pay our council tax and have our roads repaired in parcels of £500 or single transactions? And what does it all add up to in context?

How out of date is the local authority attitude to the Annual Report? Eric Pickles claims as new the requirement for certain facts to be disclosed to taxpayers such as pay scales. He says he believes in the need to address voter engagement. But those facts and many others have long been included in financial statements which are integral to the narrative. Positive engagement requires the delivery of the Annual Report as a conventional procedural matter. But on present performance that would happen AFTER the election.

To sum up: the tragedy is that the TaxPayers Alliance has done great work on examples of waste and there is a book out on government blunders but money spent cannot be unspent. It is  not possible to calculate the effect of good versus bad management.  But causes of blunders are more important than individual mistakes. For those who recognise what is unprofessional, untrained and unaccounted for know for certain that we as a country don’t have the governance that we need, deserve and miss. Politicians, Party people, academicians  please note or leave the stage.

Note 1 GDP or Gross Disposable Product is the sum of private spending, government spending, business capital spending and total net exports minus total imports. The underground or ‘black’ economy is excluded.

Transparency or accountability ?

Politicians piously profess transparency and open government. But that is a qualitative  attitude not an act. It too often means only  access to lifeless and historical mass data. It has no primary operational point, only secondary  availability for academic research or statistical  purpose.

Accountability on the other hand, which is professed  but not practiced by government, is an act of discharge or formal process for  a purpose. It is to support with evidence and organised data the formation of policy and operational decision. That embraces the total management control system and also democratic discharge and renewal. At root is the transaction which once executed is not informative in isolation.

Often the word accountable is left meaningless and in the air as in 'making councillors accountable". But for what, to whom, and how ?

The total system concept means for a functioning enterprise the nervous system exactly as it is in the human frame: alive and dynamic with constant feedback and reaction. All organisations to a greater or lesser degree operate such a total system. The corner shop version functions considerably in the mind of the proprietor. As enterprises grow larger they must give greater attention to the design drawing and flow chart etc governing people (and machine) inter-action. The stated objective(s) of the enterprise will determine  the system  but there are timeless disciplines and techniques with many reflected in legislation.

Government(s) tend to be the only organisations that have not grown into that concept largely because of the ‘Ponzi’  or Bernie Madoff mentality in the face of supposed electoral pressures, and failure to link performance and stewardship reporting to electoral proposal. The worst recent case of government failure to do ‘proper accounts’ was that of Greece in 2009 but with UK not so far behind and the European Court of Auditors refusal to pass the accounts now for 19 years with no assurance likely in the future because of the basic defect. UK government's view of its own operations is officially said to be obscured

One must remove from one’s mind the artificial separation between numbers and words. Paradoxically in government “financial statements” are for other people. But quite simply there is the human aspiration and ‘people’ and material resource inextricably linked to the monetary resource. The recording and reporting essentials are very simple: money being a conveniently universal unit of measurement a finite amount is required to do what has to be done and stakeholders need to know the outcome; the exception is the laying out of funds (investment) and the anticipatory borrowing of money ahead of events with the score being kept for that. Contrary to what many people realise there are additional disclosure requirements such as for pay level scaling.

The Annual Report is the customary vehicle (except in government) for telling we interested parties what has been the performance, reasoning and outlook and then seeking a vote of approval plus renewed or changed authority to proceed ‘in office’. 

As regards disciplines and techniques there are a number of professional bodies. Accounting is represented principally by the ICAEW (Institute of Chartered Accountants in England and Wales; the Scottish Institute is separate !), CIMA (Chartered Institute of Management accountants) and CIPFA (Chartered Institute of public Finance and Accountancy). Some years ago there was an attempt (unsuccessful) at a merger. CIMA is least noticed in government and the Treasury ‘majority party’ are economists. The ICAEW has identified the lack of a CFO(Chief Financial Officer) at the cabinet table.

It is worth mentioning alongside the above 'philosophical' analysis that there are probably two causes of the many major project failures, Not only has there been a lack of project management skill in the manderinate but also an experience-lacking inability to think clinically and expressively about objectives and requirements sufficient for translation into IT system specifications.

Who will mend UK governance ?