Monday, 29 September 2014

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 21st 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.