Public sector fiscal health needs urgent protection

PHILIP SMITH

As governments pour trillions of dollars into limiting the human and economic impact of covid19, better measures of public sector fiscal health are urgently required

Having first estimated the global governmental financial response to covid19 at US$8 trillion, the International Monetary Fund (IMF) subsequently upped the figure to US$9 trillion.

These figures are unprecedented. The upward revision was largely due to a second wave of measures by governments as the economic fallout from the pandemic proved more severe than anticipated. The total revenue and spending measures for G20 countries (US$8 trillion) account on average for 4.5 per cent of their GDP, larger than the percentages seen during the global financial crisis more than a decade ago.

The IMF’s US$9 trillion estimate consists of US$4.4 trillion in direct budget support by governments. Additional public sector loans and equity injections, guarantees and other quasi-fiscal operations (such as the non-commercial activity of public corporations) account for the remaining US$4.6 trillion. The two figures are, however, treated differently from a public sector accounting viewpoint. The US$4.4 trillion is current account expenditure, but the US$4.6 trillion of loans and other injections sit "below the line" in government accounts.

For countries in the Caribbean, the impact of covid19 continues to push governments to implement generous fiscal measures in order to ride the wave of the pandemic. For example, in Jamaica, the minister of finance announced tax cuts of around 0.6 per cent of GDP, along with targeted measures for up to 0.5 per cent of GDP to counteract the effects of covid19. This is largely expected to be financed by ongoing asset divestment. Others have sought loan arrangements in order to get through the unprecedented period. In July, the Inter-American Development Bank’s (IDB) board of executive directors approved a US$100 million loan to help TT finance its public health response against the covid19 crisis and implement fiscal and financial measures to offset the negative impact of the pandemic on its economy and the lives of its citizens. The operation is part of a two-tranche programmatic a policy-based loan program approved by the IDB, which helps TT fight the health and fiscal crisis and prepare the country’s recovery after the pandemic.

Additionally, Caribbean countries largely dependent on tourism have also had to develop new fiscal policies to keep their fiscal health in check. The Bahamas government recently announced various support measures totalling B$121.7 million (one per cent of GDP), including support for health care, income support for the self-employed, and business-support loans to small- and medium-sized companies.

Balance sheet view

According to Alex Metcalfe, ACCA’s head of public sector policy, below-the-line expenditure tends not to show up in typical measures of government fiscal health, such as the government debt to GDP ratio. "We need a more comprehensive view of public sector finances, and to do that best you need accounting data," he said. "You need to have a balance sheet perspective." This would give governments a clearer view of their financial liabilities and obligations, along with an understanding of how to manage those balance sheets, and therefore the risks. "As such, there’s a critical role here for accountants," Metcalfe said.

This is why ACCA is partnering with the World Bank to understand how accounting data can help governments navigate the impact of the covid19 crisis on their financial position. The research will look at the importance of governance structures and government institutions in supporting the public sector response.

For its part, the World Bank has a US$160 billion programme of interventions, covering 100 countries and around 70 per cent of the world’s population, over the next 15 months. Its focus is threefold: to protect lives, support livelihoods and underpin businesses.

"The most critical thing that the crisis has demonstrated to us is the capability of central governments responding to covid19," said Srinivas Gurazada, the bank’s global lead for public financial management. "The ability for inter-agency and intra-government coordination has been fundamental in getting the best results in the emergency."

As far as public financial management systems are concerned, Gurazada says the World Bank is supporting governments in working through issues such as budget preparation against the background of rising expenditure and falling revenues. "We need to look at how ministries of finance can move in an agile way to support other ministries, such as health," he said. "They need to make sure money is available at the right time, in the right quantity and at the right place."

However, he also warns that traditional controls over spending and procurement can be modified, or diluted, during times of crisis. "Compliance can be low because people want to spend fast," he pointed out. "Ultimately, governments will need to produce financial reports, and these reports will need to be audited."

Gurazada believes that the covid19 crisis could prove a public finance watershed. There has been a greater appreciation for appropriate public financial management that allows the easy flow of public funds not just during the crisis, but also subsequently when governments embark on economic stimulus packages. "The government’s balance sheet will be of critical importance," he said. "There will be more loans, more expenditure, two to three years down the line."

The journey from cash to accrual is fundamental to the transition to balance sheet accounting, and the crisis could be a catalyst for more governments to adopt this approach.

"If we are on this journey, how do we make sure it is not just a compliance exercise, and that we can make the best use of the information that becomes available as the result of using an accrual basis for government accounting?" said Metcalfe. "A really critical feature of this is the balance sheet approach."

Policy innovations

The World Bank/ACCA study will review innovative forms of fiscal policy that have emerged, and apply them to balance sheets to create forecasts that permit an understanding of the balance sheet effects. "This will create a holistic lens through which we can understand what the crisis is doing to government balance sheets," Metcalfe explained.

Perhaps more importantly, the study will analyse the implications for recovery. "The trade-off between traditional austerity and increased taxation is going to be a really interesting dialogue in the next few months and years," Metcalfe said. "But there are other ways of tackling this problem, such as looking at public sector productivity and maximising the return of public sector assets, as well as the role of public sector finance professionals within all of this."

Gurazada agreed: "We need to understand how policy translates into action and through to a sustainable recovery, and the role the public finance professional can play in that."

With US$4.6 trillion about to land on government balance sheets, the need for such an understanding is critical.

Source: Adapted from an article in the July/August 2020 China edition of Accounting and Business magazine.

Contributors: Alex Metcalf, head of public sector policy, ACCA, Maria Bleasdell, partner relations and communications manager, ACCA