Governments should adopt ‘balance sheet’ approach in managing finances
The World Bank and two major accounting bodies, the Association of Chartered Certified Accountants (ACCA) and the International Federation of Accountants (IFAC), have called on governments around the world to find ways of avoiding having to reduce spending and increasing taxes after the coronavirus (COVID-19) pandemic.
In their latest report obtained by New Telegraph, yesterday, they urged governments to take a “balance-sheet” approach to managing their finances during the pandemic.
This, they said, would ensure they can do away with expenditure cuts and tax hikes once the crisis is over.
The world is currently going through a downturn like no other and governments have pumped billions of dollars into their economies to minimise the financial damage.
According to the International Monetary Fund (IMF), public spending during the pandemic has ballooned to approximately $9 trillion.
By boosting liquidity, governments hope to keep businesses operating as well as employees on their payroll. However, analysts note that the downside to having immense relief efforts and fiscal interventions during a crisis, is that the governments will be forced to later resort to austerity measures and play the higher tax card to rebuild their finances.
“Some combination of public spending cuts and tax increases will be required over time in many countries,” the report said.
Still, the authors of the report said the governments could “minimise their reliance” on the two measures by taking a balance-sheet approach to fostering sustainable public finances.
“This can be achieved through maximising the return on public assets, focusing on value for money in the use of public resources and taking a multi-capital approach by expanding the scope of the public sector balance sheet,” the report said.
Governments are also advised against resorting to “poor-value” privatisations, which can reduce public sector net worth.
The balance-sheet approach to managing finances is founded on accrual accounting, where any outgoings or revenues are recorded when a transaction happens, not when a payment is made or received. The report said even governments operating on a cash basis can apply this mindset of balance-sheet management to their decision making.
“In tacking the COVID-19 crisis, the International Monetary Fund called on governments ‘to do what it takes but to keep receipts.’ This entails ensuring the funds are spent for the purpose intended and accounted for and reported appropriately. Also, governments would need to prevent fraud and meet citizens’ expectations on transparency of public spending,” Ed Olowo-Okere, director for governance global practice at the World Bank Group, wrote in the report.
To be credible, the report said, public sector balance sheets must be properly prepared, audited and disclosed. “Public finance professionals clearly have an important role to play in preparing the balance sheets. They can also contribute to transparency and accountability by providing clear, understandable narratives to help non-experts make decisions at a time when many countries will need to navigate a series of difficult policy choices,” the report added.