Governments must take a balance sheet approach to managing their finances through the Covid-19 crisis

By Team BitBol,

ACCA, the World Bank and IFAC say better financial information and thinking must be
applied to help manage public finances
 Economic indicators need more clarity to provide a better picture of public sector
finances in turbulent times
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.’
Sajjeed Aslam, head of ACCA Pakistan, 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’.

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