Connect with us

Hi, what are you looking for?

Economy

Better accounting can get us through the pandemic

THE coronavirus disease 2019 (COVID-19) pandemic has revealed just how much governments matter — and that competent management can be the difference between life and death. Good leadership requires good information to support smart, timely decisions. Further, democracy itself relies on information that is understood and trusted by its citizens. High-quality accounting is a vital source of that information.

In the fight against the coronavirus pandemic, while most governments debate how much debt is sustainable and what fiscal measures should be used to measure it, countries like New Zealand are deploying the fiscal measures that make sense on the basis of a proven technology: accrual-based accounting. This method underpins financial decision-making and reporting in the private sector — and has contributed to the wealth many enjoy today.

Unfortunately, most government accounting relies on ancient methods. Charlemagne would recognize the system of cash-based accounting that almost all governments still use today. Modern, accrual-based accounting, like that used by public companies, is mostly eschewed by governments; few, including New Zealand’s, use it as the basis for their budgeting and financial reporting. But accrual accounting recognizes and reports all transactions when they occur, rather than when and if cash changes hands, and accounts for all assets and liabilities, not just cash and debt.

The concept of net worth — assets less liabilities — is the most comprehensive measure of the fiscal health of individuals, companies or governments. Not only would accrual accounting give governments a clear view of their current financial positions, but it would also provide the information needed to make informed policy decisions. It allows for rapid, targeted, and secure assistance to those in need. It reduces the potential for corruption in the distribution of funds.

Not least, accrual accounting has helped countries respond better to the pandemic. Since switching to accrual accounting over two decades ago, New Zealand has steadily built a very strong balance sheet, with substantial positive net worth. In the pandemic, that information, and the public’s trust in it, helped give the government the confidence to act decisively and quickly. As Prime Minister Jacinda Ardern pointed out, a strong balance sheet allowed the government to “go early, go hard” in its successful strategy to eliminate COVID-19. According to Johns Hopkins University, New Zealand’s cumulative death rate is one of the lowest in the world, while both the UK and the US have two of the highest rates.

And the method has provided comprehensive feedback — earlier than for other countries’ — on the fiscal impact of a government’s response to the crisis. Countries still on the anachronistic cash system base their decisions on a partial view of their financial positions and prospects. No wonder that governmental accounting in the US, UK, and Europe is often seen as largely irrelevant. For good reason, corporations don’t make crucial decisions based only on the information in their bank statements. Rather, they trust in a comprehensive system of budgeting backed up by audited accounts. Governments should do the same.

High-quality information, to support informed and speedy decision-making, is vital. But so is winning the public’s trust. New Zealand has built confidence in its political system by using a public financial-management system in which high-quality accounting information is primarily a decision-making tool but also demonstrates accountability. This system builds trust in a number of ways, including by producing monthly financial statements. These inform citizens of the government’s current fiscal performance against the budget and give them this information when it matters, not months later when nothing can be done about it.

Another, equally important mechanism for building trust is the pre-election economic and fiscal update that the New Zealand government produces 20 to 30 days ahead of a general election. This document lays out the current economic conditions and prospects, and it conveys the government’s fiscal position in updated financial statements, as well as forecasted financial statements for the next four years and projections for the following 10 years. The effect of this update is that manifestoes and policies can be assessed by political parties against the forecasts in the document to minimize the risk of appearing to promise the unaffordable.

The icing on accrual accounting’s cake is the ability to put a fair market value on public assets. The cash-based system can’t do that; attempting to measure fiscal position by reference primarily to debt, or a debt-to-GDP ratio, ignores major components of the balance sheet, including public assets such as real estate.

In contrast, a focus on net worth creates incentives both to invest in assets that provide value for future generations, and to manage more professionally the vast store of wealth held by governments, not least at the local level. Studies by the International Monetary Fund suggest that additional revenues amounting to 3% of gross domestic product could be generated annually through more professional asset management — for the US, this would amount to some $640 billion, money that will be much needed to recover from the pandemic.

The pandemic has strained the global social fabric to a degree matched only by war. Economic systems have been tested in a way that makes the global financial crisis seem trivial. Government finances have been pushed into unknown territory. Recovery will require markedly better information about government’s economic resources, and better management and utilization of those resources. The technology is there. Governments just need to use it.

BLOOMBERG OPINION

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Get the daily email that makes reading the news actually enjoyable. Stay informed and entertained, for free.
Your information is secure and your privacy is protected. By opting in you agree to receive emails from us. Remember that you can opt-out any time, we hate spam too!

Latest

Economy

By Diego Gabriel C. Robles THE Philippine economy expanded by 7.4% in the second quarter — slower than expected — as rising inflation weighed...

Economy

By Abigail Marie P. Yraola, Researcher THE Philippines’ merchandise trade deficit hit another record in June as imports continued to outpace exports despite a...

Economy

THE National Government’s (NG) outstanding debt as a share of the gross domestic product (GDP) eased to 62.1% at the end of June. Data...

Economy

By Keisha B. Ta-asan SOURED LOANS held by Philippine banks fell for a fourth straight month in June, bringing the nonperforming loan (NPL) ratio...

Economy

Smart says third telco player’s PCC complaint meant to avoid liability By Arjay L. Balinbin, Senior Reporter GLOBE Telecom, Inc. on Tuesday said it...

Economy

DMCI Holdings, Inc. reported on Tuesday that its second-quarter consolidated net income went up by 73% to P9.03 billion from P5.23 billion, driven by...

You May Also Like

Investing

Having a good Instagram marketing agency to back up your Instagram account is an absolute must going into the new year. With competition stronger...

Economy

Ivermectin, an existing drug against parasites including head lice, has had a checkered history when it comes to treating COVID-19. The bulk of studies...

Investing

Insomnia is the most common sleep disorder in the global population. Therefore, it is a problem that many people suffer or have suffered throughout...

Investing

Instagram still holds the top spot for social media in terms of building brand reputation and expanding business potential. Every day, more and more...

Disclaimer: SmartRetirementReport.com, its managers, its employees, and assigns (collectively "The Company") do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

Copyright © 2021 SmartRetirementReport. All Rights Reserved.