28 May 2020

Coronacrisis: long-term actions for the public sector

Here we state our key takeaways on what the public sector could do on the short- and long-term to counter the impact of the coronacrisis.

Below we explore how governments can best deal with this on the long term in more detail:

Adopt accruals accounting

With the enormous outflow of government resources, transparency and accountability will be more important than ever. Facing huge levels of public debt and possible long-term tax increases, citizens will demand evidence that funds have been appropriately used and that their government has a long-term plan to bolster the depleted public purse.

The crisis and its cost should not be used as an excuse by governments to stop or suspend their programmes of fiscal reform, financial and non-financial reporting. Rather, governments should redouble their efforts to adopt accruals accounting at all levels of government.

The coronavirus crisis has highlighted two key areas of public sector accounting where accruals accounting makes a significant contribution to transparency and fiscal sustainability: 1) actively managing the government balance sheet and 2) managing loans and guarantees.

1 – Actively managing the government balance sheet

Active management of the government balance sheet is regarded as vital to control public finances, as detailed in the International Monetary Fund’s (IMF) World Economic and Financial Surveys Fiscal Monitor: Managing Public Wealth (October 2018).

Government responses to this crisis will dramatically increase both public sector assets and liabilities and many governments will be showing balance sheets with negative net worth – making such active management crucial.

Accruals accounting demands accurate and timely recognition and disclosure of assets, liabilities, provisions and contingent liabilities – which greatly assists in the active management of the balance sheet. It also ensures better information is available to assess financial performance by both management and by other stakeholders – including citizens and providers of finance.

2 – Managing loans and guarantees

Many governments have chosen to implement a mixture of grants and loans / loan guarantees.

Loans and guarantees are attractive for governments in the short term. This is because, unlike grants, their cost will not be immediately recognised as a cost in the entity’s statement of financial performance. Consequently, the initial cost of such programmes appears to be lower. However, it is likely that (contingent) liabilities in respect of loans and guarantees will grow over time and it is important that these are:

  1. closely monitored and the current risk profile exposure is properly assessed, and
  2. properly reported in the statement of financial position and the notes to the financial statements.

Not all governments are transparent in reporting contingent liabilities, especially when the financial information produced is limited to cash accounts and statistical information. For example, the European System of Accounts ESA 2010 focuses only on government borrowing and not on guarantees given by governments, albeit Eurostat publishes data on stocks of government guarantees.

In circumstances where many governments are using debt guarantees as a fundamental tool to reduce the coronavirus’ financial impacts, failure to report contingent liabilities could lead to a significantly underestimating the long-term fiscal impact of such measures.

Furthermore, provisions made in respect of impairment of assets will play an important role for future fiscal decision making, and statistical information does not provide this information.

Accruals accounting does. It requires accurately recognising and measuring the short and long-term financial instruments used to fund social benefits / grants / financial guarantees provided to individuals and private entities. This allows a better assessment of future government funding requirements.

Other advantages for the public sector in adopting accruals accounting can be found in our previous publications Accrual Accounting – Towards Better Public Finances  (2016) and  Accrual Accounting in the Public Sector (2007).

The advantages of accruals accounting are amplified when governments use high quality financial reporting standards. Many governments will be borrowing money from international markets so there is a need for good quality and comparable public sector financial reporting.

Therefore, we believe that in the mid- to long-term, governments should adopt internationally recognised financial reporting standards – at both a whole-of-government level, and for other public sector bodies reporting to the government.

Adopt international public sector accounting standards (IPSAS)

The leading set of public sector accounting standards is produced by the International Public Sector Accounting Standards Board (IPSASB).

The IPSASB continues to work on developing accounting standards that deal with the specific issues found in the public sector and that are often not fully dealt with by national governments own accounting standards.

Adopting such standards will lead to greater consistency and comparability between financial statements, both within the same country and internationally. Consequently, they are powerful tools to promote transparency and manage performance in the public sector. For example, the IPSASB has produced a factsheet indicating how key issues arising from the coronavirus crisis should be addressed via their suite of standards.

Public sector coronavirus issues are also being examined as part of Eurostat’s European Public Sector Accounting Standards (EPSAS) project. Eurostat has also provided coronavirus crisis support for government statisticians.

Improve crisis management

Many public sector entities, especially the larger ones, have risk management processes. However, it has become apparent that there is a shortage of crisis management procedures in many public sector bodies.

Consequently, it is very important that when the situation normalises, public bodies should review and improve the effectiveness of their risk and crisis management systems. Specific lessons learned from the coronavirus crisis are obviously applicable should another viral outbreak occur. These lessons will also provide long-term benefits when dealing with other crises, such as climate change.

The coronavirus crisis will stress-test the robustness of public sector bodies, of government finances and of the financial system as a whole. It is important that the lessons from this crisis are fully examined and that consensus is reached on the changes required to improve the resilience of public sector funding and services.

Improve IT facilities and working practices – for workers and end users

Both the public and private sectors often consider upgrading internal controls and information technology as costs to be controlled rather than facilitators of efficiency and cost management.

The coronavirus crisis has highlighted the impact of lack of investment in systems in the public sector in several ways.

In some countries, the public sector already embraces the advantages of digitalisation, but others are still heavily reliant on paper-based processes. Lack of investment in IT systems makes it more difficult for public sector workers to work remotely and thereby continue their vital role whilst maintaining social distancing.

Failure to invest in IT infrastructure can also lead to either a lack of, or a weakness in, public digital interfaces that citizens can use to access public services – such as access to furlough payments, which governments make to employees to avoid permanent redundancy.

Therefore, we call on governments to adequately fund developing public sector IT systems so that citizens are able to access more key public sector services online and that public sector staff can work more efficiently, in a more sustainable manner and have their work focused on delivering services rather than unnecessary administration.

Given the sensitivity of much of the data concerned, these systems should incorporate the latest technology to ensure security and privacy of personal data, the provenance of documents, and proof of identification for internal users and the citizen-user. Many of these issues were the drivers of the Estonian e-governance project and it will be very interesting to see how Estonia’s systems coped under the crisis.

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