Research casts new light on the weaknesses of UK public finances
Fiscal challenges faced by government after the UK general election will be even more severe than is currently understood and predicted, suggests new research based on an annual Treasury report.
The new analysis claims that a failure to recognise the findings of the annual Whole of Government Accounts (WGA) Treasury report will lead to “more painful adjustment at a future date”.
Reporting their findings in the peer-reviewed journal Public Money & Management, experts from the Universities of Birmingham and Glasgow say that the WGA – which applies adapted private sector accounting principles to the UK public sector – is currently not being sufficiently used.
“The usefulness of the WGA has been seriously underestimated,” explains lead author Professor David Heald, Emeritus Professor and Honorary Senior Research Fellow at the University of Glasgow.
“In part this is because of the attention paid to delays in its production. Financial reports are always going to be slower than national accounts which are prepared quickly on the basis of estimates and have the benefit of being internationally comparable.”
Although WGA 2020-21 was published 27 months after the reporting date of 31 March 2021, the researchers show that the WGA –3 now in its twelfth year of publication – provides valuable information that is not being sufficiently used.
Compared with national accounts, the WGA delivers “greater comprehensiveness (improved fiscal transparency) and exhibits less vulnerability to creative accounting (it is more difficult to push liabilities off balance sheet)”, the authors state. Combined with fiscal sustainability projections from the Office for Budget Responsibility, the WGA highlights the fragility of UK public finances even before the Covid-19 and cost-of-living shocks.
In this new study, the authors analyse the published WGAs since 2009-10, assessing the incremental information on government assets and liabilities and on the public sector deficit.
They find that the WGA Net Liabilities are “significantly higher” than reported by national accounts’ Public Sector Net Debt.
“Moreover, the WGA measure of the deficit is much higher than the national accounts’ measure of the Public Sector Current Budget Deficit”, adds Professor Heald.
“When the same accounting discipline which applies to the private sector is applied to government, the financial position of government is shown to be weaker than indicated by the national accounts. This is because the WGA includes assets and liabilities not in the national accounts, and because more liabilities than assets are brought in.”