Pandemic recovery depends on better government accounting

Accrual accounting benefits

• - Ability to put a fair market value on public assets
• - Gives govts a clear view of their current financial positions
• - Recognises and reports all transactions when they occur
• - Provides the information needed to make informed policy decisions

The 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 recognise 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 recognises 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. (Bloomberg)

Ian Ball and Dag Detter