This article was first published in the March 2012 UK edition of Accounting and Business magazine.
There can be little doubt that the public sector in the UK and elsewhere is in the midst of the biggest financial crisis it has ever experienced. Certainly, there are only two modern examples from the UK of similar situations – and both of those were associated with the change from a wartime to peacetime economy after the two world wars of the 20th century. Unlike then, many countries are now implementing what are often referred to as ‘financial austerity policies’, implying some combination of significant increases in taxation coupled with large-scale reductions in public expenditure.
The scale of expenditure reductions is alarming when you consider that the vast bulk of people employed in public services have probably been used to an environment where public spending increased each year as a consequence of ongoing economic growth (slowed slightly by the occasional economic recession). Now they are being asked to cope with a situation where public spending is reducing significantly in real terms at the same time as the demand for public services is rising.
While politicians will try to argue that cuts of this magnitude can be delivered through ‘efficiency savings’, the reality is that the savings that can be made are greatly exaggerated and/or are exceedingly difficult to deliver for various reasons. Similarly, political statements that everything will be satisfactory when things are ‘back to normal’ – in other words, when decent levels of economic growth have again been achieved – seem hollow in the current economic environment.
Instead it seems likely that the public sector will have to make do, for a significant number of years, with lower levels of resources than it has had in the past and must concentrate on making better use of those resources. This leads to certain fundamental questions having to be asked about public services.
What, for example, should be the role and limits of the state in the provision of public services? What should be the relative priorities for different aspects of provision? What should public services actually be trying to achieve (ie what are the strategic objectives)? How should public services be paid for, including the balance between tax revenues, charges and insurance schemes? How should the public sector be organised and governed? Can the working practices of staff remain unchanged? What should be the role of the private sector in public service provision? How can improvements in efficiency be identified and realised?
Answering these (and other) questions in a period of financial austerity is not always easy and a robust process of analysis and decision-making is needed. Financial concerns are obviously key, and good financial management will be vital. Hence there are very strong roles for public sector accountants – and public sector finance functions – to pursue. The rest of this article sets these out.
1 Promoting transparency
Misleading financial reporting and poor governance in relation to public finances can be seen as contributing to the current financial crisis faced by many countries. Thus, at the highest levels of government, there is a key role to be played, internationally, to improve reporting and governance arrangements so as to avoid any repetition of such events. This suggests a much stronger role for accountants at the heart of government than has traditionally been the case.
2 Ensuring sustainability
Longer-term financial sustainability is a key issue for public sector organisations. However, even before the onset of financial austerity programmes, many publicly funded organisations had service configurations that were simply not sustainable in the longer term in financial and/or operational terms.
The advent of financial austerity has merely added to these concerns. Clearly, a key responsibility for accountants in the public sector is to point out those situations where there is no longer-term sustainability and to advise what changes are needed.
3 Stronger strategic focus
Mention has already been made of the need for a clear strategic and longer-term vision of what public services should actually be trying to achieve. In many cases such a vision does not exist and public services operate in something of a vacuum, with little in the way of clear drivers for change. Once such a strategic vision is promulgated the budget system should be one of the key drivers for achieving that vision and a means of shifting resources accordingly. Accountants have a key role to play here. There is a clear need to ensure a strong shift away from annually based incremental budgeting models to a multi-year approach where strategic priorities have a clear input into budget decisions.
4 Prioritising service activities
In spite of what politicians say, it is extremely unlikely that the public spending cuts required can be delivered totally by real efficiency savings. In such situations, organisations often have recourse to crude methods of knocking the same percentage off everybody’s budget to balance the books. However, this implicitly assumes that all service activities are of equal value, which clearly they are not.
A key role for accountants therefore is to ensure that when spending cuts are being considered the costs and benefits of the activities the organisation undertakes are properly evaluated and some attempt made to prioritise those activities. In this way, spending reductions can be made rationally by eliminating lower-priority activities rather than damaging higher-priority activities through random cuts. These changes then need to be factored into budgets.
5 Performance improvement
Obviously financial austerity poses great challenges to public sector organisations to make quantum leaps in the efficiency of service provision. Accountants have many roles here, including:
- the development of costing systems to enable service costs to be analysed and compared with other providers
- the development of budget-setting mechanisms which promote and reward performance improvement rather than inhibit it
- the use of robust investment appraisal methods when making capital investment decisions, including the private finance initiative (PFI)
- the incorporation of robust financial performance measures into performance management systems.
6 Empowering managers
Many of the problems of public service provision in a time of austerity might be solved by greater innovation by frontline staff. However, this requires a move away from organisations that are managed by heavily centralised management regimes operated by control-freak chief executives. Those same chief executives need to display leadership and empower their staff to find ways of improving services for the same level of resources. Such empowerment can be facilitated by greater delegation of budgets to lower levels in the organisation, and accountants have key roles here to promote and operate such systems.
As all of this shows, there are some vital roles for accountants to play in dealing with austerity. Some recent studies – for example, the Audit Commission’s – have suggested that there are serious skill and systems deficits in some public sector organisations which need remedying. All accountants in the public sector need to take account of these studies and take the appropriate actions.
Professor Malcolm Prowle FCCA is professor of business performance at Nottingham Business School and visiting professor at the Centre for Accounting and Finance at the Open University Business School. He is co-author, with Roger Latham, of Public Services and Financial Austerity: Getting Out of the Hole, published by Palgrave Macmillan.