May 19, 2022 2:51 am

Public accounts and trust in government

The impact of the pandemic on the Argentine economy was stronger than in almost any other country, but it is not the first blow that Argentina has received in its recent history. The Government faces serious problems in defining and implementing an economic growth agenda that would allow it to be more prepared to face future shocks, whether they are economic crises, the effects of climate change, new pandemics, or some natural disaster. or man-made.

That growth agenda will inevitably involve significant structural changes in the economy and require significant investment. But to achieve long-term resilience and growth, these changes and investments must rest on society’s trust in the government, under the conviction that it will act transparently and competently in the interests of the country and its economy. Without that foundation of confidence, cycles of inflation, default, and low growth are likely to continue.

A government has many avenues to demonstrate that it is competent and trustworthy. One of the most critical, in the economic context, is the way it handles public finances. Governments around the world have experienced a severe weakening of their financial position due to the need to respond to the pandemic, and that makes restoring fiscal strength even more important and complex. Argentina was already experiencing fiscal stress before the pandemic, so the challenge it now faces is greater than that of most countries.

There are two ingredients that generate confidence in the management of the economy by a government, and the first is a prerequisite for the second. The first ingredient is the information on the basis of which economic decisions are made, and the second is the characteristics of those decisions. Without comprehensive, reliable, high-quality information, good decisions are unlikely to be made, and therefore financial responsibility is impossible, as is trust. The first step in building the platform for sustainable economic growth is the government’s economic information system, which falls into the category of “boring but important” things.

Government accounting is at a time of great change at the international level. Traditionally, the focus was on cash flow and debt, but today that does not even remotely reflect the economic situation and performance of a government, due to the complexity of financial transactions and government balance sheets. nowadays. Many governments do not have an exhaustive table of their assets and liabilities, of what they have and what they owe, and this makes it impossible to properly manage both the balance sheet as a whole and its individual components. Reflecting only cash reserves and total debt is gradually being replaced by a “precision accounting” system –accrual accounting– which is more comprehensive and better reflects economic reality. In its 2021 edition, the International Public Sector Financial Responsibility Index (IFAC) points out “a strong upward trend in the adoption of precision accounting globally.

Argentina is already embarked on that journey. Success depends on that change being fully and thoroughly implemented. And full and thorough implementation implies that all assets, liabilities, income and expenses are recognized and measured when making economic decisions, so that the government can account for the use of the country’s financial resources. An example of incompletely applied precision accounting is tax revenue, which continues to be measured in cash terms, and the failure to include on the balance sheet all assets required by international standards, including biological assets and infrastructure. Adopting precision accounting implies that the basis of decision-making is precision information, and since the major decisions of a government in economic matters are made when preparing a budget, that in turn means that the budget will be based on that same precision information. If decisions are not made based on comprehensive and accurate financial data, they are probably bad. A good example of this is that budgets that only consider cash flow often ignore the revenue that could be generated by more efficient use of the government’s vast portfolio of assets, which according to IMF estimates could be equivalent to 3% of national GDP. With better information, better decisions are made, whether in relation to income, collections, cost management, asset evaluation, and others. Ironically perhaps, precision accounting also strengthens cash flow management, since it manages better information about debtors and creditors.

The IMF’s own research points to the value of reliable public accounts for a government—they recover faster from economic downturns and pay lower financing costs—and reliable public accounts depend directly on quality financial information systems. Needless to say, responsible accounting leaves any government in a better position to face future impacts, regardless of their origin.

New Zealand, in a pandemic environment, offers a good example of the beneficial domino effect that occurs when a government bases its public accounts on quality information. In the past three decades since adopting precision accounting for managing public finances, the country has steadily increased its net worth (the difference between its assets and its liabilities), with a brief interruption in growth of a couple years, after the global financial crisis. And the strength of these public accounts was pointed out by the Prime Minister and the Minister of the Economy of New Zealand as one of the factors that allowed the country to “start strong and early” with its strategy of eradication, and not containment, of the coronavirus. . That strategy proved successful, facilitating a rapid economic recovery and the first upgrade of a country’s credit rating since the onset of Covid-19. But the fiscal situation not only made such an effective response to the pandemic possible, it also led to an increase in citizens’ trust in government, in stark contrast to what has happened in much of the world.

Having a high-quality information system does not guarantee that good decisions will be made: many companies do the right thing and go bankrupt. But if governments manage good information about their economy, and are transparent, their chances of success are multiplied. And it is not fixed with “patches”: it is a course that demands enormous effort and great political will. But any other course will take a country’s finances and economy down a dangerous downward path.

Professor at the University of Victoria Wellingon, New Zealand

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