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Public sector finances must go global

The strength of government accounts is just one reason why investors love Britain, writes Alan Edwards. So shouldn't we push for a global public financial management profession?

29 Nov 2011

By Alan Edwards, CIPFA

Global Finances

RECENTLY, BBC business editor Robert Peston posed the question: why do investors love to invest in Britain? He was drawing attention to the low rates on UK Government ten-year bonds compared to those not only of Greece and Italy, but also Spain and now France.

His theory was that we have:-

1. Strong governments that get on and make change happen

2. A currency that floats to its natural level

3. A well run debt management office.

All true of course. But is there a fourth and possibly more powerful reason? That investors can trust the UK governments' accounts.

Next week we should see our first ever set of Whole of Government Accounts. We have already seen a draft so investors know we have £1.1 trillion of pension liabilities and the PFI liabilities are in excess of £30bn. Whilst these numbers sound scary and they are - at least they are known liabilities.

That's not true the world over. As CIPFA's chief executive said recently, the fact that governments around the world largely account on a cash basis presents enormous risk when it is governments who are now embarking on complex financial transactions to keep the economy going.

Accountancy Age and Financial Director readers should pick up a copy of Michael Lewis' very-readable book, Boomerang: the Meltdown Tour. It's worth a look just for the introduction and the story about Kyle Bass, a US hedge fund manager who has made a fortune betting on a sovereign debt crisis. He asked the difficult questions about the balance sheets of governments that propped up banks.

What Bass found was governments with debts up to 25 times more than their annual tax revenues. Not surprisingly, he concluded it could not last and so he bet on their default. The fact it took a hedge fund manager to predict this is not something we as accountants should be proud about.

That is why CIPFA has launched a global initiative to drive improvement in public financial management (PFM). If quality of reporting and transparency are crucial to investor confidence, governments equally need top quality finance managers. Far too often around the world there is a woeful lack of investment in PFM training. That's why at the 4th High Level Forum on Aid Effectiveness in Busan, Korea in two weeks time, donors and aid professionals will endorse again the need for better PFM to strengthen country systems.

To achieve this, we need a major campaign of professionalisation for PFM practitioners by 2020. Next month I will be speaking about the creation of a global PFM profession with that very aim at the International Consortium on Governmental Financial Management conference.

Meanwhile UK public sector accountants who have been grappling with implementing international standards should feel proud. If the quality of our reporting and transparency has been crucial to keeping UK borrowing costs below our EU neighbours, then perhaps they have helped save us from the worst of the coming crisis. A 2%+ interest rate difference on UK government borrowing costs is a big number.

Governments thinking of cutting back or not investing in PFM training should look at the difference of UK 10 year bond rates compared to other EU countries and factor that into their business case. Investment in a global PFM profession could make an enormous difference to sovereign debt costs long term.

That's a worthy outcome if the world embraces better PFM.

Alan Edwards is international director and chief financial officer of CIPFA

Image credit: Shutterstock

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