Session Six: The Role Of Accounting In The Early Revelation Of Sub National Fiscal Risks, Meeting 2019
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15th Annual Meeting of the Network on Fiscal Relations Across Levels of Government, OECD, 2-3 December 2019
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Session Six: The Role Of Accounting In The Early Revelation Of Sub National Fiscal Risks, Meeting 2019
- 1. ALLOWING THE STITCH IN TIME: THE ROLE OF ACCOUNTING IN THE EARLY REVELATION OF SUB-NATIONAL FISCAL RISKS Tim Irwin and Delphine Moretti December 2019, OECD, Paris
- 2. • The goal: mitigating spillovers of sub-national fiscal problems to other regions and the national budget • An assumption: this is easier if sub-nationals prepare accounts that allow early detection of looming fiscal problems—e.g., timely, audited, comparable, comprehensive • Those accounts can be used by national governments or by others according to constitution and national strategy • It follows previous OECD research on, e.g., accrual accounting and on insolvency regimes for sub-nationals • It draws on questionnaire responses from 29 OECD countries and 3 Key Partners and a closer look at practice in 6 countries • The work is in progress, and the data need to be reviewed 2 The research
- 3. 1.1 1.1 1.9 2.2 2.3 2.8 3.0 3.0 3.7 4.2 5.3 5.9 6.0 6.0 7.3 7.4 7.8 10.3 10.8 10.8 10.9 11.2 12.8 13.2 14.1 15.1 18.0 21.4 21.9 22.3 26.9 31.8 34.4 58.9 Hungary Greece Ireland Israel Luxembourg Slovak Republic Slovenia Turkey Czech Republic Estonia Poland Korea New Zealand Mexico United Kingdom Portugal Latvia Australia Netherlands Denmark Italy France Iceland Finland Sweden Austria Norway United States Belgium Switzerland Germany Spain Japan Canada 3 The importance of the issue varies by country Sub-national debt as % of GDP, 2016
- 4. 4 Accrual accounting is now common among sub- nationals – allowing more comprehensive information 63% 34% 3% Accrual Some mix Only cash
- 5. 44% 47% 9% All levels All sub- nationals No common standards 5 Uniform accounting standards are also common – improving comparability
- 6. 6 Most national governments monitor an indicator of liabilities more comprehensive than debt 53% 28% 19% Broad measure of liabilities Only debt National government does not monitor
- 7. 7 Many national governments monitor both cash and accrual deficits 34% 13% 31% 3% 19% Only cash Only accrual Both cash and accrual No deficit monitored National government does not monitor
- 8. • Accounts that are more comprehensive: – consolidate controlled entities, such as debts of sub- national banks and other businesses? – report more non-debt liabilities, such as pensions and public-private partnerships? • More reporting of medium- and long-term fiscal forecasts and reports on sub-national fiscal risks? • More use of data on sub-national infrastructure assets—and more reliable data on their values? • In countries with large numbers of sub-nationals, more use of statistically based approaches to monitoring? 8 How could sub-national fiscal data and monitoring be improved?
Editor's Notes
- The purpose of the study done by the OECD is to assess whether the financial information produced by sub-national governments in the OECD is good enough to minimize if not avoid such events. Accounting practices matter because depending the type of accounting used, information will be more or less comprehensive and problems will show up earlier or later. To say things very quickly, and in a simplified manner, one the one hand, cash accounting has the merit of clarity and accessibility, but allows relatively easily to ”hide” certain expenditures of sub-national governments, by delaying the moment when the actual payment happens and shows in the accounts. On the other hand, accrual accounting, which is the accounting system used by private sector firms, requires that all obligations, even those that have not paid yet, be reported on the balance sheet. It also requires that detailed information be published on potential sources of cash outflows, mainly guarantees, be measured and disclosed in the annual accounts. More specifically, in the case of sub-national governments, good cash-based accounts and measures of debt show whether a sub-national government is generating enough cash to service its debts, and they allow the national government to establish rules that limit sub-national deficits and debt. Also, sooner or later, all financial operations show up in cash deficits and in difficulties repaying outstanding debt. But problems may be building up well before these things happen, and detecting the problems early on requires accrual accounts. To take one example, a struggling sub-national government may respond to declining revenues by delaying payments to suppliers – as happened during the European debt crisis in countries such as Italy and Spain. For a while, the struggling sub-national’s cash accounts may remain in balance, thereby concealing the looming problem. Good accrual-based accounts will reveal the problem earlier since they record spending when the government is invoiced, and not when it pays. It is also helpful if sub-national accounts reveal the liabilities of the entities that the sub-national owns or controls. These liabilities are often explicitly guaranteed by the sub-national government and, even when they are not, it may be difficult for the sub-national government to avoid standing behind them. Monitoring the liabilities of sub-national entities is especially useful when the sub-national governments are tempted to avoid restrictions on their own borrowing. Australia, for example, experienced this tendency in the early days of the Loan Council, when borrowing limits applied only to the states themselves. The states responded by having local governments and semi-independent state bodies do the borrowing on their behalf. Early detection of problems also requires timely accounts. To be timely, accounts must be published on a sufficiently frequent basis (e.g., quarterly instead of only annually), and there must be a reasonably short lag between the end of the period and the publication of accounts. To ensure reliability, the annual accounts also need to be audited, increasing the necessary lag. Finally, forecasts should be ideally included to show how the financial situation of the subnational government is likely to evolve. So where do OECD countries’ sub-national governments stand in these areas?