PUBLIC AFFAIRS AND MEDIA RELATIONS BLOG - Clive Booth

There may be trouble ahead…

But while there's Gordo, and Mandy, and time for romance, let's face the music and dance?

UK public finances are in a dire state. The UK's political masters and the opposition parties all claim to have the solution to repairing the debt burden but their challenges are huge. With government debt forecast to reach £1.4 trillion by 2013/14 cuts of around 10% in government spending have been mooted. To cope with budgetary restrictions as scything as this, serious considerations need to be given to the extent and method of public service provision.

In ACCA's paper There may be trouble ahead – The need for public sector redesign, Richard Harboard, a member of the ACCA UK Public Sector Network Panel grapples with some of these issues putting them into context.

Local councils are just one sector of the public services that are facing serious budgetary issues. Increases in grants received by local governments for 2010/11 will be, on average, below inflation. So, with council tax increases limited to below 5% and low interest rates offering a reduced return on investments, councils will be scrambling to balance their budgets.

These expected savings spring from the final report of the Treasury's 'Operational Efficiency Programme' (OEP) that came out just before this year's budget in April 2009. This report made five key recommendations to find savings: cuts to back office and IT operations; greater joint procurement; regular review of assets that could be sold off by the government; a new government property agency to manage property more efficiently; and, most significantly, the implementation of 'Total Place' initiatives.

The OEP estimates that these 'Total Place' initiatives, which involve getting service providers to share operations and services, could lead to savings of between 20-30%. It has been suggested by some commentators that possible schemes could include the NHS' national payroll structure being extended to the whole public sector, or BT dealing with all public sector payments.

However, there are two key problems with placing too much faith in these initiatives as a solution. Firstly, 'Total Place' schemes do exist already, some very successfully, however the ones that are successful tend to be limited geographically or are limited to very specific tasks. The schemes supposed in the OEP are neither. Secondly, the OEP fails to address some of the political difficulties in local government that could arise should these sharing schemes be enforced.

Achieving the savings envisioned by the 2009 budget will be difficult to achieve in the short term. If public services are to continue to be provided then they shall have to be provided in a different way. It is also then necessary to consider whether some services should be provided by the stretched public sector at all.

Irving Berlin penned There may be trouble ahead in gentler times. Harboard's paper is worth the read to appreciate just how the public sector might survive the next decade with pretty little to dance about.

Word of the week: carbonivore

Spotted in this week's Economist, the word 'carbonivore'. Surely the first usage of the noun, but destined to become widespread by the end of COP 15?

Colleagues of mine have done an amazing job of trying to explain what to expect will happen at the global climate change talks in Copenhagen, in December. Carbonivores, as described by the Economist, are primarily individuals, organisations or whole nations whose economic existence relies on an unsustainable reliance on fossil fuels. Changing hearts and minds will be one of COP 15's biggest challenges.

It's not easy. ACCA has been actively involved in the unfolding debate on sustainability and corporate social responsibility since 1990. Our position is outlined in the policy document published in August 2008, Going Concern? A Sustainability Agenda for Action.

We also produce a quarterly e-newsletter covering international climate change news -  Accounting & Climate Change.

Accountants are playing an increasing role in the accounting, compliance and reporting requirements of CSR and have considerable expertise in these areas. ACCA champions the extension of corporate reporting to include the social and environmental aspects of a business and has a worldwide programme of events to promote best practice in sustainability reporting in Australia/New Zealand, Hong Kong, Malaysia, Pakistan, Singapore, South Africa, Sri Lanka, the UK, and the US/Canada.

So, carbonivore. Remember where you read it first. Well, second.

Redrafting of global standards running at different speeds

Ahead of the next G20 in Pittsburgh, the US has an opportunity to show leadership and commitment to the principle of an accountable, transparent and sound system of international regulatory cooperation. ACCA has long argued that this is best achieved though the adoption of one set of reporting standards, the principles-based IFRS, to meet global market needs.

Along with others, ACCA also warned against political interference in the setting of international standards, as the reliability and predictability of accounting standards are key prerequisites for a sustainable and well-functioning capital market. Robust and credible accounting standards are essential for a speedy recovery from the financial crisis.

We have issued a news release concerning the lack of co-ordination between the world's two main accounting standard setters on a vital new standard on fair value.

Richard Martin, head of financial reporting at ACCA, says: 'Currently the two boards seem to be moving at different speeds and towards different positions. There are highly significant differences in the proposals which cannot be skated over. It also seems possible that IASB will have issued the first part of its new standard on financial instruments before FASB has consulted in the US on any proposals. This sequence continues the problem of demands for a "level playing field", which have prompted some adverse developments in financial reporting over the past year.

'We would prefer that the use of fair value was not expanded significantly from where we are,' continues Richard. 'There doesn't seem much support for the full fair value model that FASB are promoting.

'If more assets and liabilities are valued according to their market price, more volatile balance sheets could result. This could produce a pro-cyclical result, as the market tends to overshoot on both the falls and the gains.'

Richard also expressed concern that a phased introduction of the new standard might create problems for people who prepare or use accounts, as many preparers will want to see the whole package before making their various choices and set their new policies. There are significant risks that there will be problems with having parts of a new standard to co-ordinate and work with parts of the old standard. 

Not letting the facts get in the way of a good story

Anyone familiar with Shrek will remember it's Donkey who steals the movie. 'Pick me, pick me!' he cries annoyingly, craving love and attention all the time. In similar fashion think tanks and business leaders who should know better are falling over themselves to be the first to call the end of the recession.

Err, why? A slightly more cautious and adult approach is surely prudent. Given the irrational exuberance that got the global economy into the mess it's in being the world's most optimistic soothsayer is probably foolhardy.

Their evidence that the world’s economy is recovering is fragile evidence, judging from our own Global Economic Conditions Survey.

ACCA’s third quarter survey of 1,200 finance professionals in 92 countries has shown that while more finance professionals now believe the downturn has ‘bottomed out’, they also believe that a reliable recovery is still unlikely to return before late 2010 - more than a year away.

Although business confidence continued to recover in the third quarter of 2009, those who saw improvements in conditions (31%) were still outnumbered by those who had lost confidence (33%).

While increasing percentage of members (34%) now believe that global economic conditions are either about to improve or already improving, the emerging consensus, expressed by 44% of respondents, appears to be that current conditions mark the bottom of the downturn and will persist for some time.

Nearly 40% are reporting that their organisations’ income is unlikely to change over the next three months, with an equal number anticipating further losses of income, while only 22% have seen their prospects improve.

The survey also shows that as business incomes continued to decrease in the third quarter of 2009, there was a rise in late payment as well as supplier and customer bankruptcies.

Investment in staff fell at an accelerated rate in the third quarter and investment in capital projects, which had previously shown signs of stabilising, seems to be weakening further.

The global survey does highlight substantial regional variations, with the Asia-Pacific region, Africa and, to some extent, Central and Eastern Europe reporting much higher levels of business confidence, and are more optimistic than their counterparts in Western Europe and the Americas.

The figures also revealed dramatic differences in how finance professionals thought government would react to the situation, with 77% of respondents in Africa and 60% in the Asia-Pacific region expecting increases in public spending, while 68% of Western European respondents expect spending cuts. Western Europe was the only region in which public spending was, on balance, expected to fall over the next five years.

Rather than calling the end of the recession, early economic thought leaders should guard against complacency – and not confuse less panic over the crisis with strong evidence that the recession is over everywhere.