Meeting the challenges of public financial management in the GCC

Governments spend nearly 50 per cent of global GDP, and in the GCC countries, higher oil prices helped finance rapid increases in spending.

During 2003 and 2014, the GCC region witnessed significant expansion in public infrastructure, public sector wage bills, and social transfers, which led to strong growth in non-oil activity. However, a healthy public sector is usually a critical factor in ensuring a healthy wider economy. Government spending, whether on education, infrastructure or research, underpins economic activity and government officials often set the rules within which businesses and markets operate.

As countries around the world grow and develop, and national incomes increase, the business of successfully managing both the economy and public finances becomes more complex.

Governments enter into long-term agreements such as public private partnerships and incur obligations that require them to have a more sophisticated understanding of the long-term consequences of decisions. Especially as these obligations often mean that future tax revenues are committed to meet expenditure for many years ahead.

In recent years, almost every jurisdiction has experienced slower economic growth and the global outlook for growth remains weak. If economies grow more slowly than the rising cost of public expenditure, there will be more pressure on public finances. Almost all governments will need to think much more carefully about the consequences of obligations they take on and how they will manage public expenditure on a sustainable basis.

What this actually means is there is an increasing need for the same sorts of financial management systems, techniques and skills that are found in business. It is not enough to simply think in terms of cash in and cash out. There is a need for the modern accruals accounting techniques that have been used in business for decades to ensure that the financial position of the government can be properly understood.

Time for a change – the role of the finance ministry

In the aftermath of the 2008 financial crisis, it was clear that the world needed to improve public financial management – which includes the need for a transition to accruals accounting. Very often this is the task of the finance ministry.

The finance ministry is first and foremost the guardian of the public finances. Its roles may be varied, but ultimately its primary duty is to ensure that the public finances are sound. In particular, to ensure that government spending plans are prudent and can be afforded within the expected revenues from taxation and other sources. In short, to provide economic security for the country and its citizens and ensure public finances are sustainable.

This primary role implies other duties for the finance ministry, which include: ensuring that forecasts of revenues are accurate; making sure arrangements are in place for effective revenue collection; and that public money is spent wisely with value obtained for it.

Finance ministries must also ensure there is enough flexibility in their plans to be able to compensate if circumstances change. In particular, if unforeseen events occur, they must also ensure there are sufficient reserves or access to borrowing to ensure that government activities and services can still be delivered.

All of these duties imply a need for accurate and timely financial information – not just about the cash expended or received, but also about future obligations and the resources that will be available to meet them. The finance ministry should be the natural focus for improving public financial management.

What needs to be done?

Ultimately the demand for better financial management in government needs to come from policy-makers. While the legislature can demand better accountability, it is the executive that will have to take the decision to prioritise improving financial management over other competing change initiatives.

A clear case for change has to be made to the executive of the benefits of improving and professionalising government accounting will deliver. If, as professional accountants, we believe our skills, experience and knowledge can help improve the management of the nation’s finances, we have a clear duty to act in the public interest to promote this to our policy-makers.

As professional accountants, we also know that if you want something to be done better, someone must be made both responsible for doing it and held accountable for what they actually do. We therefore have another duty, which is to stand up as a profession and volunteer to take some of the responsibility for the development of improved financial management practices in government.

In playing this role, professional accountants can bring another important benefit to public financial management: their experience in the design of the systems for corporate governance. In particular, they bring experience of designing systems to support change management and to implement modern accruals accounting.

Getting the right skills into government

To discharge its responsibilities, it is not enough for the finance ministry to have comprehensive accruals-based financial information. It also needs financial management skills to make use of it, especially skills in budgeting, forecasting, estimating, financial analysis, accounting, risk management and good judgement.

Fortunately, these are the very skills that professional accountants are trained to have in abundance. Unfortunately, in too many places, there are not enough professional accountants working in public service or in senior roles. This needs to change.

There is a widely acknowledged need to bring modern business practices and financial management skills into government. International organisations such as the International Federation of Accountants (IFAC) have a role to play in promoting the profession within government. However, it will need government action to strengthen the financial skills of public employees and especially the skills in their finance ministries. Unless officials have a strong grasp of the fundamentals of finance and the way in which modern accounting records income and expenditure, ministers cannot expect to receive high quality advice.

Final thoughts

The first duty of any government is to ensure the security and well being of its citizens. Economic security, supported by sustainable public finances is as much a part of that duty as physical security. Indeed, in the long run without sound and sustainable public finances, there can be no other form of security.

That is why it is so important that governments modernise their public financial management practices to keep pace with the modern era and the increasing complexity of government. In doing this, governments need to recognise the value that modern accounting practices and professional accountants bring.

Ross Campbell is director – public sector at the Institute of Chartered Accountants in England & Wales