FIRST PUBLISHED: The Australian, 12 December 2012, page 28
Many are still not open about their true debt level.
With the world continuing to battle severe economic headwinds, we are
looking for global and sovereign country leaders to step up their
economic and management accountability.
And while the International Monetary Fund has stressed the importance of strengthening sovereign balance sheets, it appears many governments are not open about their true level of debt.
This is an unsurprising result given the prevalence of cash accounting that ignores government liabilities.
The public’s loss of trust in a government’s ability to manage their country’s financial position is one consequence of that opaqueness.
Notwithstanding these observations, the Group of 20 nations has persistently ignored the issue of poor quality of government accounting in its discussions about the financial crises and its recommendations.
Australia’s elevation to a central role in setting the G20 agenda for the next three years is a huge opportunity to change that.
I believe that a willingness by governments to commit to the adoption of accrual accounting standards-based financial and budget reporting is critical for the effective management of government and its entities — a necessary precondition for good economic decision-making.
A more transparent government reporting regime is evidence of
government commitment to being accountable, itself a necessary step to
regaining the trust of the public.
This is something successive Australian governments have got right over the past 16 years, and the experience of being held to at least the same level of integrity and transparency by its citizens as that demanded of companies provides a road map to assist governments of the world in implementing the necessary reforms more easily and in a cost-effective way.
As George Megalogenis wrote in his book The Australian Moment, analysing the global financial crisis, the rest of the world is asking: how did we get it right?
Australia’s political leaders from both major parties got two matters right: first, they implemented the requirement of robust accounting information in the form of financial and budget reports; second, they were prepared to accept advice that made use of that information.
Some of the benefits of these actions are obvious today and make Australia’s financial standing the envy of other countries.
For example, the Australian government is one of only eight (of 135 rated) central governments that enjoy a AAA rating and stable outlook from the three major ratings agencies.
It is also better informed than its counterparts in Europe and North America to develop and implement policies that address inter-generational fiscal sustainability in the context of an ageing population.
This is evidenced in the additional data on future liabilities, including superannuation and employee entitlements, reported by the government, and the decision by the Howard government to develop economic policy to provide for its employees’ retirement costs rather than leaving it to the next generation to pay for through the tax system.
Implementation of this policy saw the government close its unfunded defined benefits superannuation scheme to new members and establish the Future Fund to invest funds in financial assets for the purpose of generating revenue to meet the obligations of the government to its employees.
Today, Australia has a relatively trivial federal government liability position when compared with that of many other national governments.
The poor quality of accounting practised by most governments of the world is a huge issue confronting the world’s economies.
How can we fix an economy when we can’t even see the problems?
Australia’s position within the G20 presents a unique opportunity to have the G20 examine this issue.
To not take action is likely to result in many governments repeating the actions that caused the current crises and fail to understand fully the financial consequences of those actions.
The past five years show that this cannot be a good outcome for anyone.