Fiscal policy: foresight foretold

Fiscal policy: foresight foretold

How far away is a future-orientated approach to fiscal policy?

An auditor general on a ‘fiscal wake up tour’ – it couldn’t happen here – or
could it?

In the US it already has – David Walker, the United States comptroller
general, has recently been to 13 cities warning about the adverse fiscal
implications of recent social insurance changes in the US. And at the recent
event on internationalising the accountability profession hosted by CIPFA and
the Public Management Policy Association he challenged the five UK heads of
audit to ‘increase insight and facilitate foresight’.

So how far away from this sort of future-orientated approach are we in the
UK? And what would be involved? In the private sector, auditors routinely
provide opinions on profit forecasts. Some of the foundations are already in
place in the public sector too. The comptroller and auditor general already
reports on the government’s budget assumptions, and his true and fair style
opinion on the HM Revenue and Customs tax accounts relies on a review of
forecast revenues receivable in the next year totalling some £80bn.

However, in the public sector much longer time frames are needed in order to
assess fiscal sustainability – HM Treasury publishes annual long-term public
finance reports based on cash flow projections extending out over 50 years or
more.

Inevitably the uncertainty attached to such projections increases with the
time-frame covered, so they cannot be audited in the same way as conventional
financial statements. However, if an individual public sector body or a
government has significant ‘commitments’ to provide social benefits and other
services, then these projections are likely to be a key ingredient in an
auditor’s going concern assessment.

If auditors can review the assumptions, data and models underpinning cash
flow or profit projections for one year, then I believe the same approach can be
applied to rolling these projections further forward.

The International Public Sector Accounting Standards Board has recognised the
importance of evaluating fiscal sustainability, and last month decided to
initiate a project on this topic.

This will inevitably break new ground, as it will involve getting to grips
with novel concepts such as generational accounts and comprehensive balance
sheets, as well as working with statisticians and economists. However, by
applying the basic principles, I believe that auditors can play a key role.

So while the NAO website is not yet offering tickets for the comptroller and
auditor general’s first UK tour,I wouldn’t rule it out completely.

Ian Carruthers is policy and technical director at
CIPFA

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