Sunday, 29 January 2017

Tax and Inequality

For the Global #FightInequality week (14-20 January 2017), TJN-A and Oxfam produced a great short factsheet on Tax and Inequality. This provides an introduction to the subject and links to recent publications that you may have missed.

Along with climate change the inequality/corruption complex provides one of the greatest challenges to our societies.  We know that the most corruption societies in the world are also amongst the most highly unequal.  Similarly, the Nordic countries with the lowest levels of inequality are, not surprisingly, the least corrupt countries in the world.

Tax systems play a key role in redistributing wealth. But for this to be achieved, progressive taxation, largely destroyed over the neoliberal generation, needs to be rebuilt. This factsheet explains the basic terms involved and indicates what needs to be done to ensure that taxation achieves its twin aims of providing government income and reducing inequality.

As the factsheet explains about VAT, the favourite tax of recent decades, “studies have shown if not well applied can further exacerbate income inequality”, to put it mildly.

The factsheet also provides a good introduction and definition of the key terms used in this topic.  

The full factsheet is available for free download from:

For more detail on inequality, Oxfam have produced another briefing document in their Even It Up series, An Economy for the 99%: It’s time to build a human economy that benefits everyone, not just the privileged few.

New estimates show that just eight men own the same wealth as the poorest half of the world. As growth benefits the richest, the rest of society – especially the poorest – suffers. The very design of our economies and the principles of our economics have taken us to this extreme, unsustainable and unjust point. Our economy must stop excessively rewarding those at the top and start working for all people. Accountable and visionary governments, businesses that work in the interests of workers and producers, a valued environment, women’s rights and a strong system of fair taxation, are central to this more human economy.

Tuesday, 25 October 2016

Accrual Accounting will Increase Corruption and Reduce Public Accountability

I was recently interviewed by a researcher who is looking at attitudes towards the European Public Sector Accounting Standards (EPSAS) and the effects they may have.  A transcript of this interview is provided below.

Will EPSAS reduce corruption ?
Andy Wynne: Increase you mean? The cash accounting system is much more transparent than any accrual accounting system. The cash accounting system is based on invoices and other documentation that can be checked and provide evidence on the payments/ receipts.
Accrual accounting systems are based on fair value. There are several different ‘fair values’. Fair value relies on different hypothesis which can be manipulated.
So some road bridges in Britain are one thousand years old and many trains were introduced in the 1970s, but my local council offices were demolished after only 40 years.  So who can really say what the useful life of an asset will be?

Is there a way to avoid those shortcomings?
Andy Wynne: Yes, but why replace a system that works with one that is less good. All the evidence and all the independent academic studies show that the costs of accrual accounting are significant and the benefits actually achieved are limited.
There are studies in Britain by the most well-known public sector accounting professors, they all give the same message. Accrual accounting in the public sector is very expensive and the benefits claimed for it are not actually delivered.
One of the things claimed is that we need to have accrual accounting to have an accurate view on the level of government debt. But Eurostat provides this, on a comparable basis, every quarter for all the European governments.
In Britain the national statistics body, the Office for National Statistics also provides a figure for the level of government debt every month.
The accrual accounting approach in Britain, Whole of Government Accounts, still takes over a year to produce a similar figure. Thus with accrual accounting we move away from a timely regular monthly report and with Eurostat those reports are already standardized across Europe. 
The accrual based financial statements are not giving that. The accrual accounts from France and Britain are not consistent for instance and they are, at best, only converging slowly.
In Britain they moved to IFRS a couple years ago. In Britain we gain late information which is inconsistent with existing statistical information. It reduces accountability and confuses people. Why are there two different numbers for the level of government debt and why are they different?
If we want comparable information on government statistics that can be provided by Eurostat or globally by the IMF Government Financial Statistics.

The harmonization of public accounting standards should improve the accuracy of GFS isn’t it? GFS are on an accrual basis.

Andy Wynne: I don’t think they will. Government statistical information is provided every single month. While government accounting information is only provided once a year. Thus it does not enable more accurate statistical information. I don’t think the government accounting information feeds into the statistics information. I don’t see how this accounting information will make GFS statistics more accurate.
Most central governments in Europe are still broadly on the cash accounting basis. To get anywhere near the comparability of information we have currently with Eurostat would take years, be very costly and there is no evidence that there would be a clear benefits.  There is lots of talk about EPAS, but with austerity is this really a priority for European governments?
Why has the Irish government not adopted accrual accounting - they are next door to Britain and speak the same language?
Accrual accounting for the public sector is an act of faith. Why now? The idea behind it is that the private sector is efficient and produces wealth while the public sector is bureaucratic and a financial drain. The only reason for adopting accrual accounting is because private sector accounting, like their management generally is considered superior. But it does not make any sense - the banking crisis and austerity have shown the deep problems with the private sector. 

In Britain you would say the move to IFRS did not provide any benefits at all?
Andy Wynne: That is true! I would go further, and say that the move to accrual accounting has reduced public sector accountability. Financial statements under the cash basis are very clear. Anybody with a little maths background can understand it is only a comparison of payments and receipts with the approved annual budget. Now nobody understands financial statements under accrual accounting. You need a strong level of financial literacy and intimate knowledge of the approaches adopted to properly understand financial statements under accrual accounting.
If you want to reduce public sector accountability, then the best thing to do is to adopt accrual accounting, nobody will then understand the financial statements.
In the private sector it is different, you need to have accrual accounting to measure annual profit. That’s why accrual accounting was developed. In the public sector we do a comparison to the formally agreed annual budget, so it is a different approach - we don’t need it.  Public understandability and accountability is important.
In the private sector investors  and shareholders can have private advisors to cope with the complexity. But in the public sector are members of parliament public accountants? Are members of the Public Accounts Committees qualified and experienced public sector accountants? I doubt there is a single parliament which can really understand the figures behind accrual accounting - because they are extremely complex.

You mentioned that well known experts in public sector accounting have documented the facts that it will be extremely costly and deliver little benefits could you share with us some articles?
Andy Wynne: Yes, the following with provide an overview of the adoption of accrual accounting in the cases of Britain and Scotland and its non-implementation in Ireland:


Looking at other parts of the world do you observe the same impacts of accrual accounting?
Andy Wynne: Yes in Nigeria, for example. The government has agreed to adopt accrual accounting, but this would be a disaster. It costs a lot to produce the financial statements and requires external advisors to do so.  With the fall in the oil price the government cannot afford the reform and so I understand that it has stalled.
Even the World Bank in Nigeria is not pushing for the adoption of accrual accounting. The World Bank is not encouraging it now and in fact is advising the government to slow down its move to accrual accounting.

What about Greece, didn’t cash accounting allowed the manipulation of the accounts?
Andy Wynne: I don’t see clear evidence for this. I don’t see why a move to accrual accounting would reduce account manipulation. For instance, in UK many expenses are off the balance sheet. Public Private Partnerships and manipulation is now easier thanks to accrual accounting. Thus if there has been manipulation, accrual accounting would provide more room to manipulate the accounts. So accrual accounting cannot be the solution. Accrual accounting is more complex therefore the jobs of the auditors is more complex and thus reduces the efficiency of audits. Accrual accounting by being more complex and less transparent increases the risks of manipulation and corruption and reduces public accountability.

Thursday, 22 September 2016

Increasing evidence that privatisation and outsourcing do not work

For a generation now the assumption has been that outsourcing and privatisation are appropriate and efficient ways of providing public services.

These have always contested narratives, but increasingly this evidence is clear that market-oriented ‘reforms’ in the provision of at least health, education and public safety services have failed.

Not only do we now have the evidence, but the political will is increasingly for direct public sector provision of essential services.  That is why people vote for Bernie Sanders in the US, Jeremy Corbyn in Britain (again!), Syriza in Greece, Podemos in Spain, agains the ANC in South Africa etc etc.

For a useful review of the recent evidence see the following article:

The author, John Quiggin is an Australian laureate fellow in economics at the University of Queensland. He is prominent both as a research economist and as a commentator on Australian economic policy. He is a fellow of the Econometric Society, the Academy of the Social Sciences in Australia and many other learned societies and institutions.

The 2008 financial crisis laid bare many of the assumptions behind market liberalism – the theory that markets always know best, regardless of the problem. For decades, its advocates had dominated economics, helping to create an unthinking faith in markets, in which speculative investments were seen as fundamentally safe. The crisis seemed to kill off such ideas, but they still live on in the minds of many – members of the public, commentators, politicians, economists, and even those charged with cleaning up the mess. In his book, Zombie Economics, John Quiggin explains how dead ideas still walk among us – and why we must find a way to kill them once and for all if we are to avoid an even bigger crisis in the future.

Across much of the Global South we have another reason for avoiding outsourcing, contracting, private sector provision etc etc - the challenge of corruption.  Contracting is a major risk area for fraud and corruption - so if we have direct public sector provision of public services (including capital contracts, building etc) we avoid the risk - easy!!