Ritchie on accruals accounting for government

Now this is actually interesting from Ritchie.

If we do a bit of accruals accounting we can close the government deficit. That is, recognise tax revenue when it becomes legally due (ie, when people do the action which leads to a tax liability) rather than when it is actually due or paid, then there was no deficit under Brown.

Well, yes, sorta. Because of course accruals accounting means that you don\’t just recognise revenues in this manner. You also recognise liabilities in this manner.

Which means that we have to add into the mix the state pension liabilities accrued, the public sector pensions liabilities accrued, the PFI liabilities accrued and so on: things which would rather blow out that deficit instead of contracting it.

Odd thing for an accountant to forget really.

Or is he an economist these days?

14 thoughts on “Ritchie on accruals accounting for government”

  1. I’ve never understood this, perhaps you can help. The govt has a future pension liability. It is also very likely to keep buying stationary. Why doesn’t it have a future stationary liability? What draws the line between liabilities that ought perhaps to be thought of as a debt and those which merely future operating costs?

  2. ah … the clue might be whether you still have the liability if you stop operating. But when’s the government going to stop operating?

    Tim adds: Indeed, this is the argument against accruals accounting for governments.

    However, the point of accruals is that if you’re going to account for income when the obligation to pay is created then you must also account for liabilities in the same manner. You have to do one or the other essentially: not either or as the desire takes you.

  3. Oh sure, I get your last point. But I hadn’t previously known that this was the argument against accruals accounting for governments – it was something that’s always puzzled me. So thanks.

  4. I’ve attempted to post a comment on his site to this effect – not sure it’ll get through moderation, but as I’ve not posted there before I figured it’s worth a try 🙂

  5. Note that even if you do go to accruals, PFI liabilities are surprisingly low (about 3% of GDP last time I did the sums, because most PFI payments are for ongoing services, where the liability is only incurred when the services are provided).

  6. His argument’s rubbish (surprise, surprise).

    Of govt receipts of some £500bn, only £34bn is corporation tax. As someone has pointed out (and Ritchie has incorrectly objected to) most other tax receipts aren’t time-delayed to any real extent. Oh, that I had 12 months to pay up on my Sch. E income tax!

  7. @ john b http://burningourmoney.blogspot.com/2009/06/pfi-millstone-how-heavy-is-it-now.html has some useful stats on PFI, although it’s from last June. If I weren’t at work, I’d see what the numbers are like now (although I doubt they’ve changed much).

    The figures there suggest that even if the government could get out of paying the services element of the PFI, they’d still have liabilities of over £60bn, which may not be massive, but it’s not small fry either.

  8. As of 2008, it was GBP30bn according to the actual adjustments to report UK government accounts using IFRS, which I’d trust over a random nutter on the Internet.

  9. If you are self employed you pay money to HMRC on account each January and July. So you are never more than about 6 months behind.

    And I can’t see how moving to a ‘act now, pay now’ system (however that would work) would get more cash in to close the deficit. Yes you’d get a nice one off windfall as people had to pay the back tax and the current tax, but that can only be done once. The deficit is ongoing (I think like death, taxes and the poor, the deficit will always be with us).

    Or is this all part of Ritchie’s ‘spirit of the tax law’ campaign? HMRC can turn up on your doorstep at any point and demand money with menaces?

    ‘We have reason to believe you have had some income this month. Come on, hand it over, or Dino here might get angry. And when Dino gets angry he breaks things. You don’t want that do you? Its all legit. Ritchie said so.’

  10. That just says that they have to bring £30bn onto the balance sheets for 2009/2010. The PFI agreements can run for decades into the future.

    The latest one I can see on the Treasury website (http://www.hm-treasury.gov.uk/ppp_pfi_stats.htm – go to signed project list) ends in 2048, and the total outstanding amount to be paid is £222.4bn.

    A 30 year gilt is currently at around 4.3%, so applying this discout rate to the treasury figures gives an outstanding liability of £147.9bn.

    That doesn’t include the nearly £15bn of PFI projects that were still in procurement when the list above was published (Feb 2010 – list of projects in procurement is available from the same site)

  11. Zelazny, erm, you know what a balance sheet is, right?

    The point is, if you state the UK’s national accounts using IFRS – ie under the same measure you’d use if the UK were a company – the total liability that comes up for all the PFI projects that were agreed by 2008, for their whole lives, is gbp30bn. Everything else is for stuff that hasn’t been delivered yet, and hence according to accrual-based accounting shouldn’t yet be recognised.

    Since there’s about an 8x difference between “total theoretically outstanding amount” and “stuff that is recognised in accounts under IFRS”, we can probably assume the gbp15bn of new projects represents an additional real liability of gbp2bn.

  12. but John B…if the Govt tried to pull out now, what would the impact be…i think Zelazny is trying to point out there are penal clauses which would not apply in most private lease contracts with the equity of reedemption etc. However, clarity is always welcome….especially where Brown has been tracking up the place. he does not have a great record for acting honourably, does he…eg the salry reduction to take effect when his successor took power…what a shithole the man is.

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