Dada Adefolami

DADA ADEFOLAMI

Austerity is a commonly used to describe the financial and economic environment in which many countries find themselves. A difficult economic condition created by government measures to reduce a budget deficit, especially by reducing public expenditure, in economics, austerity is the policy of reducing government budget deficits. Although the detailed aspects of ‘austerity’ are vary between countries.

There has been a history of running significant public budget deficits for a period of years up to the start of the global economic recession in 2008. These annual budget deficits have been financed by borrowings which have added to the stock of public national debt.

There has been only limited (or nil) economic recovery in the aftermath of the global economic recession. Large public budget deficits have continued to be financed through borrowing, thus adding further to debt , while at the same time governments have implemented policies of fiscal consolidation designed to reduce the size of annual borrowing requirements. This has usually involved some combination of tax increases and significant reductions in public expenditure.

In cases where certain countries found it difficult to borrow extensively and/or the cost of borrowing was unsustainable, then some form of financial bail-out would be funded by the IMF and/or the EU, often with demands for significant reductions in public expenditure as a ‘quid pro quo’. This forced governments to reduce public expenditure, with social consequences. A number of these international bodies are now beginning to amend their views as a result of noticing the impact of these traditional ‘sound money’ policies on growth and social stability.

In carrying out the policy, many countries could be said to be committing to the fallacy of composition, which results in an attempt by all sectors of the economy to reduce the levels of debt simultaneously, and this becomes a mutually self-defeating exercise.

Although governments usually have a range of political and social objectives in mind when controlling business, they also rely heavily on tax revenues levied on company profits and, where relevant, sales and other transaction taxes. I believe the reason for the deregulation of much economic activity and stoppage of oil price subsidies is the need to increase tax revenues and create employment by gaining the economic efficiencies offered by competition and executive reward packages that are aligned to added shareholder value.

Financial austerity policies will imply some combination of significant increases in taxation coupled with large-scale reductions in public expenditure, though global economic recession commencing in 2008 has had an impact on government finances.

While some will argue that cuts of this magnitude can be delivered through ‘efficiency savings’, the reality is that the savings that can be made are greatly exaggerated and/or are exceedingly difficult to deliver for various reasons. Similarly, there are political statements that everything will be satisfactory when things are ‘back to normal’ – in other words, when decent levels of economic growth have again been achieved. Instead it seems likely that the public sector will have to make do for a significant number of years, with lower levels of resources than it has had in the past and must concentrate on making better use of those resources. This leads to certain fundamental questions having to be asked about public services.

What should be the role and limits of the state in the provision of public services? What should be the relative priorities for different aspects of provision? What should public services actually be trying to achieve (i.e. what are the strategic objectives)? How public services should be paid for, including the balance between tax revenues, charges and insurance schemes? How should the public sector be organised and governed? Can the working practices of staff remain unchanged? What should be the role of the private sector in public service provision? How can improvements in efficiency be identified and realised?

Answering these is not always easy and a robust process of analysis and decision-making is needed. Financial concerns are obviously key and good financial management will be vital. Hence there are very strong roles for public sector management – and public sector finance functions – to pursue.

Need To Promote Transparency

Misleading financial reporting and poor governance in relation to public finances can be seen as contributing to the current financial crisis facing Nigeria in the years past. Thus, at the highest levels of government, there is a key role to be played, nationally, to improve reporting and governance arrangements so as to avoid any repetition of such events. This suggests a much stronger role for the Presidency/Executive at the heart of government than has traditionally been the case.

Sustainability
Longer-term financial sustainability is a key issue for public sector organisations. However, even before the onset of financial austerity programmes, many publicly funded organisations had service configurations that were simply not sustainable in the longer term in financial and/or operational terms. The advent of financial austerity has merely added to these concerns. A key responsibility of the board in the public sector is to point out those situations where there is no longer-term sustainable and to effect what changes are needed.

Stronger Strategy

There is need for a clear strategy and longer-term vision of what public services should actually be trying to achieve. In many cases, such a vision does not exist and public services operate in something of a vacuum, with little in the way of clear drivers for change. Once such a strategic vision is promulgated, the budget system should be one of the key drivers for achieving that vision and a means of shifting resources accordingly. The Presidency/Executive has a key role to play here. There is a clear need to ensure a strong shift away from annually based incremental budgeting models to a multi-year approach where strategic priorities have a clear input into budget decisions.

Prioritising Services

In spite of what argument, it is extremely unlikely that the public spending cuts required can be delivered totally by real efficiency savings. In such situations, Management / Board of organisations often have recourse to crude methods of knocking the same percentage off everybody’s budget to balance the books. However, this implicitly assumes that all service activities are of equal value- but clearly they are not.

The key role of Presidency/Executive therefore is to ensure that when spending cuts are being considered the costs and benefits of the activities the organisation undertakes are properly evaluated and some attempt should be made to prioritise those activities. In this way, spending reductions can be made rationally by eliminating lower-priority activities rather than damaging higher-priority activities through random cuts. These changes then need to be factored into budgets.

Performance IMPROVEMENTS
Obviously financial austerity poses great challenges to the Nation to make quantum leaps in the efficiency of service provision. ThePresidency/Executive has many roles to play here, including:

1. The development of budget-setting mechanisms which promote and reward performance improvement rather than inhibit it
2. The use of robust investment appraisal methods when making capital investment decisions, including the private finance initiative (PFI)
3. The incorporation of robust financial performance measures into performance management systems.
4. The development of costing systems to enable service costs to be analysed and compared with other providers .

Finally
Austerity policies may include spending cuts, tax increases, or a mixture of both. Austerity may be undertaken to demonstrate the government’s fiscal discipline to their creditors and credit rating agencies by bringing revenues closer to expenditures.

The overall strategy of the government should be supported by, and consistent, with a suitable financial strategy. This should involve the preparation of robust, multi-year projections of the income, expenditure and capital streams associated with the strategy, which, in turn, would be linked to reasonable projections of likely financial resources available in future years. There should also be broad agreement among stakeholders (e.g. the Presidency, political leadership, board, executives and legislators) that the financial strategy in which the government strategy is based is a reasonable one, and the published strategy of the nation should incorporate its financial strategy and financial forecasts together with the key projection made and risk factors identified.

Written By: Dr. Dada Adefolami MBA, PhD, CPFAcct., Finance / Management Consultant Certified Forensic Accountant. [email protected]