2 Mar 2016 11:53am

WGA and financial transparency

On behalf of ICAEW, Ross Campbell, Robert Hodgkinson and Martin Wheatcroft have contributed to the Institute of Fiscal Studies Green Budget with chapters on Whole of Government Accounts and infrastructure

On 26 March 2015, the Treasury published its fifth set of Whole of Government Accounts (WGA), reporting the government’s financial results for the year ended 31 March 2014 in accordance with International Financial Reporting Standards (IFRS). These financial accounts, prepared on a basis similar to those that the government has required businesses, charities and other organisations in the UK to comply with for many decades, consolidate the activities of over 5,500 public sector bodies across central government, devolved administrations and local government in the UK.

Together with an associated commentary and explanatory notes, they provide a more comprehensive picture of the government’s financial performance than that available through traditional fiscal reporting in the National Accounts. This is because the WGA capture a wider range of financial transactions than are reflected in the National Accounts, including charges for obligations incurred today that will result in cash outflows in the future, as well as integrating revenue and expenditure with a balance sheet and statement of cash flows.

The income statement records revenue and expenditure incurred, culminating in an accounting deficit of £149bn for 2013/14. This is accompanied by a cash-flow statement that reconciles the operating loss of £70bn with the net change in cash balances, and a statement of financial position, commonly known as a balance sheet, reflecting assets of £1,337bn and liabilities of £3,189bn at the end of that year. The statement of comprehensive gains and losses and the reconciliation of equity movements are combined in the table to provide a bridge between revenue and expenditure and the £224bn deterioration in the balance sheet over the course of 2013/14.

The revenue reported in the WGA for 2013/14 was equivalent to approximately £10,000 per person when divided across the 64.5 million people living in the UK at the time. This was exceeded by operating expenditure of £11,100 and net finance costs of £1,200 to reach an accounting deficit of approximately £2,300 each. Assets and liabilities, measured under accounting standards, were around £20,700 and £49,400 each respectively, resulting in a net liability position at 31 March 2014 in the order of £28,700 per person.

It is important to note that the financial accounts do not fully represent the economic and social costs and benefits to British citizens from government activity. However, the amount by which liabilities exceed assets in the balance sheet provides a measure of the scale of the challenge faced by the government as it attempts to strengthen the public finances.

If used properly, financial analysis based on the WGA can enable more comprehensive scrutiny around how the government plans to deal with its longer-term financial challenges than the narrower focus of the National Accounts allows, using the common financial language employed widely outside of government. Holding governments to account using the WGA therefore has the potential to improve the quality of policymaking and wider public debate.

It was HM Treasury’s analysis of fiscal policy in 1999 that resulted in legislation for the WGA, but it was only in 2008 that the then Labour government finalised the scope and timetable for preparing the WGA. It was therefore not until after the arrival of the coalition government, during a period of much greater economic turmoil, that the first set of modern financial statements in the form of the WGA were published.


As a consequence, the public, Parliament and the government itself have the potential to be in a much better position to judge progress against the government’s objective of turning around the state of the public finances following the financial crisis – provided, of course, that the WGA become a central part of the dialogue on fiscal matters.

The reduction in the deficit on a National Accounts basis of 35% from £153bn to £100bn between 2009–10 and 2013–14 contrasts with a reduction of only 20% in the size of the annual accounting deficit to £149bn over that same period. These principally arise from the long-term costs of public sector pension schemes, asset write-downs and increases in provisions for nuclear decommissioning and clinical negligence claims, which are incorporated in the WGA but not the National Accounts.

The accounting deficits incurred over the five financial years ended 31 March 2014 added together were equal to 25% of revenues over the period. This is substantial, even for an organisation of the scale of the UK government.

Revenue in 2013–14 was £65bn higher than in 2009/10, but £51bn of this increase was from inflation, so the real-terms increase was only £14bn. This reflected real-terms declines in revenue in 2011/12 and 2012/13, despite economic growth in both those years.

This contrasted with operating expenditure, where the expressed intention of the coalition government to cut spending translated into operating expenditure being £35bn lower in real terms in 2013/14 than in 2009/10.

When combined, operating losses reduced from £109bn in 2009/10 to £70bn in 2013/14, comprising a net increase of £10bn from inflation and a real-terms improvement of £49bn.

The reduction in the level of operating losses over the period was not offset by increases in net finance costs, despite the substantial growth in debt over the period. Net finance costs did initially increase as debt grew, but declining interest rates subsequently had the effect of bringing net finance costs in 2013/14 back to the same level as five years previously.

Each revenue and expenditure statement is complemented by a balance sheet. This confirms how the financial position of the UK government has deteriorated dramatically over the last five years, with increases in assets being outpaced by much larger increases in liabilities. The main drivers were higher levels of government debt and growing public sector pension obligations, with total liabilities increasing from £2.5trn (161% of GDP) at 31 March 2010 to £3.2trn (177% of GDP) at 31 March 2014.

Growth in public sector pension obligations was the main contributor to the widening gap between public sector net debt in the National Accounts (which do not include these obligations) and net liabilities in the WGA.

The weakening financial position of the UK government as presented in the balance sheet is a concern. In particular, there will be significant increases in finance costs as interest rates rise, while pension obligations and other liabilities will absorb increasing amounts of cash as they are settled. As a consequence, there will be less available to spend on other policy objectives out of future tax revenues and potentially less headroom to absorb future economic shocks.

One area where the government did make progress in improving its financial situation was in reducing its exposure to financial risks. While contingent liabilities increased to 16% of a year’s revenue before falling to 10% over the period to 31 March 2014, remote contingencies fell dramatically from around 150% of a year’s revenue at 31 March 2009 to 16% as guarantees and indemnities provided to support the financial sector during the financial crisis subsequently expired. Combined, the remaining exposures amounted to just over a quarter of a year’s revenue at 31 March 2014.

And over recent years, successive governments in the UK have made significant progress in strengthening financial management within government. This has included implementing accruals and resource accounting, multi-year spending reviews, developing explicit fiscal objectives and the appointment of non-executive directors to departmental boards with outside financial experience. More recently, a director general of public spending and finance within HM Treasury was appointed to support further development of the finance function across government and to improve the quality of financial reporting.

Despite this progress, decision-making within the public sector continues to be hampered by a lack of timely comprehensive financial information.

Greater use of financial accounting would also enable the government to benefit from the developments in accounting and financial reporting processes, systems, financial analysis techniques and skills in the private sector. Although there will always be aspects of government accounting that are specific to the public sector, the financial experience and skills developed outside of government will become easier to utilise once a common set of financial principles and rules is embedded. The government will also be better placed to utilise standardised accounting systems and so improve the overall efficiency of its financial processes.


Public finance reporting within the National Accounts and its international equivalents is currently a specialised activity, with around 200 national governments, together with their respective sub-units, involved in accounting in this way. This compares with the millions of companies and other organisations in the UK and around the world that use International Financial Reporting Standards or similar financial reporting frameworks as a basis for their accounting and financial reporting. The view that governments should adopt financial accounting in accordance with some form of generally accepted accounting standards is becoming more popular around the world, with a number of countries announcing plans to adopt International Public Sector Accounting Standards, which provide a similar (although not identical) financial accounting framework to the IFRS-based system adopted by the UK government. Some countries, such as New Zealand, have already adopted the WGA as their primary form of accounting.

The government will continue to need to produce and use the internationally comparable public finance numbers reported in the National Accounts for the foreseeable future, not least because most other countries are still at a much earlier stage in implementing standards-based financial accounting for their own accounts. However, the key benefits of financial accounting will be seen when Whole of Government Accounts numbers become the primary measures for assessing financial performance and position used by the government both internally for financial decision-making and externally in its dialogue with Parliament and the public.

Strong public governance requires firm financial foundations. It is time for the government to adopt best practice and embed the WGA into those foundations.

To read this chapter in full and for ICAEW’s Green Budget chapter on infrastructure, visit ifs.org.uk

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