By Vivienne Russell | 16 October 2014
Regular reporting of the long-term effects of policy choices being made by government on the overall public finances and their impacts on different generations is essential if public spending plans are to be made fully transparent. This is the key message of a recent CIPFA seminar on inter-generational equity and public services.
Ian Carruthers, CIPFA’s technical director and the UK member of the International Public Sector Accounting Standards board, highlighted the importance of transparency but also the constraints of current financial reporting systems.
‘We recognise the limitations of conventional balance sheets in the public sector context,’ he told the event on October 14.
‘So we need to link them to reporting more broadly on long-term sustainability. Analysis of the impact of key policy choices on different generations is also needed.’
Among the areas in need of regular examination was the cost of political promises such as the ‘triple lock’ commitment on pensions.
‘Public sector employee pension liabilities were £1.2trillion in March 2013. But this did not include the liability for the universal state pension. These both represent a call on future tax revenues along with the other expenditure that government is committed to.’
The seminar also heard from Paul Johnson, director of the Institute for Fiscal Studies, who gave some context to the way public spending has shifted between the generations.
He noted that spending on health and pensions has increased from 30% of state income to 50% over the past 40 years, while there had been a corresponding move away from expenditure on housing and defence.
‘Such shifts have been far more extreme than anyone predicted,’ he said.
These views were echoed by Tony Travers, professor of government at the London School of Economics, who told the seminar that pensioners had been protected from the effects of the 2008 financial crisis, while younger people had not.
Looking forward, he said the dependency ratio was likely to change more with 25% more people aged over 65 by 2022.
‘A 30-year-old now pays for university, has less chance of owning a house, will have to work longer and will have the services of a reduced state,’ Travers said.
‘A current 70-year-old has had a far better lifetime deal than a current 30-year-old is likely to get. The “triple lock” on pensions is a key driver of inter-generational shift.’
He added that Whole of Government Accounts was a useful way of looking at future trends, but had as yet had no effect on spending patterns. In contrast, others at the seminar felt that the ‘big numbers’ provided by the WGA were acting as a ‘brake’ on politicians because they were shining a light on the full cost implications of various policy options.
The reforms to public sector pensions were cited as an example of the way the government had started addressing some of its long-term liabilities, although it was noted that, due to the protection of current entitlements, these would take a long time to work through.
But there was a consensus that already enhanced financial reporting under WGA will need to go even further to make the long-term sustainability of government policy choices and their impact on different generations fully transparent. This would make sure that all users understand the full long-term costs of policy commitments made today.
