January 14, 2010Doug Hadden
Paul J.M. Klumpesand Liyan Tang of Imperial College, London, have written an article on shortcomings of Government Financial Management in the recent Interational Journal on Governmental Financial Management published by ICGFM. The authors focus on under funding or the lack of effectively showing long-term government liabilities for liabilities like pensions, social security and health care. This is a topical subject given the efforts at reforming health care and pension plans around the world – from Argentina to the United States.
These liabilities span generations. Klumpes and Tang suggest that traditional government accounting methods do not value these commitments as obligations. In government accounting, these “obligations are only accountable if the service has already been provided.” Of course, many governments have not adopted accrual accounting or have adopted elements of accrual accounting.
There is clearly disconnection in incentives. Politicians tend to operate in the short term, from election to election. Considering long-term liabilities and other aspects of accrual accounting can present an accurate picture of the true financial state of any government. But, this transparency limits perceived bold moves by politicians.
The authors make a very convincing argument for governments to use a generational-based perspective rather than accrual. Many experts believe that full accrual accounting, as used in the private sector, is not appropriate for governments. Klumpes and Tang suggests that “accrual-based accounting estimates do not completely account for the financial imbalances because of the arbitrary truncation of the projection horizon.” They provide the argument for and against generational accounting and provide a framework that overcomes many of these issues.
Shortcomings of Government Financial Management a Generational Accounting Critique