There has been much to keep the media busy this summer, so it is hardly surprising that the publication in July of the Whole of Government Accounts unaudited summary report for 2009/10 received only limited coverage. However, it would be a mistake to overlook the importance of what has been achieved. In addition to demonstrating that the UK is at the forefront of developments to improve transparency in public sector financial reporting, from now on WGA will provide successive governments with a new and fundamentally important means of assessing and managing the condition of our nation’s finances.

The figures are derived from more than 1,500 separate sets of accounts, are prepared using International Financial Reporting Standards and show in stark clarity the financial difficulties facing the UK Government. The accounts show total revenue from taxation and other sources of £586bn but expenditure, principally on social benefits and staff costs, of £669bn and if one also takes into account the costs of interest on financing this deficit and the pensions liability, which in total comes to £81bn, the UK is running a substantial deficit.

accounts show total revenue from taxation and other sources of £586bn

The balance sheet picture is also illuminating. The UK public sector holds assets of £1.2trn. Most of these are shown at fair value, although the roads network is almost certainly significantly undervalued because local government, in contrast to central government, values roads, bridges and flood defences on a historic cost basis. The asset base also includes £65bn of equity investment made by the government into public sector banks, principally RBS(£42bn) and Lloyds (£17bn). The public sector-owned banks are not consolidated into the accounts as the intention is not to hold them in the longer term and including their figures would significantly distort the accounts.

What is included in the accounts, albeit as a contingent liability note rather than as a provision on the balance sheet, is the £175bn of financial guarantees the Government has made to underpin the financial sector. It is considered there is less than a 50 per cent chance that these guarantees will crystallise at some stage in the future. Let’s hope that is a good judgement! The liabilities side is dominated by the deficits associated with public sector funded and unfunded pension schemes.

These account for £1.13trn, of which the teachers and NHS schemes are the most significant. As everyone who works in a public sector finance department knows, these figures are a snapshot at a point in time and can change dramatically as assumptions change. The 2009/10 WGA accounts do not incorporate the changes brought in to index-link pensions to CPI rather than RPI as this change was announced after most of the constituent accounts had been finalised. The pensions liability reflects pensions to public sector workers, and does not include the substantial liability for state pensions earned to date.

If you add to the pension liability, the Government’s liabilities to repay gilts, decommission
nuclear facilities, meet PFI liabilities and pay out for probable clinical negligence claims, total liabilities for the UK public sector exceed total assets by £1.2trn.

These figures are so large as to be almost beyond comprehension, but what is understandable is that, as the US experience shows, running an ever-increasing deficit is not sustainable. At the same time, our ageing population means there is a long-term, upward pressure on government debt levels. Tracking the changes in the WGA position from one year to another will be a valuable, independently validated source to show whether future governments are rising to this huge challenge.

Contact

Nick Bennett, Partner, Audit & Assurance