Lies, damn lies and the balance sheet

Comprehensive, transparent and robustly scrutinised public financial reporting will become increasingly important as the Scotland Act is implemented over the next three years and the Scottish Parliament gets its new fiscal and financial powers. In this context, Audit Scotland has taken a close look at the public sector balance sheet.

I can remember when studying for an MBA module being shocked when the lecturer described the balance sheet, as the opinion of the accountant who prepared it. I had naively assumed that it was simply a matter of getting the sums right! John McLaren in the Scotsman puts it more elegantly as; "The finding that liabilities are currently estimated to outweigh assets should not be of great concern at present. For a start the methods by which such assets and liabilities are valued is very much an art rather than a science."

On this basis we should not be losing too much sleep over the rather excitable headlines of an £8bn 'budget shortfall'. If valuing assets is a tricky business in the private sector, it is even more so in the public sector. Roads, schools and hospitals are not traded in the same way as other assets, so it is difficult to value them and not a great deal to be learned if you do. That's not to say that the report is not useful.

Audit Scotland make the point that there has been a shift in how capital projects are financed, from grants to borrowing and private finance. Obviously the latter two options have to be repaid. Local government has its own prudential borrowing powers, but health boards don't. As a consequence the NHS has used the more expensive private finance to fund 22% of its current property, plant and equipment portfolio, compared to 10% for local government. This is one of the reasons UNISON has argued for health boards to be given prudential borrowing powers.

For those who thought PPP/PFI is just an historical cost, think again. The report confirms that public bodies will pay an estimated £27bn over the rest of the life of these contracts. The Scottish Government is a bit coy in their infrastructure plan about the value of future PPP schemes, but it looks as if at least £3bn of projects (in capital value) will be funded in this way. The important point about PPP and the balance sheet is that these are very long term contracts with little flexibility, either financially or in terms of service provision. Another factor we warned about at the time.

There are predictable headlines about pension liabilities, though we have been spared the very silly 'black hole' headlines this time. For the record, the report confirms that the Office for Budget Responsibility (OBR) has estimated the effect of the recent changes to pension schemes. Overall UK gross spending will fall from the current 2.3 per cent of Gross Domestic Product (GDP) to between 1.3% and 1.5% of GDP by 2061/62. But let's not spoil a big number with the facts!

The report also highlights potential liabilities for the Scottish Government as the funder of last resort. This is greater when third parties are delivering services, as the Southern Cross debacle proved. Another example is the impact of the UK Government welfare reforms on the financing of social housing. However, this takes us into risk management territory and that's even more difficult to cost.

The Auditor General has unsurprisingly avoided the independence consequences of all this, but rightly points out that sound financial reporting is all the more important as we approach greater financial devolution. That of course would be even more important if Scotland was independent.

So, transparency in financial reporting by all means. But let's look past the headlines and recognise that there are no absolute certainties when it comes to the public sector balance sheet.