Lessons from Failures of UK Accounting and Fiscal Governance

This article is published in association with IMF.

David Heald

My new journal article with Ron Hodges (University of Birmingham) explores what has gone wrong with UK accounting and fiscal governance. The UK is a long-established parliamentary democracy and an important European economy. While we reject the ‘Britain is broken’ narrative which has been popularized, we recognize that the UK has exhibited dysfunctionalities. The article utilizes the “economization” framework developed by Miller and Power (2013) to illuminate the sources of difficulties, while this blog summarizes our findings. It is clear that some of the issues are specifically British but there are others which might also apply to other countries.

It is difficult to disentangle multiple causes. The UK has struggled to recover from the 2008 Global Financial Crisis (GFC), which the size of its financial sector made more damaging. The policy response of austerity impeded the economic recovery and soured the political mood. UK governments had long blame-shifted unpopular policies onto the European Union rather than defending those policies, many of which they favoured. This set the scene for the political miscalculation of the 2016 Brexit Referendum thus ending the Cameron Conservative Government which had expected a ‘Remain’ outcome. Brexit then became the dominant issue in UK politics, though to some extent it was code for other things such as immigration. Then came Covid-19, the Ukraine war and the cost-of-living crisis, constituting what has been described as a polycrisis.

In many ways, the UK has a positive story to tell about accounting governance. It was an early adopter of accruals accounting in government, uses accruals for budgeting, and follows modified International Financial Reporting Standards. The fact that it does not use International Public Sector Accounting Standards is partly historical (full standards were not available in the mid-1990s) and partly the UK’s exceptionalism in wanting to go it alone. The motivation for the UK reforms was to increase transparency and improve public financial management (PFM). Transparency has greatly improved and has extended to Whole of Government Accounts which have been published for financial years since 2009-10 (Bradley, Heald and Hodges, 2023b). The benefits in terms of PFM have been eroded by the suspension of multi-year Spending Reviews and by political instability inside the Conservative Party.

The IMF’s 2016 Fiscal Transparency Evaluation criticized financial reporting delays which have subsequently become much worse. Covid-19 damaged timeliness but the main issue has been the local audit crisis in England which has led to multi-year delays and will most likely result in disclaimed local authority accounts and in disclaimed 2022-23 Whole of Government Accounts. This disaster can be traced back to the abolition of the Audit Commission and the privatization of its District Audit function in England which had been created in 1844. It is striking that these problems do not occur in Scotland, Wales or Northern Ireland which have retained their public sector local audit capacity. Once timeliness in financial reporting has been lost, it is very difficult to re-establish particularly in the context of stressed-out local authority finance departments and outsourced local audit (Bradley, Heald and Hodges, 2023a).

UK fiscal governance has profound problems which interact with political and constitutional issues. The UK is one of the most fiscally centralized democracies in the world. The reflex reaction to public policy problems seems to be more centralization, even when excessive centralization is the underlying problem, particularly in England. The ‘first-past-the-post’ electoral system in the context of a multi-party system can lead to extreme swings. The Conservative Government of Boris Johnson won 56% of seats in the House of Commons in the December 2019 general election on the basis of 44% of the popular vote. The Labour Government of Sir Keir Starmer won 63% of seats in the July 2024 general election on the basis of 34% of the popular vote.

Also striking has been the ideological spread within both major parties, leading to policy instability. 2015 to 2024 was a period of Conservative Government with five Prime Ministers, seven Chancellors of the Exchequer, and ten Chief Secretaries to the Treasury (the minister responsible for public spending). Ex-ante budget scrutiny by the House of Commons is negligible, though ex-post scrutiny by the National Audit Office and the Public Accounts Committee is extensive.

The substantive problem is a mismatch between what the electorate seems to want in terms of public services and what political leaderships believe they are willing to pay in taxes. The Office for Budget Responsibility (the UK’s fiscal council) repeatedly makes it clear that UK public finances are not sustainable if the core problems are not addressed. As an adjudicator, the OBR came under pressure at the time of the 23 September 2022 ‘fiscal event’, so labelled to avoid the OBR reporting, when there were big unfunded tax cuts and spending increases. What brought reversal of much of that fiscal package was the market reaction. Since 1998, the UK has gone through a series of fiscal rules which have encouraged arbitrage. The present fiscal rules have led to cynical games: public debt must be falling between the penultimate and final year of the forecast period, which can be achieved by pencilling in non-disaggregated and non-credible spending figures for the final year.

The main lesson from the UK is that apparently well-designed accounting and fiscal institutions can fail to deliver on expectations of transparency and better PFM because of the political and economic context.

What has been achieved in the context of accounting governance (accruals reporting and budgeting) and fiscal governance (creation of the OBR in 2011) has to be sustained. What the UK needs now is a sustained economic recovery (uncertain because of international developments and the fiscal inheritance) and a period of government stability without the ministerial and policy churn of recent years.