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Accrual budgeting has been adopted at the state level in a handful of jurisdictions in both the U.S. and Canada, rejected in some others, placed on hold in still others. As yet it has not been adopted at the federal level in either country.
Accountants seem to be in unison in calling for accrual budgeting as an inevitable outgrowth of the adoption of accrual accounting systems and a range of international accounting standards bodies support this line.
Implementation of the Generally Agreed Accounting Principles (GAPP) is seen as the first step along this path with advocates of the new public management (NPM)reforms that adoption of accrual budgeting will "articulate full costs and realign incentive structures" in public accounting/ activities. Australian reforms in this area are often cited by North American advocates as examples of successful policy reform but as yet (200) there is little evidence on which to base evaluation.
Government budgets serve a range of purposes; they are resource allocation plans, statements of intent and policy priority, a means of reducing social conflicts, a conversation between budget guardians and spenders, and identify emphasis between policy specific and whole-of-government policy. Accrual budgeting, then, can be seen as an attempt to change the balance of power within the budgetary system.
Accrual budgeting must be seen within the context of a larger effort to refocus government activity and reducing the cost of providing services. The analysis covers four sections - the reform strategy adopted, the debates regarding technical questions, the impact of budget decisions within cabinet, and the importance of accrual budgeting as a vehicle for broader reforms. The broader reforms include the adoption of price-output reforms, use of market prices and contestability as central elements, seeking to reduce the effects of budget lock-in and incrementalism in public programs.
Accrual accounting requires all expenditures to be recorded when they occur (not simply when they cash is paid out), affecting the timing of expenditure recording and making clearer the multi-year costs of decisions. Accruals also capture impacts on the financial position of departments, including the costs of owning and maintaining assets and delivery of services. Responsibility for extimates was devolved to line departments, output-based appropriations were implemented and a system of market-testing was adopted to measure competitiveness of the prices accepted by the departments. By linking prices paid to outcomes the basis for contestability was provided.
Contestability provides guardians with new information. Pricing reviews help identify the most cost-effective provider and reduce lock-in and incrementalism. Devolved estimate responsibility makes line departments accountable for setting and controlling service delivery costs. Central budget agencies can determine if a new provider could deliver the services at lower cost. In short, accruals are hoped to deliver competitive agencies and a method by which governments could identify and engage with the most cost-effective suppliers of services.
Evaluating accrual budgeting and price-output reforms
In terms of breadth the Australian reforms can be seen as successful, delivering a fundamental change to appropriations, estimates, and budget decision making in only two years. This was in spite of a deep sense of panic within the central agencies and the need to call on external help in practical accounting matters that were not covered by internal skill sets. This was a 'crash throug' approach. There were problems with establishing lines of accountability, and cash-based figures were provided in some budget papers to allow for better comprehension of ministers. Treasury was not happy as they prefer cash-related balances, while Finance was happy to see the budget as a resourcing document. Government accepted the change but remained wary, requesting some traditional measures of fiscal and budgetary accounting remain available, especially cash balances in the main budget document.
Technical issues - Valuing assets
Accruals require assets to be valued; once valued these can be included in the full cost of delivery, allowing for clearer choices between policy/ provider options, appropriate returns on assets can be seen, capital charges imposed and as a means of deciding between maintain or replace decisions for assets.
Public accounting provides some challenges for the accrual method in terms of valuing fixed public assets (what is a national park worth?). Choices include historical cost, current cost, market prices or net present value. What can be done about assets that have no private sector equivalents? Finance has decided to use 'Deprival value' - an opportunity cost approach.
Australia imposes capital charges on line departments for assets used as a means of giving agencies an incentive to use their capital effectively and sell those they are not able to use well. Where assets sit under a line department but not directly controlled by that department (a country railway, for example, where the line department is unable to set fares) these assets may be viewed as administered or custodial assets only - this being the case it does not seem logical to penalise or advantage to department for this administration. Revenue also poses some problems as future revenues are not included in accrual accounting, but future liabilities are. The capacity to levy and collect taxes in the future must be considered an asset the government has at its disposal.
Australian states appear to have accepted accrual budgeting each has devised its own method and each seems intent on not allowing the federal government too much detail as to their financial position. This arrangement complicates issues where jointly owned or funded assets are concerned.
On the whole the shift to accrual budgeting in Australia has improved accuracy and completeness of information. However, issues of transparency, consistency and comprehensiveness in reporting, especially between states and the federal government, continue to concern.
Accrual budgeting and Cabinet
In practice in 1999 the introduction of accrual budgeting proved difficult. The Expenditure Review Committee (ERC) received accrual briefings from Finance. A number of ministers complained that these were not clear. ERC demanded revisions including current year cash summary. Ministers complained that the accrual briefings did not give a clear view of the implications of their decisions or demonstrate whether or not fiscal discipline was being exercised. Finally Finance was required to produce cash briefings; such double reporting in 2002 being claimed as part of the 'transitional arrangements' for the shirt to accruals.
Since the introduction of accrual budgeting the quality of estimates is thought to have declined due to line department manipulation to reduced efforts to monitor the quality of these estimates. Over time it is thought that longer data series will allow Finance to produce the trend and historical data that ministers/ cabinet appear to want. Other reforms undertaken in other areas are also likely to change the type of information required by cabinet, perhaps reducing the pressure on the transitional accrual budgeting measures.
Accrual as a vehicle for reform
Accrual budgeting should be considered as part of a larger program to produce a more 'business-like' government. It was intended as a catalyst to drive improvements in long term allocation of funds along more efficient lines. This would be delivered by measuring the price of outputs, devolving responsibility for estimates and costs of service provision to line departments.
The second thread was to change the behaviour of public sector managers by providing incentives for efficient contracting. Full cost impositions make in house supply using expensive public servants less attractive than some external suppliers for some service delivery tasks. Fixed price contracts, even where they deliver higher transaction costs, can deliver superior efficiency in allocation of public resources.
Such reforms remain a contested terrain with the linkages between the implementation of accrual budgeting and the broader reform implications still weak and mostly untested. Finally, the devolution of decision making and the logic of outsourcing will be resisted by those who wish to remain in their current positions within the public service.