Guest post by Desmond Gibney, lecturer in accounting at National College of Ireland. This post is based on his paper to PSAI Annual Conference 2017, titled ‘Using account numbers in political debate: the Irish Water case’, due to be presented Friday 13 October.
Theodore Porter wrote in 1995 that ‘numbers are the medium through which dissimilar desires, needs, and expectations are somehow made commensurable.’ Consider the following news headlines in relation to the potential cost of abolishing the State-owned utility called Irish Water: ‘It would cost €900 million to abolish Irish Water…’ (TheJournal.ie, April 2015); ‘Irish Water abolition “would cost State up to €7 billion”‘ (The Irish Times, March 2016); ‘Scrapping Irish Water could cost €1.6 billion’ (Irish edition of The Times, May 2016 (£)). This range of figures illustrates the challenges in making sense of accounting numbers used in political debate. But this is not a new phenomenon, as illustrated by the case of Lockheed and its ‘Tri Star’ jet in the 1960s and early 1970s. Lockheed spent $1 billion on developing the jet, and then sought $250 million in federal government loan guarantees to complete the programme. Lockheed was accused of using “highly misleading information”, and during lengthy congressional hearings in 1971 on the loan guarantee, nobody mentioned that the $1 billion already spent was, in accounting terms, a ‘sunk cost’ and therefore was irrelevant to the decision about future spending.
The accounting issues related to Irish Water include cost classification, off-balance sheet financing, budget enlargement and accounting arbitrage. The backdrop to these issues is the impact of a period of austerity. Some of these have featured in the news headlines mentioned above and have also impacted on the political debates surrounding Irish Water and in particular whether or not the utility should be abolished. The news story featuring the €7 billion cost of closing Irish Water was published on the front page of The Irish Times in the period between the inconclusive results from February 2016’s general election and the start of talks between various political groupings about formation of a new government. The article dealt with cost classification and correctly categorised certain items such as the cost of the water meters and systems for procurement and billing as ‘sunk costs’, but failed to explain why such ‘sunk costs’ should be excluded from decision-making. The article also failed to show a full breakdown of the €7 billion figure.
The accounting issue of off-balance sheet financing received considerable prominence during the lengthy process that eventually led Eurostat to conclude in 2015 that Irish Water’s borrowings should be included in the government’s balance sheet. Strictly speaking, the Irish government does not have a balance sheet in the sense that some other governments do have, as instead it relates to whether particular liabilities are included or excluded from the general government balance (GGB), which is the difference between government revenues and expenditure, and the balance is either a surplus or (more usually) a deficit. The focus is on liabilities rather than assets, because accounting rules dictate that if assets are included, then so must the corresponding liabilities.
Off-balance sheet financing is significant because of the EU’s Maastricht Treaty of 1992, which requires compliance with targets for ratios of debt to GDP and deficit to GDP. If a government is trying to reduce its deficit, it may use a strict application of EU rules on GGB to keep liabilities out of the GGB, and this can encourage governments to consider making expenditure commitments that may otherwise not have been considered, and this acts as a form of budget enlargement. In relation to the debate surrounding Irish Water, this could mean that if the government had been successful in keeping Irish Water debt off-balance sheet, then that would have enlarged the overall budget of the government because it would have freed up the expenditure limits for extra spending on public services such as schools and hospitals.
The period of austerity has posed particular challenges for public sector accounting in the EU, with a focus on the reduction of expenditure, debt and deficit. The greater emphasis placed on the condition of a country’s public finances and the balance sheet classification of government expenditure is particularly important for countries (such as Ireland) who received financial assistance from the IMF, EU and ECB ‘troika’, because regular reporting of financial and accounting information was a condition of receiving such assistance. One of the items contained in the Irish government’s December 2010 memorandum of understanding with the ‘troika’ was a plan for moving towards full cost-recovery in the provision of water services, with a view to start charging in 2012/2013. However, austerity also provides an incentive for EU member states to practice accounting arbitrage, whereby weaknesses in reporting of government statistics are employed, and use of off-balance sheet devices can be contrary to the declared objectives of increased transparency.
The paper attempts the use of Actor-Network Theory and the work of Bruno Latour to offer an interpretation of the relevant issues mentioned above. The methodology used includes interviews, analysis of published information and parliamentary debates, and a FOI request granted to a third party. There has been little research on the use of accounting information by politicians, and it is not always clear in advance what accounting information would be helpful to politicians. The use of accounting numbers in political debate has been somewhat neglected in political studies, but its importance in accounting and finance can be demonstrated by a special issue of Public Money & Management devoted to the topic in 2016, as well as coverage in political economy journals.
This article is part of a series by authors presenting at this year’s PSAI Annual Conference. If you are a participant at this year’s conference and would like to have your work featured on the blog, please contact us and let us know.
2 thoughts on “PSAI 2017: ‘Using accounting numbers in political debate: The Irish Water case’”
When one reads the Comptroller and Auditors Generals report regarding pensions we see “contingent, unfunded liabilities” of 120bn plus but not a pip squeak from those in academia and government receiving them or earmarked to receive them. Basically, if you compare to any business the money must be taken from the cash register.
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