Austerity Policies in Accounting of Public Agencies

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Table of Contents

Introduction
The Austerity Problem in the Contemporary Times
Austerity Policies and Economic Growth
Accounting for Austerity: More Than Balancing Books
Conclusion
Reference List

Introduction

The 2008 global financial crisis compelled governments to rethink their spending patterns by introducing major cuts in budgets coupled with coming up with strategies to reduce deficits. In other words, austerity policies focus mainly on cutting public spending. However, Schui (2014, p. 18) faults this definition by insisting that the rationale of austerity is to “restore balance in government finances and regain economic dynamism and competitiveness”. Therefore, austerity policies have evolved with time to maintain a balance between cutting government expenditure and providing quality services to the public. For instance, the introduction of New Public Management (NPM) sought to shift the austerity policy’s focus from routine expenditure cuts to ways of improving efficiency and value for the money that governments spend on the public. After the 2008 financial crisis, governments reverted to public expenditure cutbacks as the central definition of austerity. However, this move is myopic because the long-term impacts of such cutbacks do not contribute to the intended objectives. This paper holds that the introduction of austerity policies should lead public service organisations to reconsider their accountability, reduce reliance on rules and procedures, and introduce performance management based on targets, monitoring, and incentives.

The Austerity Problem in the Contemporary Times

In the wake of the 2008 financial meltdown, the majority of countries across the world adopted the exceptional stimulus measures to spur growth as a way of managing the crisis. However, Blyth (2013) laments that by the end of 2010, most countries had replaced such measures with austerity programs. Allegedly, during the 2010 G20 Toronto meeting, international governments agreed that reducing budgetary deficits through austerity measures would moderate the growing public debt and expenditure (Wolf 2014). The way forward would see “a mix of public spending cuts, reducing/freezing labour costs, and the privatisation of public assets and reducing the welfare state and public services in general” (Whitfield 2012, p.76). The contemporary problem with austerity lies with the failure of these objectives to spur economic growth as intended. Whitfield (2012, p. 80) notes that austerity has failed “to achieve its rhetorical and theoretical aims, such as government debt reduction, increased GDP and rising levels of full-time employment”.

Apparently, austerity seems to achieve the opposite of its objectives with soaring unemployment rates, shrinking workers’ benefits and wages, business failures, and foreclosures among others. For instance, the privatisation of health care provision has led to poor service delivery and increased costs as opposed to the intended outcomes (Grimshaw 2013). A study by Kurunmaki and Miller (2008) shows that regulating and accounting for health care provision by NHS using payments by results (PbR) does not improve service delivery. The conclusion formed here is that introducing austerity measures in healthcare provision will have adverse effects on the quality of the services delivered. Another study by Oxfam (2013) shows that close to 25 million people may be living in poverty by 2015 in case the current austerity measures are not revisited. Therefore, austerity measures have evidently failed to spur economic growth and reduce poverty. With this knowledge, the overarching question is on how public organisations can integrate accounting into austerity measures to improve accountability and efficiency.

Austerity Policies and Economic Growth

The primary role of public service organisations is to offer quality services by utilizing the available resources even in the face of austerity. Even with budget constraints, such organisations should employ innovative strategies through the application of best accounting principles to ensure improved performance to meet the set targets and offer incentives. Accounting under austerity should help citizens to hold governments to accountability by availing information on public expenditure and tailoring ways of achieving economic growth under constrained budgetary allocations. Public services organisations are known for resource wastage and inefficiency. Accounting tools that have been used successfully in the private sector should be incorporated into public services organisations to improve efficiency and accountability. For instance, the adoption of accruals accounting allows prudent financial management in public service organisations thus reducing resource wastage in the sector. According to Bracci et al. (2015, p. 887), “Accruals accounting provides a complete and reliable picture of the financial and economic position and performance of a government, by capturing in full the assets and liabilities as well as revenue and expenses of an entity, over the period covered by the accounts and at the moment they are closed”.

There have been arguments that austerity is a short-term solution to financial crises and thus the long-term implications like loss of motivation amongst employees are counterproductive. A 2015 study in the Netherlands showed that austerity measures led to strong financial stability albeit in the short term (Van der Kolk, ter Bogt & van Veen-Dirks 2015). However, at this point, public service organisations should capitalise on the positive impacts of austerity like financial stability and use innovative ways to counter the negative effects. For instance, public services entities can introduce performance management to ensure that employees operate in a competitive environment to achieve certain targets (Jabeen 2011).

Such organisations could also use incentives as a way of motivating employees in the long term to counter the negative outcomes of austerity. In other words, public service organisations should only pick what works with austerity and implement best management practices to ensure quality service delivery and spur economic growth. In another case, Newcastle City Council used creative approaches to weather the adverse effects of austerity imposed by the central government. According to Ferry and Ahrens (2015, p. 920), Newcastle City Council improved accountability in the face of government cutbacks by enrolling grassroots groups “via new budgetary emphases, in different ways of working, becoming policy proposers with local government acting as assessors and arbiters of competing funding proposals”. This way, the council’s accountability improved as the beneficiaries of public services were involved directly in determining how the available resources would be utilised.

Accounting for Austerity: More Than Balancing Books

Given the ever-changing environment under which public service organisations operate, austerity measures will remain in place moving forward. However, Anderson and Minneman (2014) argue that austerity can be replaced with alternative ways of managing government expenditure. Nevertheless, the view of austerity measures as mere government spending cutbacks will continue to hold due to the politics surrounding the issue. Therefore, public services organisations should become innovative and come up with ways of working under constrained budgets without compromising service delivery to the citizenry. In other words, organisations should stop working against austerity policies and instead respond proactively to the emerging issues concerning reduced budgetary allocations from the state. As such, public services organisations should leverage accounting technologies as a way of managing austerity.

Therefore, accounting cannot be reduced to balancing books given the resource challenges facing such organisations. In this sense, Vosselman (2010, p. 192) argues that accounting “has to be seen as a performative activity that can only be defined through its operationalization”. Accounting for austerity should thus shift focus from the traditional financial perspective to other broad areas like “social, institutional, political and organisational contexts” (Parker & Guthrie 2014, p. 1222). From a social perspective, accounting for austerity will reduce its reliance on rules and procedures and focus on security, care, equality, prosperity, and happiness among other societal issues. Piketty and Goldhammer (2014) argue that even though measuring social well-being may not be conclusive, there is a growing need to account for human, social, environmental, and natural capitals. Consequently, constructing accounting responses to austerity from a multidisciplinary approach will spur economic growth and maintain quality service delivery without being pushed to the brink of bankruptcy due to tight budgetary allocations.

Conclusion

The conventional understanding of austerity policies implies the reduction of government spending through budgetary cutbacks as a way of spurring economic growth and bridging deficits. However, public services organisations need to approach the issue of austerity proactively and come up with ways of functioning normally even under limited resource allocation. The adoption of accruals accounting will promote accountability and the involvement of the public in decision-making. Additionally, such organisations should introduce performance management and come up with ways to motivate employees as a way of ensuring improved service delivery. Likewise, organisations in public service should reduce their reliance on rules and procedures and shift their focus on proactive responses to austerity. Accounting for austerity is more than balancing books. Emerging trends in accounting demand the broadening of austerity responses to encompass social, human, natural, and environmental capitals.

Reference List

Anderson, B & Minneman, E 2014, ‘The abuse and misuse of the term ‘Austerity’ implications for OECD countries’, OECD Journal on Budgeting, vol. 14, no. 1, pp. 109-122.

Bracci, E, Humphrey, C, Moll, J & Steccolini, I 2015, ‘Public sector accounting, accountability and austerity: more than balancing the books?’, Accounting, Auditing, & Accountability Journal, vol. 28, no.6, pp. 878-908.

Blyth, M 2013, Austerity: the history of a dangerous idea, Oxford University Press, New York.

Ferry, L & Ahrens, T 2015, ‘Newcastle city council and the grassroots: accountability and budgeting under austerity’, Accounting, Auditing, & Accountability Journal, vol. 28, no. 6, pp. 909-933.

Grimshaw, D 2013, ‘Austerity, privatisation and levelling down: public sector reforms in the United Kingdom’, in Vaughan-Whitehead, D. (ed), Public sector shock, Edward Elgar and ILO, London, pp. 1-27.

Jabeen, M 2011, ‘Impact of performance appraisal on employees motivation’, European Journal of Business Management, vol. 3, no. 4, pp. 197 – 204.

Kurunmaki, L & Miller, P 2008, ‘Counting the costs: the risks of regulating and accounting for health care provision’, Health, Risk & Society, vol.10, no.1, pp. 9-21.

Oxfam 2013, A cautionary tale: the true cost of austerity and inequality in Europe, Web.

Parker, L & Guthrie, J 2014, ‘Addressing directions in interdisciplinary accounting research’, Accounting, Auditing & Accountability Journal, vol. 27, no 8, pp. 1218-1226.

Piketty, T & Goldhammer, A 2014, Capital in the twenty first century, Belknap Press, London.

Schui, F 2014, Austerity: the great failure, Yale University Press, Boston, MA.

Van der Kolk, B, ter Bogt, H & van Veen-Dirks, P 2015, ‘Constraining and facilitating management control in times of austerity: case studies in four municipal departments’, Accounting Auditing & Accountability Journal, vol. 28, no. 6, pp. 934-965.

Vosselman, E 2014, ‘The ‘performativity thesis’ and its critics: towards a relational ontology of management accounting’, Accounting & Business Research, vol. 44, no. 2, pp. 181-203.

Whitfield, D 2012, In place of austerity: reconstructing the economy, state and community, Spokesman Books, Nottingham.

Wolf, M 2014, The shifts and the shocks, Penguin Books, London.

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