Magazine article Public Finance

Nein Danke

Magazine article Public Finance

Nein Danke

Article excerpt

Something strange was recently flagged up in Germany's government accounts.

The finances looked good, dazzling even; finance minister Wolfgang Schäuble had just booked in millions of euros in revenue from the sale of federal bonds.

But things weren't really as they seemed, explained German newspaper Die Welt, citing analysis by fi rm Barkow Consulting.

Like any other country, Germany issues sovereign bonds to raise money. It can also issue additional bonds under the terms of a previous off ering. In an era of low interest rates, the latter off ers a higher rate of return than issues that are new. Investors pay for this privilege with a premium on the price of the bond, which works to bring its overall yield in line with the market rate.

In the case of one increase on a 2014, 30-year treasury off ering, this premium was as high as 50%. On euro1bn (£0.87bn) worth of borrowing, this meant euro502m (£436m) in revenue for the public coff ers. By 2020, Barkow Consulting estimates, these bonds could earn euro30bn (£26bn) in such premiums, provided interest rates remain at a similar level.

Amid a global shift to an accrual basis in government accounting, Germany is one of only a handful of advanced economies that seems determined to stick with a cash-based system. Th is means it can book such handsome windfalls into its accounts in one fell swoop.

But these revenues are soon set to start leaving the accounts again. Th ey represent the higher interest rates the government is going to have to pay out over time, which is how the premiums are amortised to investors. Die Welt pointed out that, in the private sector, where governments require accruals-based accounting, they would be spread out over the remaining term of the bond in the books to refl ect this reality.

Given the country is renowned for its fi scal prudence, it seems odd that Germany continues to rely on an accounting method that international standard setters deem so fl awed. Could the country's reputation be based more on appearances than reality?

Germany's finance ministry, the Bundesfi nanzministerium, told PF that, simply, there is no political support for the comprehensive accounting reform a move to accruals would require: "Th e potential benefi ts of such a reform on a federal level are perceived to not outweigh the considerable cost associated with a move to accruals."

Politically, there are plenty of reasons a government might want to resist this shift. A major downside for some, explains Ian Ball, chair of CIPFA International and former chief executive of the International Federation of Accountants, is often billed as accruals' biggest benefi t: "It makes governments more accountable, especially when they have to report against standards that they do not themselves determine [like the accruals-based International Public Sector Accounting Standards]."

Without that transparency, governments can delay payments from late in the budget year to create the illusion of savings on a defi cit, obscure the long-term cost implications of arrangements like public-private partnerships or keep a looming fi scal crisis under wraps.

In Germany's case, avoiding an accruals-based system means, for instance, it doesn't have to report a loss associated with its holdings of Greek government debt - surely a welcome advantage as support for the country's bailout agreement falters among German voters.

And it's not just the German government that is opposed to accruals. While local and state authorities have adopted it to varying extents, Germany's parliament has rejected far less dramatic reforms as recently as 2010. Elsewhere in Europe, both Norway and the Netherlands state they have no plans to shift to an accruals-based system.

A key factor is cost. Moving a public accounting system to accruals and installing all the additional capacity that requires is neither quick nor cheap. Some estimates have put the potential price tag at anywhere up to euro290m (£252m). …

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