The failure of the United Kingdom’s accounting and fiscal governance

Abstract

Purpose

This paper aims to unravel the puzzle that the United Kingdom’s high-quality government accounting and fiscal architecture is associated with low-quality outcomes, including poor productivity growth, high public debt, public services which do not meet citizen expectations and historically high levels of taxation. It contributes to public sector accounting research in the fields of fiscal transparency and governance.

Design/methodology/approach

This paper uses Miller and Power’s (2013) economization framework and Dunsire’s (1990) concept of collibration to explain why being a global leader in public sector accounting reform and in fiscal and monetary architecture has not protected the UK from weak governance. The intersection of economization’s roles of accounting with modes of government accounting clarifies the puzzle.

Findings

Whereas accruals government accounting contributes to fiscal transparency, this is not a sufficient condition for well-judged policy and its effective application. Collibration is the dominant mechanism for mediation in the fiscally centralized UK, but it has failed to deliver stable outcomes, in part because Parliament is limited in its ability to hold back inappropriate behaviour by the Executive. Subjectivization has disrupted adjudication because governments at all levels resist constraints on their behaviour, with unpredictable and often damaging consequences.

Originality/value

This paper provides insights through the combined lens of economization and modes of government accounting, demonstrating the practical value of this conceptualization. Although some causes for unsatisfactory outcomes are specific to the UK, there are cautions for accounting and fiscal reformers in other countries, such as Member States of the European Union.

Citation

Heald, D. and Hodges, R. (2024), "The failure of the United Kingdom’s accounting and fiscal governance", Accounting, Auditing & Accountability Journal, Vol. 37 No. 9, pp. 305-335. https://doi.org/10.1108/AAAJ-06-2023-6513

1. Introduction

Internationally, recent decades have seen far-reaching developments in public financial management, including conversion in many countries from cash accounting to accruals accounting on models owing much to private sector practice and also to the adoption of fiscal targets for deficits and debt intended to restrain the growth of public debt. There have been attempts to reduce the scale and scope of the public sector, influenced by the examples of the USA under Ronald Reagan (President 1981–89) and the UK under Margaret Thatcher (Prime Minister 1979–90). The policy shift came around 1980 and, though later nuanced, persisted until the 2007–08 global financial crisis (GFC). If the 1945–79 period in the UK can be interpreted as the Keynesian social-democratic consensus (Crouch, 1997), then the years 1979–2008 were the period in which neo-liberal ideas dominated public debate about the scope, scale and style of the public sector (Lapsley and Miller, 2024). The UK has had great difficulty recovering from the shock of the 2007–08 GFC and the period since then has seen a series of supposedly rare shocks hitting the recovery.

Tooze (2022) popularized the idea of polycrisis in which a series of apparently unconnected shocks interact in a disruptive way. The most important shocks affecting the UK have been: the GFC (particularly severe because of the scale of the financial sector); Brexit (the UK voluntarily leaving the European Union [EU] on 31 January 2020 after a referendum on 23 June 2016); the COVID-19 pandemic which effectively closed down much of the economy in 2020; and the Russian invasion of Ukraine on 24 February 2022, the effects of which led to an unexpected surge in inflation and a cost-of-living crisis. Adding to the mix are adverse demographics (ageing is increasing the dependency ratio), higher interest rates on higher public debt, a realization that defence spending has been run down too far, and the fiscal costs of responding to the climate crisis. The cumulative effect has been to intensify the UK’s long-standing problems of low productivity growth and widening regional inequalities (Dorling, 2023).

There is an emergent literature which strikes a despondent tone about the UK’s economy and public finances. Bevan (2023) takes the pessimism further back, sub-titling his book “A Century of Systemic Failures of Governance”. Other recent books in this vein include those by Abell (2019), Drake (2023) and Dunt (2023). Consistent features in this literature are a “Broken Britain”, characterized by ineffective public governance, collapsing public services despite historically high tax/GDP ratios, and sinking levels of trust in government and politics. This pessimism is not confined to commentary on the UK: Wolf (2024) portrays democratic capitalism as being in global trouble. While acknowledging the existence of this broader canvas, this paper focuses on UK failures in accounting governance and fiscal governance which have contributed to this political mood.

Whereas the Labour government in office in 2008 attempted to soften the effect of the GFC, the Conservative-Liberal Democrat Coalition (2010–15) imposed severe public spending cuts which have become labelled as “austerity” (Barbera et al., 2020). The wisdom of this approach remains a controversial topic (Blyth, 2013; Hood et al., 2023). Rather than just tackling a serious budget crisis as a problem of macroeconomic imbalance, the Coalition seized an opportunity to attempt a fundamental reduction in the size and scope of the UK public sector, the Chancellor of the Exchequer (George Osborne) being the architect of this approach. Often loosely defined, austerity can be thought of as a prolonged period of public expenditure cuts in real terms or, more mildly, as a period in which real-terms public expenditure does not grow sufficiently quickly to cope with changes in demography and other demands on public services (Hood et al., 2014). What was unusual about this period was the successive annual reductions in public expenditure and their cumulative size, whereas the normal pattern of fiscal consolidation had been a couple of years of sharp reductions, then a renewal of growth once the macroeconomic crisis had subsided (Hood and Himaz, 2017). The polycrisis has led to another period of austerity, a condition which the former UK Prime Minister Boris Johnson (2019–22) said, at the time of his convincing Conservative election victory in 2019, that he would abolish (Lee, 2021).

In order to understand the sources of current UK policy weakness, a careful distinction is required between “accounting governance” and “fiscal governance”.

In relation to accounting governance, the UK Treasury implemented accruals reporting for government departments from financial year 2001–02. Unlike most countries which have adopted accruals accounting in government, the UK Financial Reporting Manual (FReM) is based on International Accounting Standards Board (IASB) standards, not on International Public Sector Accounting Standards Board (IPSASB) standards. These are modified and interpreted by the Treasury under the guidance of the Financial Reporting Advisory Board to HM Treasury (FRAB). Some of this distinctiveness is a matter of historical timing, with the UK adopting accruals reporting in government before the IPSASB became fully established. Some is UK exceptionalism in wanting to go it alone. Nevertheless, because the FReM and IPSASs have a common base in International Financial Reporting Standards (IFRS) prepared by the IASB, the differences are not pronounced. Indeed, an Ernst and Young (2012) study commissioned by Eurostat rated the UK as the highest conformer to IPSASs, even though it does not directly apply them. Where the UK is genuinely distinctive is in preparing public expenditure plans on an accruals basis whereas many countries use accruals for financial reporting but cash for budgets. Moreover, the UK has published Whole of Government Accounts (WGAs) consolidating the public sector as a whole since financial year 2009–10, thereby building a link to national accounts aggregates (Bradley et al., 2023b). Accruals accounting in government was projected to have benefits in terms of greater fiscal transparency and improved information for decision-making (Likierman, 1995).

UK innovations in terms of financial reporting have been supported by public audit. The National Audit Office (NAO), headed by the Comptroller and Auditor General, owes its origins to 19th-century reforms under the Chancellorship of William Gladstone who also established the Public Accounts Committee (PAC) within the UK Parliament. Since then ex post scrutiny of expenditure has been intense, in marked contrast to weak or non-existent ex ante scrutiny by Parliament of government spending plans (Wehner, 2010). A breach in the coverage of public audit occurred in the 2010s when the Audit Commission, which conducted and/or supervised local authority audit in England, was abolished by the Conservative-Liberal Democrat Coalition. All local authority audits in England were outsourced and the scope of value-for-money audit greatly reduced. The Levelling Up, Housing and Communities Committee (2023) of the House of Commons reported that only 1% of local authorities in England had 2022–23 audited accounts published by the 30 September 2023 administrative deadline, with the backlog of delayed audits then standing at 918. In February 2024, emergency measures were proposed, orchestrated by the Financial Reporting Council (FRC) (FRC, 2024). This crisis did not extend to Scotland, Wales or Northern Ireland which had not privatized their public sector local audit capacity.

In relation to fiscal governance, the UK appears to have strong fiscal and monetary institutions (IMF, 2016). The central bank (Bank of England) has been independent since 1997 and the Office for Budget Responsibility (OBR) was established in 2010, providing economic and fiscal forecasts to the Treasury and it continues the work of the early 2000s in the Treasury on fiscal sustainability projections (Eich, 2008). There are influential organizations outside government which provide informed challenge (Institute for Fiscal Studies, Institute for Government, National Institute for Economic and Social Research and the Resolution Foundation). The UK is a parliamentary democracy of long standing, with an active set of select committees, of which the House of Commons’ Treasury Committee (fiscal oversight) and the PAC (ex-post review of government financial reporting and audit) are the most prominent. The IMF (2016) conducted a Fiscal Transparency Evaluation of the UK which was generally positive, though with criticism about lateness in financial reporting and the treatment of fiscal risks.

A much-used mechanism for establishing fiscal discipline is the spread of fiscal rules (Keep, 2024), which can be formulated in many different ways. The central idea is that forward-looking fiscal rules based on national accounts aggregates, supported by high levels of fiscal transparency, commit governments to restrain the growth of public expenditure relative to tax revenues and reassure financial markets into which public debt is sold. However, fiscal transparency in the UK suffers from intrinsic obstacles (the details are technically complex and not well understood by citizens) and constructed obstacles (decision-makers have incentives to exploit arbitrage of accounting standards, both financial reporting and national accounts, and to obfuscate the application of fiscal rules) (Heald, 2012). This paper contributes to the existing literature on transparency in public administrations (Cuadrado-Ballesteros et al., 2023) to illustrate that apparently sound accounting and fiscal governance structures cannot, of themselves, protect society from the effects of inadequate, or even corrupt, decision-making.

A common feature of reforms to accounting governance and fiscal governance is the expectation that these will induce “better behaviour” from politicians and inform electorates about deficits, debt and fiscal sustainability. This expectation may not be realized if there is a failure to match a strong investment in governance architecture with commensurate behaviour in practices and decision-making.

This article is structured in the following way. After the research objective has been specified, the theoretical approach, derived from economization (Miller and Power, 2013) and modes of government accounting (Heald and Hodges, 2018), is expounded. The Miller and Power (2013) economization framework has been used in a limited number of public sector studies previously. For example, Ferry et al. (2022) review the challenges arising from audit and accountability reforms of local government in England, while Bradley et al. (2023b) provide an assessment of the UK’s WGAs. This paper provides originality by extending the use and analysis of the framework to the broader canvas of the UK’s accounting and fiscal governance, linking it to the concept of collibration (Dunsire, 1990; Bradley et al., 2023a) as an important form of mediation in the public sector. Using summary tables and graphs, the UK’s fiscal record from 1997–98 to 2022–23 is briefly described. Having established the fiscal facts, these are interpreted using the theoretical framework and by drawing on relevant literature. The Discussion addresses the question of why there is such despondency about UK policy outcomes. The Conclusion summarizes what has been established, including the finding that expectations of “better behaviour”, even in the presence of apparently sound accounting and fiscal governance arrangements, have not been fulfilled.

2. Research objective and method

This paper aims to unravel the puzzle that the UK’s high-quality accounting and fiscal architecture is associated with what many people regard as low-quality outcomes. Such outcomes include low rates of productivity growth, high public debt, public services which do not match citizen expectations and historically high levels of taxation. Of course, there is the possibility that some of these outcomes, particularly those relating to the scope and quality of public services, might reflect the actual priorities of key actors (Christophers, 2019). Technical issues, whether accounting or fiscal, are encountered in a political space where there are profound disagreements about the desirable role and size of the state.

The research is based upon an analysis of the UK’s fiscal record since 1997–98. The time period could have been extended backwards but that would not have affected the main conclusions at the cost of sacrificing important detail. The data used for Section 4 are published by UK public authorities, drawn primarily from the OBR and the ONS, in respect of statistical accounts and forecasts, and from the Treasury, which provides annual WGAs. The data sources, all of which are available on-line, are referenced. These sources, together with their explanatory notes, were also used to develop the modes and roles of government accounting in Table 2. The data used were checked for internal consistency by one of the authors, and the various institutions were contacted for the few outstanding queries on completeness of data sets. Data are interpreted using the framework of modes of government accounting (Heald and Hodges, 2018) and roles of accounting (Miller and Power, 2013). Literature from academic, official and professional sources provides evidence of the impact and importance of specific influences on UK accounting and fiscal developments over this period.

3. Theoretical framework

The exposition will begin with modes of government accounting, and then move on to roles of accounting. Modes of government accounting are the measurement systems which generate information about the finances of government, involving matters of substance relevant to the government sector. Roles of accounting concern the processes through which accounting, broadly conceived, impacts on the economy and society.

3.1 Modes of government accounting

Four modes of government accounting are identified by Heald and Hodges (2018).

1. Government financial reporting refers to the annual reports of public sector entities, traditionally prepared on a cash basis, but now on a full accruals basis in the UK. These are backward-looking as the reports relate to concluded periods of time. They are complex documents and there are few direct users of public sector accounts, much therefore depending on information brokers (Rutherford, 1992). There can also be substantial delays after the year end before their publication, much longer than in the private corporate sector.

2. Statistical accounting refers largely to the general government sector of the national accounts, which in the UK are prepared on the basis of the European System of Accounts (ESA10) (Eurostat, 2013). Two features ensure that what are often called “fiscal statistics” take precedence over government financial reporting: the speed of production (almost in real time, though subject to extensive later revision) and international comparability (vital for foreign exchange and debt markets and for international monitoring agencies, such as the IMF, and supranational bodies, such as the European Commission and the European Central Bank). Statistical accounting is forward-looking (forecasts) as well as backward-looking (long time series of revised data).

3. Budgeting is forward-looking, in formal terms for the year ahead (what the UK Parliament votes through the Supply procedure) but supposedly multi-year (three to five years ahead) as this is the time period relevant to expenditure policy choices. Budgets attract a lot of not necessarily well-informed political and media attention, because they determine who will gain and who will lose, so they are highly salient to political decision-makers. Whether budgeting is Executive-dominated, as it is in the UK, or not depends on history and constitutional arrangements. Numbers which are used for budgeting come under intense pressure, as can those who prepare or adjudicate them.

4. Fiscal Sustainability Projections have developed as long-term projections over 45 years on top of medium-term forecasts for five years. These can only be done by assuming that “existing policy” will continue, though what that is can be problematic. Supposed policy, such as continuous exploitation of fiscal drag and increasing debt/GDP ratios, is sometimes implausible but ties the hands of official forecasters. Assumptions about attainable rates of economic growth and demographic trends tend to drive the result as to whether present policies are fiscally unsustainable. These circumstances allow finance ministries to play games about the time profile of fiscal consolidation (e.g. tax increases and spending cuts after the next election) and about what is policy, such as pretending that legislated annual fuel tax indexation will occur, when this last happened in 2011–12 (OBR, 2024b).

3.2 Economization

Within their concept of economization, Miller and Power (2013) identify four roles of accounting. Although these are generic to accounting, not specific to the public sector, this exposition summarizes them in relation to government accounting and elements of the fiscal framework.

1. Territorialization defines the entity for which accounting takes place. Miller and Power (2013, p. 579) emphasize that “Accounting may focus on the performance of an actual physical space”, such as the ward of a hospital or an office within a local authority. “The space may be abstract in the form of a particular product line, a legal entity such as a government agency or a collection of such entities” (ibid, p. 579). A common feature is that these territories of accounting enable them and their respective performances to be reviewed, evaluated and compared with other such spaces by senior managers, board members, regulators or even in some instances (such as public services) by the general public. The spread of New Public Management (NPM) (Hood, 1991) led not only to the breaking-up of large amorphous government departments into agencies of various types but also to the reconceptualization of the increased number of organizations as reporting entities in terms of financial results and of their performance against objectives. Accounting does not cause centralization but might make its implementation easier, for example through top-down control using accruals numbers. Over the study period, there has been increased centralization, particularly within England in relation to local government, notwithstanding devolution to Scotland, Wales and Northern Ireland. Moreover, the UK government has become a financial reporting entity at the whole-of-government level, as determined by the application of IFRS accounting standards (Bradley et al., 2023b), in contrast to statistical accounting’s general government sector.

2. Mediation “links up different actors with a common narrative and may constitute a network of relations within and beyond the boundaries of the enterprise” (Miller and Power, 2013, p. 581). Essentially, it refers to how accounting, as a language of communication, creates linkages between policy actors who make their own decisions on the basis of numbers which reduce the complexity of organizational life to a simplified portrayal of that reality. The virtual shadow is what becomes managed by the organization and interacts with external and hierarchically superior actors. An important form of mediation in the public sector is collibration (Dunsire, 1990) which can be thought of as achieving societal goals, not by setting detailed rules to govern behaviour, but by setting up power relationships in which interaction of the self-interested behaviour of policy actors leads to the desired outcome. Collibration is in essence about the allegedly stabilizing effect of a balance of power, with the assumption that there is some “ringmaster” with the capacity from time to time to tilt the balance in favour, or against, particular actors. Under stress conditions, systems that rely on collibration can break down, as evidenced in settings as varied as international relations, industrial relations and audit regulation (Bradley et al., 2023a). The breakdown of collibration can result in system instability or sub-optimal equilibria from which escape is difficult. Hood (1994) interpreted collibration as an alternative governing device to homeostatic controls which seek to shape behaviour by setting detailed operational rules in a form that supposedly corrects deviance.

3. Adjudication is a highly observable role of accounting, with government financial reporting and statistical accounting forming the basis for much adjudication in the public sector. Miller and Power (2013, p. 583) refer to “The constitution of territories or entities for accounting and the mediation of ideas and techniques, the linking of different actors, being indissociable from the allocation of responsibility”. Technocratic systems of adjudication run into the difficulty that, in democratic societies, the electorate decides through the mechanism of free and fair elections whether an incumbent government should continue in office. Buller and Flinders (2005) noted the trend for key adjudicators to be made “independent” through depoliticized institutional arrangements which put them out of the direct reach of ministers and the legislature. UK examples include the Bank of England, financial regulators, the OBR, the NAO and judges. Such depoliticized adjudication points are believed to enhance operational effectiveness and reassure external actors such as financial markets, which look for evidence of fiscal discipline and the rule of law. Indirect means of ministerial influence remain, including via appointments and pressure, but depoliticization raises questions about the legitimacy and accountability of independent agencies, leading to rhetoric about “who elected the judges?”.

4. Subjectivization: Miller and Power (2013, p. 586) state that “Accounting is a subjectivizing practice par excellence”. They suggest that a century or more of attempts to assess individual performance and encourage individuals to assess their own performance, has resulted in the contemporary calculating self, as agents react to efforts to account for them and evaluate them. Organizations face pressures from above, and those at the top of the pyramid face pressures from electorates, media, and sterling and debt markets. Pressure can lead to better performance. However, it can have dysfunctional consequences, such as false reporting upwards and countermeasures by the subjectivized that look attractive at the time. Examples include cost reduction at the expense of future resilience to shocks and pushing debts outside the perimeter of reporting, which can lead to divergent results by mode of government accounting. The shortening of decision-makers’ time horizons leads to the taking of bigger financial risks. Moreover, the top of government can itself be subjectivized by external forces. Miller and Power (2013, p. 563) refer to subjectivization as including “the fundamental presumption of an individual who is free to choose, and indeed obliged to choose, albeit often by reference to financial norms or standards”. Those subject to subjectivization from hierarchical or external influences may respond along a continuum from submission, through reluctant compliance to defiance and manipulation.

4. The UK fiscal record, 1997–98 to 2022–23

Attention now turns to an examination of the UK’s fiscal record since 1997–98. The present malaise can be dated back to the 2007–08 GFC, from which the UK economy has still not fully recovered. Overlapping crises make the effects of each difficult, if not impossible, to disentangle.

For the period 1997–98 to 2022–23, UK nominal GDP and real-terms GDP (using the GDP deflator) are plotted as continuous lines against the left-hand axis of Figure 1 (OBR, 2024a; ONS, 2024c). Against the right-hand axis, the histogram plots annual changes in real GDP, showing the crisis years (GFC and COVID-19), highlighting the spectacular fall in 2020–21 and the swift recovery in 2021–22. Real GDP growth has been weak since the GFC, which did damage to the productive capacity of the UK economy.

Against the left-hand axis, Figure 2 plots real-terms Total Managed Expenditure (TME) from 1997–98 to 2022–23, adjusted by the GDP deflator to 2022–23 prices. Against the right-hand axis it plots TME in real terms as a percentage of GDP. Both measures show that TME expanded, as a policy choice, during the 1997–2010 Labour Government, with TME in real terms as a percentage of GDP peaking at 46.5% in 2009–10 due to the GFC. The percentage then came down during the 2010–15 Conservative-Liberal Democrat Coalition and the post-2015 Conservative Governments (39.6% in 2019–20). Then came another peak (53.1% in 2020–21) due to the COVID-19 pandemic. Thus far the percentage measure has not returned to the downwards trend, so COVID-19 might have induced an upwards ratchet effect on public spending.

Figure 3 provides insight into why public expenditure austerity is now perceived as having been so damaging to the quality of public services. TME in real terms is converted to an index with 1997–98 = 100. This again shows the strong growth during the 1997–2010 Labour Government and the abrupt change throughout the 2010s, followed by the surge during the COVID-19 pandemic. Also plotted is TME in real terms per capita which diverges downwards from TME in real terms from the early 2000s, and there is now a large difference.

Examining both is important because the UK population increased from 58.31 million at mid-year 1997 to 67.60 million at mid-year 2022, an increase of 16% (ONS, 2024d). Real-terms TME per capita increased from £10,133 in 1997–98 to £14,760 in 2018–19 (the year immediately pre-COVID) which is lower than in 2008–09 (the year after the GFC). On the index based on 1997–98 = 100, real-terms TME reached 166 in 2018–19 (the last pre-COVID year), whereas real-terms TME per capita was lower at 143. In 2022–23 the index for real-terms TME was 196 and the index for real-terms TME per capita was 169. In terms of personal experiences of public services, the per capita data are more relevant.

There are three further factors to note. Firstly, over the period since 1997–98, there have been large changes in the composition of TME, with defence and debt interest declining and health and welfare increasing (Crawford et al., 2018; Treasury, 2023). Secondly, the indexes make no allowance for increases in complexity, for example, from the ageing demography and increased treatment possibilities in medicine. Thirdly, over such a long period, there will be a positive Relative Price Effect: public sector costs will tend to rise faster than the GDP deflator (Baumol, 1967; Hartwig, 2008), most obviously in healthcare but with more general applicability. Many public services are labour-intensive with human interactions perceived to be indicators of quality. Productivity gains equivalent to those in the private market sector are not necessarily achievable but public sector wages must broadly keep pace or severe problems of retention and recruitment will result. Moreover, other public sector inputs such as construction costs and pharmaceutical prices usually rise faster than the GDP deflator which is a measure of inflation in the economy as a whole.

Cumulatively, it becomes easier to understand why there is currently profound dissatisfaction with UK public services (IPSOS, 2023), notwithstanding the upward trends in TME shown in Figure 2.

Attention now turns to measures of deficit and debt (statistical accounting) and WGA net liabilities (government financial reporting). It is possible to have declining debt/GDP ratios when there are deficits: for example, the nominal GDP denominator is likely to be increasing and other factors as well as deficits affect changes in PSND.

Against the right-hand axis of Figure 4 is plotted Public Sector Current Budget Deficit (PSCBD) as a percentage of GDP from 1997–98 to 2022–23 as histograms. By convention, deficits are presented as positive numbers. Only in five of 26 financial years has there been a surplus, four close to the beginning of the time period and also in 2018–19. Large deficits have occurred at two crisis points: at the end of the 2000s and in the early 2010s (GFC); and at the beginning of the 2020s (Brexit, COVID-19 and the cost-of-living crisis). The GFC-induced deficits were gradually reduced in the years up to 2019–20, whereas the 2020–21 COVID-19-induced deficit (11.6% of GDP) came down dramatically in 2021–22 while staying higher than pre-COVID.

Four alternative measures of debt and liabilities are plotted in Figure 4 as a percentage of GDP. The first three measures are statistical accounting measures of public debt whereas the fourth measure is taken from the UK WGAs (Treasury, undated). The four measures of debt and liabilities plotted in Figure 4 are:

1. Public Sector Net Debt including the Bank of England but excluding public sector banks (PSND) (statistical code HF6X), which is taken as the base case

2. Public Sector Net Debt excluding the Bank of England and public sector banks (PSND exBoE) (statistical code CPOA)

3. Public Sector Net Debt including the Bank of England and public sector banks (PSND inclPSB) (statistical code RUTO)

4. WGA Net Liabilities, taken from successive UK WGAs (Treasury, undated), this being the government financial reporting measure.

Public Sector Net Debt (PSND) as a percentage of GDP stays below 40% from 1997–98 to 2007–08, jumping to 50.5% in 2008–09 (GFC). It then increases up to 2014–15 (81.6%), is fairly level until 2018–19, then rises again from 2018–19 to 95.7% in 2022–23 (mostly because of COVID-19). The magnitude of increases in the debt ratios has been reduced by the unexpected inflation due to COVID-19 which has increased the GDP denominator. Nevertheless, the PSND percentage is more than double the 40% ceiling prescribed by the sustainable investment rule established by Gordon Brown, Chancellor of the Exchequer, 1997–2007 (Treasury, 1998; King, 2015).

The GFC has complicated statistical accounting’s public debt measurement in two ways. Firstly, the Bank of England has engaged in Quantitative Easing which involves buying UK government debt in the secondary market, whereas buying government debt directly from the Treasury would be regarded as illegitimate monetary financing (House of Lords Economic Affairs Committee, 2021). Excluding the Bank of England (PSND exBoE) reduces the debt measure by 10.8 percentage points in 2022–23.

Secondly, systemically important private banks, thought to be in danger of failure, were nationalized to protect financial stability. The public debt measure including the Bank of England and public sector banks (PSND inclPSB) (RUTO) is available in the ONS databank (ONS, 2024b). Because statistical measures of public debt disregard assets other than liquid financial assets, PSND inclPSB includes the liabilities of public sector banks but not their non-liquid assets. Also, year-on-year changes are distorted by the gradual disposal of involuntary government shareholdings. On this measure, the public debt ratio peaked spectacularly at 145.3% in 2009–10 (compared to 64.7% for PSND including the Bank of England), falling to 108.9% in 2022–23 (compared to 95.6%) (ONS, 2024b, Table PSA5A). The smaller margin of difference is due to disposals of government shareholdings in those banks. The divergence of the three public debt measures demonstrates how sensitive to definitions the portrayal of public debt is.

The fourth measure plotted in Figure 4 is WGA Net Liabilities, the government financial reporting measure of public sector liabilities, presented as a positive number. At 71.9% in 2010–11, it was close to two of the three public debt measures, but diverges upwards in the 2010s, long before COVID-19, reaching 157.2% in 2021–22. The reasons for this divergence are not entirely clear but the effect of lower discount rates on the valuation of future liabilities measured according to IFRS must be a significant factor (Treasury, 2024, p. 280). There seem to be three main factors involved. First, pensions, for which discount rates are derived from financial markets whereas the national accounts use a Eurostat-prescribed discount rate (Eurostat, 2020, p. 40) which rarely changes. Secondly, non-pension liabilities which are measured by discounting (such as provisions for future expenditures like nuclear decommissioning and clinical negligence) but which are excluded from the national accounts. Thirdly, a rise in new provisions, perhaps as a result of government relying on guarantees during COVID-19.

The divergent measures of debt and liabilities plotted in Figure 4 show what a complex topic public debt measurement is, particularly since the GFC. Although there are statistical arguments in favour of PSND exBoE, its popularity as “fiscal mandate” (Keep, 2024) with the UK Government owes much to the fact that it shows a lower percentage (84.8% in 2022–23) than PSND (95.6%), further from the symbolic figure of 100%. The worrying feature of Figure 4 is the path of WGA Net Liabilities which is the result of applying modified IFRS to the UK public sector (Bradley et al., 2023b) and provides a more comprehensive picture of UK public sector assets and liabilities.

A point to be developed under territorialization in Section 5 is that the UK’s territorialization of public sector data is much broader than in many other countries, particularly in relation to tiers of government and focus on the public sector as a whole. OECD data largely focus on statistical accounting’s general government sector, as does the EU’s Maastricht Treaty debt ceiling on general government gross debt. Narrower definitions such as general government are easier to game by putting activities and liabilities outside the applicable statistical boundary. The latest OECD (undated) data on general government expenditure in 2022 report that the UK’s level of spending (48.11%) was 21st highest of 34 reporting countries and 11th compared to the 22 EU countries which report.

To complete the fiscal data, Figure 5 plots UK taxation as a percentage of GDP for the 1997–98 to 2022–23 period. It shows that UK taxation in 2022–23 is higher than in any of those earlier years. Indeed, it is higher than it has been since calendar year 1949. What is striking from Figure 5 is how narrow the range has been over the period, with a minimum in 1997–98 (31.2%) and a maximum in 2022–23 (36.3%), albeit on a rising trend. However, UK governments are now rhetorically pincered between this historically high tax ratio, largely due to low economic growth, the polycrisis and citizen dissatisfaction with public services.

Summarizing the context of these fiscal data, Table 1 subdivides the 1997–2024 period, tabulating major events with fiscal implications. There have been three UK Governments: Labour (1997–2010); Conservative-Liberal Democrat Coalition (2010–15); and Conservative (2015–24).

The Labour period has been split into three rows. There are cells for public expenditure, taxation and major crises, with a summary comment in the final column. The longest entries relate to the Conservative governments since 2015, during which there have been five Prime Ministers, seven Chancellors of the Exchequer and ten Chief Secretaries of the Treasury (the Cabinet minister responsible for public spending). In contrast, nine Chancellors had held office from 1979 to 2016, three of them leaving office when their party was defeated in a general election.

5. Discussion

Having set out the theoretical approach and the statistical facts, the main issues to be addressed in this Section are why UK fiscal performance now looks so bad and why its sophisticated accounting processes and apparently strong fiscal institutions did not prevent this outcome. In the 2000s before the GFC, there was an air of confidence about UK economic and fiscal performance (Balls and O’Donnell, 2002), now there is gloom about it, both domestically and internationally (Bevan, 2023).

Five elements of the polycrisis have been prominent: Brexit, COVID-19, cost-of-living crisis, climate crisis and unprecedented government instability. A review of 17 Parliamentary-style democracies between 1974 and 2023 indicates that the UK had the shortest period of ministerial occupancy of posts relative to their party remaining in power and that “Cabinet ministers appointed so far in the current parliament (elected in 2019) have served in one post for (an average of) just eight months” (Difford, 2024, p. 25).

There are connections between the five elements, and scope for argument about the extent to which these are exogenous (e.g. global pressures) or endogenous (e.g. self-inflicted). In terms of public financial management institutions and processes, the UK would score well on any international assessment, such as by the IMF (2016). However, good institutions and processes do not necessarily prevent either bad luck, if crises overlap, or bad policy decisions, including allowing the downgrading of capacity to respond to crises.

The theoretical framing provides insights into these troublesome developments. The overlapping elements of the polycrisis complicate the attribution of under-performance to causes, including how far back in economic and political history it is necessary to go. Two issues have roots preceding the polycrisis, namely, productivity failures which have reduced resource availability for public services (Chadha, 2017) and the decline of Cabinet government which has contributed to erratic decision-making (James, 2020).

This section is structured around the interaction between economization’s four roles of accounting and the four modes of government accounting. Table 2 summarizes the findings in matrix format.

5.1 Territorialization

The first row of Table 2 summarizes how territorialization impacts on and through the four modes of government accounting.

The UK has a long tradition of planning public expenditure as a whole (Thain and Wright, 1995). Consequently, the wide extent of existing territorialization limited the effects of the introduction of accruals accounting and WGAs because UK practice already had a broad canvas. However, these developments have given central government the scope to apply financial management policies decided at the centre more extensively than in most countries. There is now very limited self-governance of local authorities and city regions in the UK compared to much of the EU (Lowndes and Gardener, 2016; Bailey and Wood, 2017).

The aftermath of the policy response to the GFC has raised a new question as to how “government” is territorialized at the macro level. One of the biggest items in the depoliticization agenda has been the widespread acceptance of independent central banks, with the Bank of England being granted operational independence over monetary policy from the Treasury at the beginning of the 1997–2010 Labour Government. A large gap of 13.4 percentage points has developed by financial year 2021–22 between “UK Public Sector Net Debt” (as plotted in Figure 3) and “UK Public Sector Net Debt excluding the Bank of England”, caused by the Bank of England buying UK government debt as part of Quantitative Easing from March 2009 (ONS, 2024a, Table PSA5A). These developments mean that the clear distinction between monetary and fiscal policy anticipated in 1997 has blurred. The Bank of England is owned by the UK government but is outside general government although in the public sector for statistical accounting, while it is consolidated in the UK WGAs for government financial reporting purposes. How the relationship between the UK Government and the Bank of England became repoliticized and problematic is analysed below under Subjectivization.

What has been re-emphasized by the COVID-19 pandemic and the climate crisis is that, in extreme circumstances, governments have responsibilities extending beyond the government sector and have the capacity to mobilize economic resources. The polycrisis has caused increased attention to be paid to net debt relative to that of comparable economies, consistent with the view in Eichengreen et al. (2021) that public debt is not necessarily bad, but that everything depends on keeping it proportionate to the country’s circumstances. Moreover, what is territorialized as government in a country, and hence what is recognized as government debt, depends significantly on constitutional inheritance (e.g. whether federal or unitary government) and on organizational structures (e.g. whether publicly-financed health care, housing and universities are inside or outside accounting and statistical boundaries of government). This adds to the difficulty of interpreting cross-country data. Territorialization is more than merely a technical accounting issue; it affects the perceptions, both domestically and internationally, of the fiscal position of a nation or region.

Most fiscal analysis and decision-making cover relatively short time horizons, to which fiscal sustainability projections on a 50-year horizon constitute the exception. Whereas government financial reporting and statistical accounting refer to past years, and budgeting is for one year or three-to-five years ahead, the time horizon of fiscal sustainability projections means that they bring distant future years into the calculations. In effect, this is territorializing the future.

To a substantial extent, the costs of climate change affect the future rather than the present, being most relevant to budgeting and to fiscal sustainability projections. There is early evidence, for example from the Environment Agency (undated), of the direct damage that is already being done. The big costs will come from replacing infrastructure that has been made redundant; from reduced economic growth; and from the compensatory payments for climate change damage which, as a G7 country, the UK might make to developing countries.

The problem is that such sustainability projections lack an audience for the message that existing levels of public provision are not sustainable at currently acceptable levels of taxation. Furthermore, existing government policies may do little to respond to the climate change agenda, despite rhetorical claims, so future costs are not included in fiscal sustainability projections. The politically salient time horizon for taxation and spending decisions is very short, often not going further than the next election. The effect of disregarding the messages now is that adjustment will come later and will be more brutal than it otherwise needs to be.

5.2 Mediation

The second row of Table 2 summarizes how mediation impacts on and through the four modes of government accounting.

Accounting, both in its narrow technical sense (i.e. structured reporting) and its broader sense of multi-faceted measurement, plays a mediating role in public and private governance. Hood (1994) postulated three styles of public governance: reliance on trusted leaders; reliance on performance metrics; and reliance on collibration (i.e. generating an equilibrium arising from the interaction of opposing forces, with government as ringmaster from time to time resetting the balance between those forces). In the UK, the trusted-leader model has been out of fashion since at least the 1970s. The 1997–2010 Labour Government built a complex hierarchy of performance measurement systems, much of which was dismantled under the 2010–15 Conservative-Liberal Democrat Coalition Government. Post-2010, highly centralized governance has relied upon resource reduction imposed by the centre, often known as “austerity”.

Mediation is where there have been major effects to which accounting has been a contributor. Since 2010, block grants to English local authorities have been brutally cut, with some financial offset from them being made bidders for multiple streams of central government-controlled funds (Bailey and Wood, 2017). This process involves large bidding costs and distorts local priorities and accountability. Blame for deteriorating public services has been shifted by central government to English local authorities which have been stripped of key functions, including much of school education, and seen their taxation powers severely constrained. Council tax in England is still based on 1991 property values and increases above a certain level have been subjected to local referenda (Gamble, 2015). Notwithstanding rhetoric about devolution and levelling-up, there has been a fundamental shift in collibration, with the balance of power being tilted by central government in its own favour (Lowndes and Gardner, 2016). These collibration processes invariably include interested parties seeking to reposition themselves for best effect. In the case of local government inspection and audit, the Local Government Association representing English local authorities supported the replacement of compulsory inspection with a voluntary process, while some private sector auditors have sought to move public sector auditing obligations closer to those in the private sector (Bradley et al., 2023a).

Mediation (“everything is comparable”) allows central government politicians and officials to apply “one-model-fits-all” without being concerned about the detailed effect of implementation in different regions and localities. This shift in collibration towards a more powerful centre with less knowledge of conditions on the ground has contributed to the loss of trust in government that was a factor in the Brexit referendum result.

Budgeting is what politicians and media care most about, and statistical accounting is what markets care most about. This can marginalize government financial reporting (too slow) and fiscal sustainability projections (model-based and relating to time horizons that current decision-makers may not care about). Yet the combination of polycrisis and political instability has undermined the Spending Review system which was intended to bring multi-year budgeting for the duration of a Parliament.

Hardiman (2022) noted how UK political developments have damaged government performance and public accountability. She put the blame on the UK’s first-past-the-post electoral system, a hardened winner-takes-all political culture, and the ideological space within the two main political parties, both of which have had recent leaders (Jeremy Corbyn, Labour, 2015–2020; and Liz Truss, Conservative, 2022) elected by party members without having the support of their MPs. This leads to erratic policy making. Shortly before the December 2019 general election, which Labour were clearly going to lose, Jeremy Corbyn committed £58 billion to the reversal of already implemented increases in the female retirement age, something that had not been specifically included in the Labour manifesto (Savage and Helm, 2019). The more consequential episode, because this was done by a government in office, was the 23 September 2022 fiscal event that is discussed under Subjectivization.

The UK, with its large financial sector, was badly hit by the 2007–08 GFC and its recovery was weak up to the onset of the COVID-19 pandemic in March 2020. As shown in Figure 1, UK real-terms GDP took until 2012–13 to reach its pre-crisis level. As well as blaming the outgoing Labour Government for the fiscal deficit, the 2010–15 Conservative-Liberal Democrat Coalition opted for fiscal consolidation on the basis of 80% spending cuts and 20% taxation increases (Gamble, 2015). With health spending protected from real-terms cuts, local government funding, and hence its expenditure, was cut drastically (Harris et al., 2019).

These policy choices raise two issues: the desire of UK politicians to have Scandinavian-level public services at US levels of taxation (Emerson et al., 2024); and the fact that the UK is one of the most fiscally centralized democracies (Dorling, 2023). The former contributes to disillusionment with public services and paralysis about the taxation reform which should have been possible during the tenure of Labour governments with large majorities from 1997 to 2010. The Mirrlees Review (Mirrlees et al., 2011) missed that window of opportunity. The latter hollowed out democratic decision-making at the local level, particularly in England where there is no intervening devolved government. Subjectivized local authorities have taken financial risks, for example with town centre redevelopment and out-of-jurisdiction property speculation (Bradley et al., 2023c). Over the period from 2010 to 2020 (the onset of the COVID-19 pandemic), UK government capacity to regulate and deliver, at both central and local levels, became stretched and fragile.

5.3 Adjudication

The third row of Table 2 summarizes how adjudication impacts on and through the four modes of government accounting.

Adjudication relates to compliance with rules and regulations (including those relating to government financial reporting and statistical accounting) and assessment of performance. In the private sector, markets are the decisive adjudicator in product markets as unprofitable firms will be liquidated, and also in capital markets where under-performing firms are at risk from takeover by those who can use the assets more effectively.

In the public sector adjudication is much more complex, not least because the nature of activities means that performance is more difficult to assess and there are more stakeholders. Governments can be at the mercy of volatile public debt markets, and for many industrialized economies, this is in the background most of the time but can move to centre stage rapidly in a crisis situation. Roberts (2011) regards depoliticization as changing the architecture of government without sufficient attention to the behaviour of actors subjected to the resulting constraints. Prevailing wisdom about monetary policy among economists has led to the spread of central banks with operational independence from the elected government. Moreover, NPM ideas have led to the proliferation of independent regulators across industrial sectors where governments used to be monopolistic suppliers (e.g. energy, transport and telecommunications) and across core public services (e.g. education and health). This development is seen as building sectoral expertise not available in government departments (for reasons of culture and relative pay) and – less overtly – as facilitating blame avoidance or insulating decisions from ministerial interventions motivated by electoral pressures.

In the context of government financial reporting and statistical accounting, compliance adjudication has two dimensions: who sets the rules and who monitors their application. For government financial reporting in the UK, these are done, respectively, by the FRAB, modifying and interpreting IFRS, the FRC, which oversees the development of financial reporting practices and auditing standards, and the NAO, in its role as auditor for central government departments and the developer of the Code of Practice for local government auditing in England. For statistical accounting, both dimensions were done pre-Brexit by Eurostat (refining the System of National Accounts 2008 into ESA10) and monitoring the application of ESA10 by the ONS, particularly in the context of the EU Stability and Growth Pact. Brexit has eliminated Eurostat as an adjudication agency for UK statistical accounting, except in the context of UK legacy contributions to the EU Budget. In terms of budgeting, the Treasury has discretion over how this is done (e.g. coverage and time horizon), subject to working within OBR economic and fiscal forecasts. In terms of fiscal sustainability projections, the OBR is preparer as well as adjudicator.

Democratic theory suggests that the ultimate performance adjudicator is the people through representative democracy (Bovens et al., 2014). The depoliticization of adjudication (putting key decisions out of the reach of the public and its elected representatives) might create or exacerbate problems of governance and accountability. Firstly, there are some areas of public policy where there might be general consensus that certain decisions (e.g. on aviation or road safety) should be delegated to “experts”. However, most areas of public policy involve the exercise of political judgements (e.g. about acceptable trade-offs) on which non-experts will demand their say. Tolerance of experts will decline when it seems that they are inserting their own value judgements and disguising these as technical matters, or being used by governments to evade accountability for decisions (Hodges et al., 2022).

Second, depoliticization may lead to the politicization of the choice of adjudicators: the focus on who gets appointed for life to the US Supreme Court illustrates this well, enabling Presidents to bequeath a legacy to successors. In the UK, this re-politicization relates to key appointments to public bodies that have adjudication functions, as evidenced by controversies over appointments to the boards of the British Broadcasting Corporation, the Electoral Commission and the Office for Communications. Depoliticized adjudicators such as the judiciary, Bank of England, energy regulators, OBR and NAO can become the site of complex games of blame shifting and subversion of the formal architecture.

Third, the UK House of Commons is supposed to be the principal to the Executive’s agent but much of the time it is the other way round. This inversion of accountability claims has been made more visible by external control of party leadership by the small and unstable memberships of the Conservative and Labour parties. The public often do not distinguish between the Government and Parliament, with the latter having been brought into disrepute by the 2009 expenses scandal. Parliament is vulnerable to both populism and authoritarianism:

A survey of 1,198 adults conducted by Ipsos MORI for the Hansard Society indicates that parliamentary deadlock over Brexit had a detrimental impact, with just 25% of those asked expressing confidence in MPs’ handling of Brexit, and 42% believing the country’s problems could be dealt with more effectively if the government didn’t have to worry about votes in parliament (Marshall et al., 2020, p. 94).

In complex settings, retaining a balance between accountability and independence is difficult, especially when adjudicators are subjected to conflicting pressures generated by subjectivization.

Not having fully recovered from the 2007–08 GFC and distracted by the Brexit question, the UK was ill-prepared for COVID-19 (Heald and Hodges, 2020). Its public expenditure and taxation responses were eventually broadly in line with those of comparable countries, but execution was damaged by credible allegations of political cronyism through preferential access to procurement channels and there being evidence of fraud in the allocation of furlough payments and business loans.

5.4 Subjectivization

The fourth row of Table 2 summarizes how subjectivization impacts on and through the four modes of government accounting. Whereas territorialization and adjudication focus on the architecture, subjectivization is about behaviours which impact on mediation.

Subjectivization has two directions, downwards from the centre and at the top when the centre seeks to evade external rules (e.g. EU Stability and Growth Pact before Brexit) and its own rules (e.g. the current version of domestic fiscal rules). Budgeting exerts direct downwards control from the centre of UK government over more than ten thousand legally distinct entities, with government financial reporting confirming at the entity level and statistical accounting at the aggregate level that entities have conformed. Subjectivization may include routine control of funding levels, reductions in funding as some form of punishment, or abolition of a public body which has not conformed to expectations (Dalton et al., 2023). However, entities are not necessarily passive recipients of top-down demands and subjectivization covers a range of responses, from submission to resentful compliance and defiance, through tactics such as false reporting upwards and engaging in behaviour which reduces resilience and exposes the organization to hidden risks. The subjectivization responses of some English local authorities, involving exposure to risks in property outside their jurisdiction, illustrate the extreme end (Bradley et al., 2023c). Whereas there is often political indulgence for “wheezes” (“doing good by stealth”), there is the risk that government capacity at various levels is damaged without that being communicated to the centre or to the public. Organizations and people learn to tell “superiors” what they want to hear.

However, it is not only organizations towards the bottom of the hierarchy that may display such behaviour: the Treasury has been known to evade its own rules and push liabilities outside reporting (e.g. Private Finance Initiative [PFI] liabilities before 2009–10 and putting organizations outside general government).

Policy development in response to the cost-of-living crisis was hampered in mid-2022 by the eviction from office by Conservative MPs of Prime Minister Boris Johnson (7 July) and the subsequent campaign for the party leadership and hence premiership which ended with the choice by Conservative Party members of Liz Truss (6 September). The unsuccessful candidate (Rishi Sunak) described Liz Truss’s policy platform as “fairytale economics” (Hutton, 2022). That platform included attacks on “Treasury orthodoxy” and implied threats to the independence of the Bank of England and to the position of its Governor Andrew Bailey. Political and media outriders amplified the attacks that came from the leadership candidates themselves.

The first act of Truss’s Chancellor of the Exchequer Kwasi Kwarteng, was to dismiss Sir Tom Scholar, Treasury Permanent Secretary since April 2016. Kwarteng sidelined the OBR by labelling his 23 September 2022 statement as a “fiscal event” (Treasury, 2022a), not as a budget, thereby exploiting a loophole in the OBR’s founding legislation. Despite an offer by the OBR to provide the usual fiscal forecasts, this was refused. Kwarteng’s statement included energy subsidies of £150 billion over two years and £45 billion a year of tax cuts, all financed by more borrowing. This was enthusiastically received on the Conservative benches in the House of Commons and lauded in the right-wing press. Sterling plunged, interest rates on government debt soared, and the Bank of England had to reverse Quantitative Tightening to support the gilts market and prevent over-leveraged private pension funds from collapsing.

What is surprising about the reaction to the 23 September statement is that the markets were so surprised by its contents. All the tax cuts, except one, had been flagged by the Truss leadership campaign during summer 2022: the exception (“the rabbit out of the hat” favoured by Chancellors of the Exchequer) was the abolition of the top rate of UK income tax (currently 45%) which would only have cost £2 billion. Given Truss’s leadership campaign rhetoric against “government handouts”, the untargeted nature and duration of energy subsidies also surprised. Perhaps the campaign promises had been discounted as directed at the small electorate of 172,437 Conservative Party members (Jones, 2022), to be quickly forgotten in office, or the “big bang” of immediate rather than phased implementation had not been expected. The media reception turned sour, with the focus on the unfunded tax cuts and the alleged unfairness of these favouring the well-off during the cost-of-living crisis.

Kwarteng was dismissed by Truss on 14 October, Truss announcing on 20 October her own intention to resign. Much of the 23 September package was reversed before the 17 November Autumn Statement (Treasury, 2022b). This was accompanied by OBR forecasts and delivered by Jeremy Hunt, the Chancellor in the Government of Rishi Sunak who had become Prime Minister on 25 October. On this occasion, the final decision was taken by Conservative MPs, not by party members, as only one candidate was left standing.

Although at the top of the UK fiscal hierarchy, Truss’s and Kwarteng’s actions can be interpreted as at the defiant extreme of subjectivization, reacting to what were perceived as irrational constraints on their actions created by institutional structures, such as those imposed by the OBR which was regarded as part of the damaging “Treasury orthodoxy” of “bean counters”. Kwarteng wanted to spend the £30 billion buffer that the adjudicating OBR had identified in March 2022, but which a new forecast would have shown had already evaporated. The Bank of England, effectively another adjudicator, was targeted during the Truss leadership campaign: ultra-loose fiscal policy would force the Bank of England to raise interest rates even higher than otherwise, thereby taking the blame while the Government claimed the credit, an example of blame-shifting behaviour (Hood, 2014). Ironically, a government rhetorically committed to free markets and the small state had forgotten the power of foreign exchange and debt markets.

A high-quality institutional framework can be subverted, especially if depoliticization (Buller and Flinders, 2005) has led to a loss of legitimacy. The ruling in the High Court of Justice that Brexit could not go ahead without a parliamentary vote resulted in the Daily Mail castigating the three judges as “enemies of the people” (Slack, 2016). The concept of the “popular will”, as expressed in the Brexit referendum, challenged parliamentary democracy, with the role of Parliament being seen as to acquiesce to whatever the UK Government wished to do in relation to Brexit. This is important in the context of a winner-takes-all culture, where the national election result is held to overrule all other democratic mandates and give the right to decide everything, even where Parliament has previously legislated to distance particular decisions from ministers to increase credibility with financial markets and the public.

The efforts of governments to represent the “popular will” and to collibrate institutional structures in its own favour may nevertheless fail. This is because modern political systems have become sensitive to prominent opinions and anxieties, fuelled by social media and new forms of mobilization that may represent interest groups with narrow or extremist views. This “hyper-democracy” (Heclo, 1999) exacerbates pressures on governments and legislatures. Flinders and Wood (2015) argue that depoliticization does not succeed in protecting politicians from criticism, but rather that it is increasingly extended (becoming “hyper-depoliticization”). This restricts executive discretion without reducing the pressures on politicians as “an increasingly virulent lobbying and media elite are not satisfied by delegation to technocratic bodies” (p. 364).

With hindsight, the IMF’s (2016) generally positive Fiscal Transparency Evaluation of the UK was over-optimistic, or perhaps the September 2016 completion date was too close to the 23 June 2016 Brexit referendum which triggered political disruption. In terms of fiscal architecture, the UK has had fiscal rules for most of the time since 1997. In terms of behaviour, the UK’s track record is much less impressive. Emmerson and Stockton (2021, Figure 4.6) record how fiscal rules have proliferated and often not been met, sometimes for good reason because economic circumstances had fundamentally changed. Over time governments have learned how to game the fiscal rules, including rolling time horizons set with close attention to the election cycle. Emmerson and Stockton (2021) conclude:

A clear lesson from the last 25 years is that, rather than having firm and fixed fiscal rules, it would be better for these to be considered rough rules of thumb that Chancellors should strive to keep to in most periods. This should be communicated from the outset. We should not pretend that any fiscal target, however carefully designed, will be sacrosanct for evermore.

Since that was written, cynicism about the UK’s fiscal rules has become widespread, characterized as “fiscal fiction” (Financial Times, 2024) and misunderstood, even by the Chief Secretary to the Treasury (Rutter, 2024). Rather than the PSND exBoE ratio falling over the 5-year forecast period, the current fiscal rules require only that it is forecast to fall in the last year of the forecast period, which is easily achieved by artificially depressing public expenditure aggregates in that year and assuming that legislated tax indexations which have been overruled for years will go ahead (House of Lords Economic Affairs Committee, 2024). In the big picture, the greatest threats to fiscal governance have been UK governments’ responses to the constraints to which they have subjectivized themselves. In turn, perceptions of grievance by those lower down the government food chain encourage misbehaviour which they feel able to justify to themselves at the time.

6. Conclusion

The theoretical framing based on Miller and Power’s (2013) roles of accounting has provided a structure for analysing why the UK’s apparently sound arrangements for accounting and fiscal governance have not protected it from outcomes regarded as bad, both domestically and internationally. The interactions of roles of accounting with modes of government accounting illuminate what happened over the study period 1997–98 to 2022–23, particularly through Table 2’s analysis of the synergies and tensions between modes. Analysing how the four modes affect, and are affected by, economization’s four roles of accounting casts light on the UK’s problems of accounting and fiscal governance. The four modes of government accounting cannot of themselves protect a country from bad political decisions, though the adopted analytical framework casts light on why these may occur. Crises, requiring rapid data, reinforce the pre-eminence of statistical accounting because of the speed with which these are produced and their international comparability.

A more complete picture of public finances, providing reliable information on what has happened, scores well on transparency indicators but does not necessarily change the behaviour of decision-makers. The potential of fiscal transparency to enhance public accountability has been weakened in the UK by political dysfunctionality, as demonstrated in Section 5: Discussion and Table 2’s exposition of Subjectivization. Two of the UK’s five crises (Brexit and cost-of-living) have to a substantial extent been self-inflicted. There have been greater weaknesses in the architecture of UK governance than seemed to be recognized in real time, for example, in relation to the electoral system, the internal governance of political parties, and excessive fiscal centralization.

Whereas “excessive centralization” is a frequent diagnosis of UK governance problems, all paths appear to lead to more centralization even when couched in the language of “devolution”. Although the chaos unleashed by the 23 September 2022 fiscal event might have produced some reflection, there is little ground for optimism that the UK Parliament is capable of meaningful reform of its financial procedures. In the event, the fiscal crisis was ended by the reaction in financial and foreign exchange markets. Independent adjudicators who play an important role in supporting governance in many arenas increasingly come under implicit and explicit pressure (Hazell and Riddell, 2024), an indication that such adjudicators may themselves be subject to politicization within hyper-democracies (Flinders and Wood, 2015). For example, Mark Littlewood, director of “Popular Conservatism”, was quoted just before the 6 March 2024 budget as saying that “The OBR’s chair, Richard Hughes, appears to have more control over fiscal policy than the government itself. Some meaningful effort needs to be made to wrestle this back” (Helm, 2024). The OBR has tightly specified statutory functions set out in the Budget Responsibility and National Audit Act 2011, passed by the Conservative-Liberal Democrat Coalition.

Deficiencies in UK parliamentary financial procedures suit the government of the day, opposition politicians who aspire to gain the same power in a winner-takes-all political culture, and the Treasury which protects its domain of influence. Subjectivization has disrupted mediation and adjudication in the UK because governments do not like constraints on their own behaviour, including self-imposed ones, and the UK Parliament is highly limited in its ability to hold back inappropriate, or even corrupt, behaviour. Good governance architecture is a necessary, but not always sufficient, safeguard against bad public policy decisions. In democratic theory, the Legislature is the principal and the Executive is the agent, but most of the time UK governments control Parliament, certainly on financial matters. Wehner (2010) has documented the financial weakness of the UK Parliament but political actors with decision-making power have little interest in addressing them.

No democratic government would now declare itself against fiscal transparency but such protestations should not necessarily be taken at face value. A number of recent books, including political memoirs, bring disconcerting evidence. Hood et al. (2023, p. 251) refer to “the old Treasury joke that ‘there is no fiscal crisis that cannot be tackled by swingeing classification changes.’” Comments on the public record or potentially attributable to individuals expose breathtaking cynicism within the Treasury about exploiting weaknesses in their own control systems. Philip Hammond, Conservative Chancellor of the Exchequer (2016–19), who officially abandoned the PFI in 2018, stated: “I had already discovered, and my successor would have spotted the joys of contingent liabilities in public accounting. You can offer any number of guarantees but don’t use public money” (Davis, 2022, p. 107). Academics who criticized PFI accounting (see Andon, 2012) might be “amused” by belated recantations of responsibility by now-talkative former ministers and officials (Hood et al., 2023). Manipulations by those responsible for the design and operation of control systems will encourage organizations lower down the authority hierarchy to overcome the controls which subjectivize them.

The greater pressure there is on public spending the more vulnerable become both national accounts (no longer policed by Eurostat) and government financial reports. The Treasury (2024, Annex A) has dropped in WGA 2021–22 the disaggregated reconciliations between the income statement and balance sheet with the corresponding national accounts measure on the grounds of data unreliability and marginal relevance after including these reconciliations, without caveats on quality, in all the prior 12 years of WGA publication. In fact, these reconciliations (Bradley et al., 2023b, Tables 2 and 3) expose the subjectivized response in relation to the adoption of PFI, classification decisions on Network Rail and housing associations, and the role of the Bank of England in Quantitative Easing. Other examples will follow, including keeping a failing privatized water company out of PSND if it collapses and has to be nationalized, said to involve a £15.6 billion addition (Isaac, 2024). Some of the weaknesses in the PFI model arise because of attempts to circumvent accounting and statistical standards.

There is growing academic and practitioner interest in the public sector balance sheet, whether on a statistical or government financial reporting basis (Ball et al., 2024). Having the two measurement systems deal with the increasingly complex nature of public sector accounting due to transaction types and standards changes is a valuable access point for information brokers on whom Parliament and citizens depend for independent analysis. Hopefully this will bring renewed interest in determining the uses of government accounts and in supporting users (Ferry and Midgley, 2024).

Amidst much gloom about the UK, it is necessary to maintain perspective. All four modes of government accounting contribute to greater fiscal transparency and together have contributed to gaining a more complete picture of UK public finances than exists for countries that have not adopted accruals accounting in government or done public sector-wide consolidations. Without these, the scope for off-balance sheet financial engineering is immense and brings huge fiscal risks.

The UK cost-of-living crisis is working through and the crisis of government instability has eased, with the long-term political and fiscal consequences yet to be determined. This creates opportunities for further research, including how the UK emerges from its current difficulties. This research is limited to one country, though the methodological approach could be applied to other countries where public sector accounting reforms are taking place and there is public access to government finance data. Such comparative research might establish whether the UK experience is distinctive or whether, for example, similar tensions exist in countries which remain members of the EU and must still operate within its fiscal architecture.

Figures

Figure 1

GDP data, 1997–98 to 2022–23

Figure 2

Total Managed Expenditure, 1997–98 to 2022–23

Figure 3

Indexes of Total Managed Expenditure, 1997–98 to 2022–23

Figure 4

Deficits, debt and liabilities, 1997–98 to 2022–23

Figure 5

Taxation as % of GDP, 1997–98 to 2022–23

Table 1

UK fiscal periodization of 1997–2024

Period	Public expenditure	Taxation	Major crises	Comments
1997–1999 (Labour)	Acceptance by Chancellor Gordon Brown of predecessor’s (Kenneth Clarke) tight plans for first two years. 1998 brought two fiscal rules: golden rule to operate over the economic cycle and the sustainable investment rule (debt to be less than 40% of GDP). The 1998 control aggregates of Departmental Expenditure Limits and Annually Managed Expenditure, and the principle of multi-year Spending Reviews, have survived	Innovation of windfall tax on privatized utilities	Crisis-free. Chancellor Gordon Brown resisted Prime Minister Tony Blair’s desire to join the euro, leading to Gordon Brown’s “five tests” which were never fulfilled	Labour received a strong fiscal inheritance from Chancellor Kenneth Clarke
2000–2007 (Labour)	Years of public spending plenty made possible by more than 50 successive quarters of GDP growth. Doubts about extent to which spending increases resulted in better services rather than higher costs, despite heavy emphasis on performance metrics	Pre-election promises not to increase income tax rates limited scope for tax reform. Failure to address local government tax reform during period of fiscal plenty, leaving council tax still based on 1991 property values	Crisis-free	Missed opportunity for taxation reform during a period of strong public finances
2008–10 (Labour)	With Gordon Brown as Prime Minister, Chancellor Alistair Darling tried to pull back on expansionary Spending Review 2007 and nationalized a number of insolvent banks	Structural problems not resolved. Temporary measures such as a new Top Rate of 50% and phased withdrawal of Personal Allowance for incomes over £100,000 later became embedded. Temporary reduction in standard rate of VAT from 20% to 15% was reversed on schedule	Dominated by the effects of the Global Financial Crisis, which caused a global recession and resulted in a UK deficit of 14% of GDP	Labour was blamed by opposition parties for fiscal incompetence and weak financial regulation causing the fiscal crisis. This damaged Labour’s future electoral credibility
2010–15 (Conservative-Liberal Democrat Coalition)	The Coalition brought in a period of severe public expenditure cuts which became known outside government as “austerity”. Chancellor George Osborne opted for 80% from expenditure cuts (especially on welfare and local government support) and 20% from taxation increases. Treasury interest in performance metrics declined and delivering the planned fiscal aggregates took precedence. Establishment of the Office for Budget Responsibility in 2010	Key measures were reduction in corporation tax and large increases in the income tax Personal Allowance. Fundamental problems in the UK tax system were not addressed, notwithstanding these being documented by the Mirrlees Review (2011)	Continuing effects of the Global Financial Crisis led to low economic growth and weak productivity growth, to some extent masked by high immigration. Controversy about the UK’s membership of the EU grew in response to economic frustration, exploited by long-term eurosceptics	Substantial public support for austerity measures during this period and suspicion of Labour, which led to the return of a majority Conservative Government in 2015, with a manifesto commitment to hold a referendum on continuing membership of the EU
2015–2024 (Conservative)	A period of majority Conservative Government with five Prime Ministers, seven Chancellors of the Exchequer and ten Chief Secretaries to the Treasury. Under Chancellor Rishi Sunak (2019–22) there was massive public spending in response to the COVID-19 pandemic, with concerns later raised about fraud and cronyism in public procurement. Prime Minister Boris Johnson (2019–2022) promised no return to austerity, but Chancellor Jeremy Hunt (2022–24) made it clear that it was back, though avoiding the word	The most significant event was the “fiscal event” on 23 September 2022, described as such to avoid the “budget” label which would have required a fiscal forecast from the Office for Budget Responsibility. The summer 2022 contest for the leadership of the Conservative Party (and hence to be Prime Minister) saw denunciations of Treasury orthodoxy and threats to Bank of England independence. After the immediate sacking of the Permanent Secretary to HM Treasury by the incoming Chancellor (Kwasi Kwarteng), £45 billion of tax cuts and £150 billion of energy subsidies were announced, leading to falls in sterling and rising interest rates on government debt. Many of these tax measures were rapidly reversed and the energy subsidies curtailed from two years to six months. The 23 September fiscal event brought down the Truss Government, despite being enthusiastically welcomed by Conservative MPs on the day	Initially unconnected developments constituted the polycrisis The Leave result in the Brexit referendum led to the resignation of Prime Minister David Cameron, immediate sterling depreciation, a bitterly divided House of Commons, and Brexit on 31 January 2020 The COVID pandemic started in the UK in March 2020 The cost-of-living crisis started in 2022 with the synchronized global recovery from the pandemic, the loss of supply capacity due to the pandemic, then magnified by the war in Ukraine Obligations to respond to the climate crisis affect public spending in various ways, including demands for replacement infrastructure The crisis in UK government which began in June 2016 with the Brexit referendum peaked in summer 2022 with the dismissal of Prime Minister Boris Johnson by Conservative MPs, the catastrophic “fiscal event” on 23 September, the dismissal of Prime Minister Liz Truss also by Conservative MPs, followed by her replacement by Rishi Sunak	These crises have raised doubts about the governance and capacity of the UK state. The legacy of the divisive Brexit debate continues to dominate politics in England and Northern Ireland. The first-past-the-post electoral system for the House of Commons contributes to divisiveness. After the 2015 election, the Labour Party was taken over by the hard left under Jeremy Corbyn, leading to two more election defeats in 2017 and 2019. Career progression, even survival in the Conservative Party, became dependent on Brexit enthusiasm. Both Jeremy Corbyn (Labour leader, 2015–19) and Liz Truss (Conservative leader and Prime Minister, 2022) were chosen through a ballot of party members, without strong support from their party’s MPs. The fiscal damage done by the polycrisis would have been severe in any case, but the legacy of the governance crisis means that markets will be more attentive to UK fiscal developments. Whichever party is in power after the expected 2024 general election will receive a toxic legacy on spending and tax

Source(s): Prepared by authors

Table 2

Interaction of roles and modes of accounting

	Financial reporting	Statistical accounting	Budgeting	Fiscal sustainability projections
Territorialization	Accruals accounting emphasizes the reporting entity. Consolidation techniques based upon concepts of control have provided a broader coverage than the emphasis on general government expenditure in statistical accounting. Exclusion of liabilities arising from pensions, guarantees and public-private partnerships leave scope for under-reporting	Statistical accounting puts the emphasis on general government, creating the vulnerability to arbitrage which puts assets and particularly liabilities outside its scope. This is narrower coverage than government financial reporting and therefore more vulnerable	Budgeting is where governments have most scope to decide what is within budget, and this is heavily influenced by constitutional provisions and inherited practice. Since 2002–03, UK governments have budgeted on an accruals basis, though following statistical accounting on coverage. What is inside and outside can be controversial as well as technical	Fiscal sustainability projections provide the widest territorialization as they recognize long-term factors such as demography. Fiscal sustainability can only be judged over the long term, so that five-year medium-term economic forecasts extended with 45-year cash projections are constructed on the basis of current policies. The future is territorialized
Mediation	Entity-level reporting has a clear role in supporting accountability for the use of public resources, although this may be compromised by boundary changes and the obligations of non-public bodies in the provision of public services. Central government’s use of collibration powers on lower layers of public bodies may directly affect the reporting of results by those bodies. Mediation at the whole-of-government level has proved more difficult to establish in view of a limited user audience. The reasons for this include long delays in publication and technical complexity	Statistical accounting derives its central role in mediation from the combination of international comparability and the speed with which provisional data can be published. Governments (via the Treasury) are likely to have regard to the comparative performance of major economies and expectations of international capital markets	Budgeting is what politicians and the media care most about, focusing on the year ahead or a small number of years ahead. This is where decisions about the size of the public sector and priorities given to different spending areas are determined. Central government may have extensive powers of collibration that impact upon the relative powers of local authorities and other public sector entities. Budget statements of the Chancellor of the Exchequer are political and theatrical, as well as economic, events	Long-term fiscal projections are sensitive to what are assumed to be current policies, even when it is obvious that future fiscal constraints will compel policy change. These projections have low mediating impact as they rarely enter public debate and remain the domain of specialists. One reason for this is that they paint a pessimistic view of the future, bringing in expenditure on state pensions, which is outside the scope of the other three modes of government accounting, either for reasons of coverage or time horizon
Adjudication	The UK follows IFRS as interpreted and modified for government by the Treasury with the approval of the Financial Reporting Advisory Board. Adjudication of compliance is the responsibility of the NAO which reports to the Public Accounts Committee of the House of Commons. Although theory refers to citizens as users of these statements, performance adjudication is often limited to a few specialized intermediaries. Recent excessive delays in the publication of these statements have reduced their performance-adjudicating potential	The UK follows ESA10, which was an international obligation prior to Brexit. In future it might follow the UN System of National Accounts of which ESA10 is a derivation. Eurostat monitors compliance by EU member states but now has no role in relation to the UK, except in regard to the UK’s remaining financial obligations to the EU. International organizations such as the IMF (Article 4 consultations) and OECD (country reviews) are influential. Fiscal statistics are produced very rapidly and receive close attention from debt and currency markets	The Treasury has a lot of discretion, although there is monitoring by international organizations such as the IMF and the OECD. The OBR gives the Treasury some adjudicative protection against ministerial fantasies and pressures to fudge forecasts in its reviews of the expected impact of budget statements. The events of September 2022 illustrate that the OBR’s adjudicative role could be side-stepped by a government. The Institute for Fiscal Studies is an influential commentator providing independent performance adjudication	The OBR took over responsibility from the Treasury for long-term fiscal projections which started in the early 2000s. Repeatedly, the OBR shows that current policies would lead to spiralling public debt, but these receive little public attention. Performance adjudication is limited to specialized commentators, such as the Institute for Fiscal Studies and some academic commentators, and the international debt and currency markets
Subjectivization	Government action is constrained by following external accounting standards when compliance is credibly monitored. Under fiscal pressure, governments may seek to subvert their own rules, for example by recourse to borrowing and liabilities which are not reported. Public entities lower down the hierarchy will point to irrational constraints as justification for trying to evade them	Governments are constrained by their need to access debt markets and to protect their currency. The UK Government uses its executive dominance over Parliament (at least when it has a working majority of seats in the House of Commons) to pass the necessary legislation. Limited subjectivization may come from independent regulators such as the Bank of England and the OBR	Budgeting involves subjectivization at all levels. Governments are constrained by macro-fiscal realities because of the importance of debt and currency markets. Being dependent on public money from the budget exposes public organizations to instabilities they would not face if they were private organizations. In some circumstances, there may be resistance to constraints	Fiscal sustainability projections extend the usual shortish time horizon to 50 years or more, which is far beyond the time horizon of electoral politics. UK demography is known to be adverse in fiscal terms. There is so much uncertainty about the future that resistance may come in the form of ignoring warning signs, with the result that future adjustments will be more brutal than might otherwise have been necessary

Source(s): Prepared by authors