Government accounts to get the private treatment

Resource accounting closed St Bartholomew's Hospital: it occupied too valuable a piece of real estate

Conspicuous austerity has always been the rule at the Treasury. Not for the guardians of the public purse the luxury of plush carpets, leather chairs and big oak desks. Even the ministerial corridor has red lino on the floor.

But look closely at the nylon-covered, Seventies-patterned, hard-back chairs and you will spot a bar code. Each item of furniture in the building has been counted and labelled. It is part of a huge exercise to draw up a commercial-style balance sheet for Whitehall.

This is all very well for the sort of property, land and office equipment that any business has to value. It is a lot harder with infrastructure such as roads and bridges, although this has become essential anyway in order to compare public investment with private through the Private Finance Initiative. For heritage assets such as the paintings in the Tate Gallery, it is a mind-boggling task. Do they really have a depreciated replacement cost? Can the language of accounts be brought to bear on the masterpieces of Turner?

The point of attempting such bizarre calculations is the switch to "resource accounting" for the public sector. There is nothing like an accountancy term to stop people reading any further, but it is well worth ploughing on. This switch in public sector accounting, which will be tested internally in 1999 and introduced fully by 2000, will change the way we think about what government is for and how big, or small, it ought to be. It is the next stage in the process that started with market testing and contracting out and went on to the independent executive agencies and PFI, and reflects Deputy Prime Minister Michael Heseltine's belief that government should be run more like a business.

Back to the accountancy, first. Resource accounting means the introduction of private sector business accounting principles to the public sector. The present public accounts are almost completely drawn up on a cash basis. By the millennium, this will change to an operating statement and balance sheet for each department. In addition there will be an audited statement of department spending compared to its aims, an "output and performance analysis". The three new financial statements, alongside the traditional cash monitoring, will follow as closely as possible the UK GAAP standards. A Financial Reporting Advisory Board, peopled with independent experts as well as officials, will monitor the new standards.

So the Ministry of Agriculture, Fisheries and Food, for example, will have its balance sheet and accruals-based operating statement. In theory it will also publish a statement showing cash spent on its particular objectives - "to protect the public", "to improve the economic performance of the agriculture and food industries", "to protect and enhance the environment" - broken down by programme, although this will clearly require some heroic assumptions.

The idea is that the new system will give departments a much better handle on what government spending is achieving and on what resources it is taking up. For example, the present system both discourages public investment and encourages the inefficient use of assets once they are in place. It makes departments reluctant to invest in the first place because the cost has to be scored up front against the year's cash budget. Moreover, once the investment is made, there is no annual depreciation charge, so no sense of the economic cost of using the asset.

Thus the Treasury sits in a prime piece of central London real estate. The building has become shabby because of a lack of investment in its upkeep. But because it is "free" there is no incentive for the department to relocate to Canary Wharf, say, or Manchester, and pay a low rent while renting out the existing building at a premium.

Resource accounting closed the much-loved St Bartholomew's Hospital in the City of London: it occupied too valuable a piece of real estate. The technique clearly can not take account of the "public good" aspects of much state provision.

There is a parallel with the PFI, whose foundation is the notion that taxpayers want healthcare services rather than hospitals as such. Either the state can invest in a hospital and consume the services, or the private sector can build the hospital and the state buy the services it provides. Resource accounting in the public sector will make the decisions look equivalent, but in financial terms.

The planned switch is radical. It will put the UK in the vanguard of public sector accounting. New Zealand is one of the few countries to have done anything similar, but not involving departmental programmes. Rather, its ministers have contracts with top civil servants for running departments, as if the purchaser-provider divide in the NHS had been applied to Whitehall.

The UK system rests on the assumption that the government is not here just to be here, but to provide services to taxpayers at the best possible value for their money. There is no doubt that introducing sensible accounting principles will have some very welcome effects on civil service decisions.

Rosemary Radcliffe, an expert at accountancy firm Coopers & Lybrand, thinks it will mean a big improvement for three reasons. It will reduce the focus on a single measure of the government's finances, the public sector borrowing requirement. It will switch attention instead to the government's net worth, which, as the Independent reported last month, has fallen catastrophically since 1990, putting UK government finances on a weaker footing than other industrial nations. Thirdly, she said: "More transparency in reporting the financial affairs of the nation must be a good thing."

However, resource accounting might also provide the ammunition for those who want to argue that if the government cannot provide those services at the best possible value for money then somebody else should be doing it.

Think of it this way, and there are no limits to how far government could shrink. Public accountability in its widest sense - the political accountability of departments to ministers and Parliament, and ultimately voters - will be replaced with accountability in its private sector sense. Government will have the same kind of accountability as a company which must make a profit and satisfy its customers if it does not want to go out of business.