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Comment: Greek Steps Forward

By Ian Ball, chairman, CIPFA International


Last month, Alexis Tsipras, the Prime Minister of Greece, stated that improving the country’s institutional framework of public financial management to reinforce transparency and accountability is of more importance than beating fiscal targets.

This is a significant development, which warrants more attention than it has received. Following the Greek Government’s better than expected fiscal performance, and the June agreement with creditors, which granted Greece significant debt relief, this announcement by the Prime Minister holds the promise of better prospects for Greece and its citizens, and will have given investors added confidence following the successful return to the capital markets in July.

The crisis in Greece was triggered by a previous Greek government engaging in financial reporting practices that in a private sector context would be seen as financial reporting fraud. For Greece to be seen to take serious steps towards fully regaining the trust of financial markets requires exactly the type of reforms announced by Prime Minister Tsipiras. And the announcement coming from the Prime Minister himself is also significant, as history demonstrates that for public financial management reforms to be successful it requires commitment at the most senior levels of government.

In 2017, no institutional framework for public financial management can be regarded as adequate unless it complies with the accrual basis of measurement - the basis which underpins all of the international systems of accounting and economic statistics. Indeed, chronic mismanagement is inevitable when any system focuses on just two numbers (cash and debt). The announcement from the Greek Prime Minister signals an intention to implement reforms aimed at significantly upgrading the management of Greece’s finances.

There are two aspects of reform that will be important to markets. The most immediate is that the Government uses the accrual framework implied by such reforms in making all significant financial decisions – that is to say, decisions are made with proper regard to the impact of the decision on the Government’s net worth. Demonstrating both the determination and the capacity to assess the full impact of major decisions will give confidence that the Government is giving greater priority to the use of correct numbers in the management of its fiscal position.

The second aspect that will be important is that the institutional reforms upgrade the whole financial management system, recognising the importance of having the different stages of the financial management cycle (including decision-making, fiscal objectives, budgeting, appropriations and financial reporting and external audit) operating in concert. Too many governments (half the OECD countries at the latest count) operate financial management systems in which the budget is on a different basis to the financial reports. The difficulties this creates for proper accountability and incentives are obvious, and this is an area where Greece can be one of the leaders in Europe. An example of a successful financial management system operating in such an integrated manner is that of the New Zealand Government – Greece would be well advised to examine the New Zealand model in the design of their new institutional framework.

It is perhaps surprising, given the origins of the Greek crisis, the creditors did not stipulate improved institutional arrangements for public financial management, and in particular, accrual based information for decision-making. So it is to the credit of the current Greek Government that they have understood the importance of these reforms for a successful and sustained return to the capital markets. Sound financial management, based on high quality information that meets international standards, will build trust and confidence, making this the most important reform Greece could undertake.

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