Trust in Public Finances: A Survey of Citizens in 10 European Countries
In recent years, economic and fiscal fragility have seriously tested trust in public finances in Europe. Prospects for growth remain weak. The need to tackle high sovereign debt levels in many countries continues to dominate the political agenda. Add in the challenge posed by the continent’s aging demographic and the pressures on public finances in the coming decades seem to continually mount.
What do Europeans think?
Against this grim picture, a recent Institute of Chartered Accountants in England and Wales (ICAEW)-PwC survey reveals that only one in five Europeans are confident in their government's ability to manage public finances, an indication of how slender the trust is between citizens and governments today. The survey is part of a joint ICAEW-PwC initiative to engage key decision makers and stakeholders to help strengthen public sector financial management across Europe.
The report, based on a survey of 10,000 citizens in ten EU countries (Belgium, Finland, France, Germany, Italy, Poland, Spain, Sweden, the Netherlands, and the UK), suggests that this crisis of confidence is equally shared across all age groups and across all countries. Low levels of trust in governments' financial management are correlated with limited confidence in governments' plans for financing core public services in the future.
While Europeans acknowledge the need to address Europe’s legacy of public debt with seven in ten calling for further action from their government to reduce their country’s debt levels, eight in ten believe that more can be done to ensure better value in how taxpayers' money is spent. Europeans aged 45-54 years are particularly doubtful of their government’s ability to manage public finances and finance essential public services in the future. Younger respondents, 16-24 years old, are slightly less skeptical.
Not only are Europeans distrustful, but they also feel uneducated when it comes to understanding the state of public finances. Two in three report that they don’t have a solid understanding of their own country’s public finances.
There is a silver lining.
Across Europe, there is a clear appetite for more and better information, particularly in countries with the highest levels of distrust in governments’ public finance management. Overall, a significant majority of Europeans want their government to enhance the provision of comprehensible and transparent information about their country's financial situation and to explain how public funds are being used. This call for improved financial literacy is made equally by men and women, although is emphasized more by older age groups than by their younger counterparts.
What can governments do?
The current context creates an opportunity for governments to recapture citizens’ trust in public finances. Trust does not inexorably decline; it can be re-built on solid foundations. But doing so takes time and requires strong political commitment. Addressing the underlying issues that undermine sound financial management and removing impediments to greater scrutiny by citizens, media, and markets are key steps. The global financial and economic crisis revealed serious shortcomings in the state of accounting and reporting within much of the public sector in many European countries. Such deficiencies can effectively mask the real picture of public finances. There is a clear case for governments to communicate more complete and transparent information about their public finances, and explain it in simple and clear terms to the public. This is a key feature of democratic accountability. But this requires governments themselves to have access to comparable, transparent and robust information. This is not always the case.
Too many governments still use cash-based accounting practices, which provide only a short-term view of public finances. Accrual accounting, on the contrary, reflects the long-term impact of political decisions in the financial statements. Making the transition from cash accounting to a base line accruals accounting system will provide the foundation for enhanced public financial management systems, thereby enabling sound management of public resources and improved planning for future needs.
Greater harmonization is also needed to address the diversity of government accounting standards and arrangements in place across Europe today. According to a recent study commissioned by the European Commission’s statistical arm, Eurostat, accounting practices not only diverge between Member States but also often between governments within the same Member State. A cost-effective EU-wide approach to improving public sector accounting and reporting, leading in the longer term to all Member States using similar high-quality accounting standards in line with best international practices, will help pave the way to greater comparability and scrutiny.
Sustainable public finances require better accounting and reporting as well as greater political accountability for the impact of spending decisions on current and future generations. Having the right information is an insufficient condition for success if such information is not understood or used. Any reform measures will need to also invest in upgrading financial skills and capabilities. It is only when decision makers and civil servants master the tools for tackling large-scale budgets, with an enhanced understanding of assets and liabilities, that we can get sustainable public finances. Governments need to embrace robust financial management, based on strong financial leadership to drive sound financial discipline across all government entities. This is a necessary step toward a more positive legacy of sustainable public finances in Europe.
The accountancy profession has an important role to play in this process. As a profession, we have the technical knowledge and skills to support governments as they take steps to strengthen management of public finances. In addition to helping embed greater financial discipline, restoring credibility to government finances, the profession can also support the wider education process. From our side, we are continuing our joint initiative through 2015 to help encourage informed debate amongst EU policy makers and stakeholders on the path toward sustainable public finances.