Strong PFM Requires End-to-end Financial Literacy
Dr. Susanna Di Feliciantonio | March 16, 2017 |
Political and constitutional systems vary markedly across the EU; so too do public financial management (PFM) structures. The common thread is the need to ensure effective democratic accountability and encourage greater public transparency.
These issues are at the center of the Institute of Chartered Accountants of England and Wales’ latest report, Public Finances in Practice, based on the insights of senior professionals working at the heart of public finance functions in 10 EU member states and EU institutions.
Effective PFM goes hand in hand with a strong system of accountability. As our respondents make clear, this needs to be underpinned by increasingly specialized financial knowledge. If taxpayers’ money is to be spent efficiently, politicians, ministers, and officials across public administration need to share a common language for PFM. This must include an understanding of the cause and effect relationships between policy decisions, costs, and the build-up of future liabilities.
Across Europe, a lack the time and limited financial expertise hinders parliamentarians’ ability to interpret financial data and use such information to inform policy-making and evaluate public sector spending in detail. Programs to improve financial understanding need to be urgently prioritized. As pointed out by several of our respondents, politicians often tend to argue for additional funds rather than focus on ensuring that allocated funds are spent efficiently. Parliamentary debate on the annual budget is certainly important—but so too is scrutiny of how the budget is actually spent.
Increasing, politicians’ and officials’ financial knowledge would empower informed policy-making, facilitating difficult investment and spending decisions. This also means looking at the accessibility as well as the availability of financial data. More data is not necessarily better data. Providing clear, searchable databases that relate to key areas of spending is more likely to enable genuine scrutiny rather than simply publishing volumes of public spending data. After all, the people who rely on this information to make important decisions are generally not finance professionals.
It is incumbent on public finance professionals—who are core to the system—to explore innovative ways to present public financial information in a more intelligible way. Clearly, high-quality and timely financial information is needed. For some, this will require further work to ensure consistency and consolidation (especially in countries not yet using accruals-based accounting standards). But it also means using available data to improve decision making, for instance, through more cost-benefit analyses, better forecasting, or value-for-money assessments. Some are already moving toward performance-based budgeting. Looking further ahead, governments need to think about how to present a real-time picture of their overall financial position. Doing so would enable both finance and non-finance decision makers to see the bigger picture and focus on the areas requiring active financial management. It would enhance the policy-making process, from inception to implementation.
Public finance professionals need to help governments put in place best-in-class finance functions. It is important, therefore, that issues to do with their recruitment, training, and retention are tackled to avoid worsening skills shortages. This issue is at the forefront of our respondents’ concerns. This may require more investment in training and rewards to bring them more in line with that on offer in the private sector. Equally, it may mean looking at more flexible working options or improved use of technology. Employment policies will need to adapt. We believe, for instance, that it should become normal for finance professionals to move in and out of public administration throughout their careers.
How governments manage their public finances matters to us all. Public finance professionals play a crucial role, making certain that governments can meet their current and future obligations while managing short-, medium-, and long-term risk. PFM improvement cannot be achieved without them. But public finance professionals cannot build a strong PFM culture without support. All the other players in the system—including politicians, ministers, public officials, media, and citizens—need to step up too. Ensuring they have the financial skills to do so is a key starting point.