Public Sector Governance and Accountability Series: Budgeting and ...

Overview 9
helpful in improving budgetary outcomes. Performance budgeting is a costly
exercise, but it has the potential to yield positive net benefits if accompanied by
a performance management culture and results-accountability to citizens.
In chapter 6, Paul Boothe revisits the debate over the adoption of accrual
accounting in the public sector with a particular focus on providing guidance
to policy makers in developing countries. After a brief review of the workings
of cash- and accrual-based accounting systems in the public sector, the chapter
examines the arguments for and against adoption of accrual accounting in
industrial countries. It further explores the interaction between fiscal rules
and accounting regimes, as well as the incentives that are created for policy
makers. The chapter concludes with a review of the arguments for and
against the adoption of accrual accounting in developing countries and lessons
for policy makers.
Despite strong encouragement from a number of international agencies
and accounting organizations, the adoption of accrual accounting for the
public sector in industrial countries is still an issue of considerable controversy.
At the most fundamental level, there is ongoing disagreement about
whether the accounting needs of the public sector, which center around
democratic accountability, are well served by a private sector–based
accounts system that focuses primarily on financial performance and profitability.
Concerns are also expressed regarding the difficulties encountered
in valuing assets (such as museums, hospitals, and military hardware) that
produce no income stream and for which no market exists. A final area of
disagreement is related to whether the benefits of moving to accrual
accounting in the public sector outweigh the substantial costs of transition
from cash accounting.
The analysis in chapter 6 of the interaction of accounting regimes and
fiscal rules shows that seemingly simple fiscal rules, such as committing to
budget balance, have substantially different implications under cash and
accrual accounting. Indeed, the initial fiscal environment and the nature of
the fiscal rule could lead authorities to prefer one accounting regime over
another. Only one of the simple fiscal rules—a net debt rule—was seen to be
neutral with respect to accounting regime. Thus, careful attention should be
paid to the implications for fiscal rules when changes in accounting regimes
are being considered.
In conclusion, Boothe recommends that in deciding whether to set
accrual accounting as a goal of public sector reform, policy makers in developing
countries need to make a hard-headed assessment of their institutional
environment and capacities, as well as of the benefits and costs of
such a reform.