concrete and fiction

the accounting system as mental prison, once more

About six weeks ago, while grumbling on social media about the state of the world, I had occasion to write:

“it happens to be the case that the OBR scores gilts issuance and not collapsing school walls and flooding, but both of them are predictable future expenses”

This has proved timely, as a few thousand UK children have not been able to return to school because of the imminent collapse of structures made with “Reinforced Aerated Autoclaved Concrete”, and a few thousand more are presumably distracted from their learning by glancing up at the ceiling.

It was not a feat of prophesy at all, by the way – I was writing about something completely different, and was just grabbing for an example of an overhanging contingent expense that I thought everybody knew about.  On the other hand, it is grimly funny, particularly as the original decision to cancel the capital budget for schools was made as part of a general program of reducing the UK government budget deficit, which was widely sold to the public as “fixing the roof while the sun shines”.  Seldom has a metaphor failed with quite such precision.

As the ensuing political discourse has been as predictable as it is stupid as it is depressing, I’ll try to think in slightly more abstract terms.  Obviously, what we’ve seen here (and are seeing, as both government and opposition flounder around trying to pretend that the deterioration of aerated concrete is subject to fiscal policy) is an example of an accounting system as a mental prison. 

Some kinds of commitment to future expenditure are recorded in the accounts and some aren’t.  An important subset of the kind of future commitments which aren’t in the accounts are those which people don’t realise that they’re making – failure to spend money on a small problem today is, much of the time, a de facto decision to spend a lot more money on it in the future when it’s got too big to ignore.  And there is feedback here; the more the planning system operates only on the basis of the accounts, the more kinds of unintentional future liabilities there are going to be.

So, should we record crumbly concrete as a liability alongside index-linked gilts?  How about the liability of dealing with floods if we don’t address climate change?  Should cutting funding for a youth club be recorded as a commitment to the net present value of the future cost of a dozen extra prison places?  These are actually difficult questions.

I personally think that the concrete scandal does look like a weakness in government accounting – I’ve looked around to try and find out about the depreciation standard for property and not really found any details beyond a journal article saying that the way it’s calculated isn’t very useful.  But a straightforward comparison to the private sector does suggest to me that not many normal companies would find themselves caught short like this at the end of something’s depreciation life – one of the strengths of accounting earnings is that they are always very clear that part of the cost of owning something is the need to set up a fund to replace it when it wears out. 

(An exception! A lot of UK pub companies don’t depreciate their buildings, arguing that they spend enough on maintenance and repairs to keep them going indefinitely.  And to be fair to them, there are plenty of pubs in England and Wales that have been around for more than three hundred years.)

But with this caveat in place, it’s important to recognise that although almost every decision you make today (particularly in government) will have lots of long term effects stretching way out into the future, you don’t actually want to reflect all of this in your accounting system.  If everything’s a long-dated asset, then nothing is.  

The big philosophical battle in any accounting system is between trying to recognise the future effects of current decisions, and trying to make the accounts descriptive of what happened in the period they’re meant to cover.  You don’t want to get to a point (as, in my opinion, a lot of private sector accounting standards have already reached) where the accounts are mainly telling you about changes in someone’s estimate of the far future, and only incidentally recording the transactions that have actually happened.

So the fault is not in our accounting systems, but in ourselves.  The point is not necessarily that our actual accounting system is in some sense wrong – it’s that any accounting system is a mental prison of some kind, and one which needs to be periodically escaped from.  The accounts are only one way of organising one kind of information.  Politicians need to be very careful indeed when they set fiscal rules.