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Global Science and Technology Forum Conference
Speech by Professor the Hon. Stephen Martin, Chief Executive, CEDA
As always it is a great pleasure for me to be here in Singapore. My pleasant duty is to welcome you all here on behalf of GSTF, and in particular its President and Chief Executive, Mr Anton Ravindran.
As a frequent participant in GSTF Conferences, I am well aware of the benefits that delegates receive from their active participation in discussion, debate and informal networking. I am sure that these dual conferences will be no different.
The conference themes are indeed topical and relevant in these troubled global economic times. Qualitative and quantitative economics set the scene for what are the real drivers of economic growth, increasing living standards and sustainability. With these come the need to have rational, transparent and ethical standards and principles in a variety of areas - no more so than in accounting and finance, particularly in the public sector.
So let me make a few introductory remarks on each of the broad themes associated with the two conference streams.
FINANCE AND ACCOUNTING
As noted on the GSTF website, as financial markets integrate and business operations diversify, there is a need for adoption of common global accounting practices. This need is further intensified when inadequacies in the financial reporting system have surfaced, more often than not in the recent past, infringing the credibility of reported financial data. Such incidents have bought a call for research on better alignment of corporate financial reporting requirements amongst users of financial statements.
On a global scale, such calls have become deafening. Over the last several years, although particularly since the GFC of 2008-2009, there have been many sovereign debt defaults and write-downs taken by investors in public debt or, as they say in the language of the financial markets, taking a haircut often means coming out of the barbershop with a good old-fashioned GI crew cut! The effects have ranged from financial institutions collapsing through to countries moving into double-dip recessions.
These issues were the focus of the 2012 International Federation of Accountants annual conference in Vienna in March. The sovereign debt crisis engulfing the European Union in 2010-2012, and related government debt issues affecting the United States, have highlighted the lack of transparency and accountability of governments, poor public finance management and public sector financial reporting, and the deficiency of institutions for fiscal management in many countries. These institutions create neither the constraints nor the incentives for governments to manage their finances in a manner that protects the public interest and also protects investors.
IFAC has consequently issued a major policy statement on many of these issues (IFAC Policy Position 12, March 2012). It is of the view that governments around the world must implement the necessary institutional arrangements to protect the public as well as investors in government bonds. It is critical that governments work to establish greater trust between themselves and their constituents; this should be one of the highest priorities for national leaders and public officials. To establish such trust it is important that governments provide accurate and complete information on expenditures and transactions, in order to demonstrate accountability and stewardship, and to reinforce their own credibility.
This means providing clear and comprehensive information regarding the financial consequences of economic, political, and social decisions. This information must also focus on the longer term impact of decision making; something that cannot be achieved through the reporting and disclosure of only cash flows. Furthermore, given the prominence of banks and private sector investors that hold government debt, there is strong demand for the same level of financial transparency and accountability from the public sector as is expected from the private sector.
The type of information required can only be provided through a high-quality, robust, and effective accrual-based financial reporting system, which allows for government assets and liabilities (including debt) to be appropriately recorded, reported, and disclosed - and hence effectively monitored. The most globally accepted high-quality accrual-based financial reporting system is IPSASs. IPSASs provide for the full disclosure of all assets, liabilities, and contingent liabilities, which is vital for assessing the true economic implications of public sector financial management. The disclosure of all liabilities, including long-term obligations (e.g. pension obligations), also may encourage government leaders to make decisions that are driven by matters other than short-term political incentives.
IFAC recognises that, to enhance public sector financial management, governments must implement the necessary institutional arrangements to support transparency and accountability, including:
(i) the preparation and delivery of high-quality and timely accrual-based financial reporting;
(ii) the publication, in a timely manner - no longer than within six months from the end of the reporting period-of independently audited financial statements;
(iii) the preparation and publication of public sector budgets and appropriations on the same basis; that is, on an accrual basis and in a timely manner;
(iv) full transparency - preparation and publication - of all financial reporting, budgets and appropriations in a sufficiently appropriate amount of time ahead of elections; and
(v) established, well-defined, and publicly available principles for fiscal management and control, with full transparency (publication in a timely manner) to demonstrate that principles are being followed.
In this context it is noteworthy that the Australian Government has moved to tackle many of these matters. The Commonwealth Financial Accountability Review (CFAR) is examining the Australian Government's financial framework particularly with respect to
The Commonwealth financial framework regulates the financial activities of Commonwealth entities. It is based on requirements in the Australian Constitution, and its legislative dimensions can be seen as an agreement between the Parliament and the Executive on the Commonwealth's use of public resources, including how the Executive will be held accountable for that use.
The key legislative components of the framework are the Financial Management and Accountability Act 1997 (FMA Act) and the Commonwealth Authorities and Companies Act 1997 (CAC Act). Together with the Auditor-General Act 1997 and the Charter of Budget Honesty Act 1998, these Acts reflected a fundamental shift in Commonwealth financial management over the 1980s and 1990s, from a rules-based environment with centralised controls (governed by the old Audit Act 1901) to a more principles-based and devolved environment.
Since the introduction of the FMA and CAC Acts, there have been some substantial changes to government financial arrangements. These include:
In addition, community expectations of government have changed. Citizens expect the government to act in an integrated and coordinated way and to respond to increasingly complex issues efficiently and effectively. They expect services that meet their needs, rather than services that reflect organisational structures and boundaries. Governments are also expected to cover an increasing range of risks that may not previously have been considered the responsibility of the public sector.
As the pace of economic and social change quickens, governments must be more responsive than ever. This is at a time when public finances are under increasing pressure and the public sector is expected to do more with less. Many current models for planning and delivering public services are unlikely to be sustainable over the medium to long term.
Government has recognised the need to review its operations to meet current and future challenges, as seen with the review of government administration, Ahead of the Game. In this context, it is timely to reflect on the Commonwealth's financial framework and its contribution to efficient and effective use of public resources. While the framework isn't broken, there is scope to enhance existing arrangements, including by incorporating the best of contemporary thinking and practice into Commonwealth performance and resource management.
This naturally, then, leads into consideration of some of the broader issues of economics.
QUALITATIVE AND QUANTITATIVE ECONOMICS
Qualitative economics measures change between economic variables whereas quantitative economics uses a range of complex mathematical and statistical procedures to analyse economic phenomena. Together, these techniques help economists explain economic issues and understand human actions, group interactions and communities.
In the complex environment of the modern world, affected as it is by rapidly changing technology, costs, benefits and expectations for households and businesses, requirements for education and skills, infrastructure and energy and sustainable environmental issues, the significance of economics has never been more important.
I referred earlier to the Global Financial Crisis (GFC) and the current European Sovereign Debt Crisis. Nowhere does this illustrate better how the twin elements of qualitative and quantitative economics have substantial implications for micro- and macro-economic policy. Let me quickly elaborate based on a paper I presented at the IFA Conference (GFC and Sovereign Risk- mitigating measures and solutions from down under, International Federation of Accountants Conference, March 19-20, 2012, Vienna, Austria).
The GFC was followed by the deepest recession in the world economy since World War II. However, it could be argued that this was largely a 'northern hemisphere' problem, with its severest effects felt in the United States and Europe. Its consequential effects were not as severe in developing and emerging economies, or in some other developed economies such as Australia.
Governments in developed economies utilised enormous amounts of fiscal and monetary policy stimulus during the height of the GFC to strengthen demand and to restore financial stability in the banking system. Consequently even now interest rates are currently close to zero, while public debt burdens have swelled to the highest levels since the 1940s. Policy makers have had to resort to less orthodox measures to stimulate demand, including quantitative easing and manipulating the yield curve.
Northern hemisphere economies have recovered very slowly and continue to reflect deep malaise in the finance and banking, housing and industrial sectors. Many, including the UK, Spain and the Czech Republic are experiencing a double-dip recession. Importantly, the seeds of the current European sovereign debt crisis were sown prior to the GFC, were intensified during this time and continue to plague economic recovery in the Eurozone and potentially beyond. They have again focussed the world's attention on issues of globalisation, financial stability, regulatory regimes and political will to take hard decisions.
The Australian economy performed better during the GFC than other advanced economies on nearly all relevant indicators, and continues to do so in the face of current European upheavals. Financial conditions were stressed, but the financial system held up remarkably well; the economy slowed, but did not fall into recession and while unemployment rose, it did so by far less than in many other advanced economies.
Australia achieved remarkable outcomes although it was exposed to the combined actions of the Government through discretionary fiscal expansion (Economic Security Strategy, Nation Building and Jobs Plan and bank guarantees) and aggressive monetary policy responses by the independent Reserve Bank of Australia (RBA). While the delivery of several of the government's fiscal stimulus programs were open to criticism (and highlighted again the need for transparency in financial reporting), there is no doubt the underlying strength of the Australian economy and its financial and regulatory system ensured Australia did not go the way of so many other western economies.
A range of factors have been advanced to explain the relatively strong performance of the Australian economy during and since the GFC. These include:
Measuring the success or otherwise of Australia's economic performance then hang on a clear analysis of both qualitative and quantitative data. Sources such as the Reserve Bank of Australia, Australian Treasury and Australian Bureau of Statistics provide a wealth of such information. I recommend each to you should you wish to follow up these points.
Each of the conference themes is topical and relevant. There is a degree of overlap between them. The papers that are to be presented are of an outstanding quality. And the delegates clearly, are here with inquiring minds.
I wish you every success over the coming two days. I look forward to hearing the results of your discussions.
Professor the Hon Stephen Martin