As the political world goes mad over Murdoch, HM Treasury has published its first go at Whole of Government Accounts (WGA). And it's quite an interesting read, especially if you're a sad old accountant like me. Here are some reflections:

1. As at 31/3/2010, the UK Government had assets of £1.2trn but liabilities of £2.4trn, producing a net liabilities position of £1.2trn. Note that this is not the same as having debts of £1.2trn; not all of these items need to be paid now. Some may never need to be paid at all, such as estimates for medical neglicence costs. But the numbers are big, and they're scary. To the extent that these items do crystallise, they'll be made good from future taxation (!)
2. The Tax Revenue note ¹ includes a line item for "Social security and National Health Service contributions". This is terribly arcane. Both items are now paid out of general taxation, of which National Insurance forms a part. Why have they used this peculiar form of words, instead of just saying "National Insurance"?
3. There's also an oddity with respect to government employees. Their employer NI and pension contributions are excluded completely ² on the grounds that they'd only gross up the tax revenue and employee expense lines. But, accepting this to be the right treatment, on what basis does public sector employee costs include notional income tax and employee NI amounts, as they appear to? Both these should also be netted out, because public sector workers are paid from tax; they don't pay income tax or NI on a consolidated basis.
4. The publicly owned banks are out ³. Technically speaking, this isn't correct, but they've been excluded because the government intends to get rid of them, and excluding them completely is deemed to be the only way to give a true and fair view.
5. There seems to be no liability for unvested state pensions. In other words, someone who has yet to retire and has been issued with a state pension entitlement letter from NICO won't find a penny in these accounts representing their pension. Strictly speaking this is correct, as government could change the law (as it is planning to do with the state retirement age) to reduce or eliminate the liability. But it makes for uncomfortable reading. The figures, if included, would be very big indeed.
6. There are no comparatives, so the accounts will certainly be qualified when they're issued in final form by 31 December.

Now, let's deal with some monumental Ritchiebollocks that's been floating around today about WGA:

[WGA] are also blatantly wrong, and so seriously misstated that any auditor must be duty-bound to qualify them as being  a completely unfair view of the state of the government’s finances.

 

The reason for saying this is simple:  it is an absolute rule of accounting that revenue must be recognised as it falls due and any sum not collected must be treated as a bad debt. However, the revenue included in these accounts is the net sum of cash collected relating to the year 2010/11. As such the accounts are stated net of losses to tax evasion, which the Revenue themselves admit might be £35 billion a year, and may be as high as £70 billion a year in my estimate, and they are also stated net of tax avoidance.  The Revenue have admitted they have £25 billion worth of tax avoidance subject to dispute at present, and I believe that this is the sum lost annually for this reason.

 

As a result I contend that the top line of these accounts is understated by at least £95 billion, meaning they are grossly and materially misstated in accounting terms or, in layperson’s terms, they are just a straightforward lie about the true financial state of the government.

Er, so because Ritchie believes that avoidance and evasion total up to £95 billion annually, he's asserting that the revenue line is understated by at least £95 billion. Do you see what he did there?

And, on top of that, he's wrong. Tax avoidance is businesses following the law but in ways that government didn't intend. The only remedy for government is to change the law to make their intentions much more clear. In terms of WGA, the tax revenue line can only include that tax that was legally due given the facts and circumstances as they actually happened. It would be very deceptive to include tax that wasn't legally due, only to then remove it as a cost later down the accounts. He's also wrong in terms of evasion. Tax evasion is a bit like shoplifting. And no retail business in the country grosses up its sales line for items that were shoplifted and then eliminates the profit below the line. It isn't GAAP. It's utter nonsense.

People who read this post also read:

• Ritchie and the optimal highest rate of tax
• The importance of the 100 Group to the UK’s finances
• The qualifications in Whole of Government Accounts 2010
• The flip side of progressiveness
• That David Cameron family tax haven non-story in full

Filed under: Accounting, Current issues, Politics with tags banks, income tax, national insurance, qualified accounts, richard murphy, state pensions, whole of government accounts