Chapter 4.

Management
accounting in the public sector
As the public sector is managing taxpayers’ monies, appropriate management accounting
systems appear as an important feature of democratic life and the exercise of political actors’
accountability to citizens (Dorf, 2006; Freeman, 2006; Mashaw, 2006; Morgan, 2006; Rosner,
Markowitz, & Milbank Memorial Fund., 2006). Accordingly, public sector management
accounting is concerned with the producing and disclosing of figures aimed at proving the
righteous use of taxpayers’ monies, emphasising economy, efficiency and effectiveness of
public spending, performance oftentimes being collapsed to polity’s value for money
(Arnaboldi & Azzone, 2010; Jacobs, 1998).
The need for appropriate management control systems is especially vivid at times of financial
distress when resources are under major constraints, as evidenced by the Greek debt crisis
since 2008 (Morales, Gendron, & Guénin-Paracini, 2014). The problem is accentuated when a
country finds itself losing its financial sovereignty, being placed under financial control from
parties other than their own citizens, such as countries under IMF or World Bank programmes
(Annisette, 2004; Collins, Holzmann, & Mendoza, 1997; Lane, 2012; Neu & Ocampo, 2007;
Neu, Ocampo Gomez, Graham, & Heincke, 2006; Neu, Rahaman, Everett, & Akindayomi,
2010; Reinhart & Rogoff, 2011; Sikka, 2009; Uddin & Hopper, 2003; Valcke, 2010).
Governments and parliaments are demanded an account of the fair utilisation of the resources
they have been granted or loaned.
Having appropriate management accounting systems in the public sector has appeared as a
growing concern accompanying the so-called “modernisation” of government and polity has
accompanied or caused calls for greater public accountability and polity’s modernising
(Buchanan, 1986; Buchanan & Musgrave, 1999; Niskanen, 1971, 1986; Romer & Rosenthal,
1979). Grounded in a contestation of the public sector’s legitimacy and usefulness, the
proponents of modernisation argue that the public sector is a tool of political oppression and
is economically inefficient. Accordingly, even though the public sector is perceived as an
unnecessary evil, owing to its existence, needs for modernising it has been grounded in the
idea that it would benefit from learning from private sector management (Hayek, 1979). This
ideology has instilled the principles of a New Public Management (Andersson & Tenglad,
2009; Arnaboldi & Azzone, 2005; Brignall & Modell, 2000; Broadbent & Laughlin, 1998;
Clarke & Lapsley, 2004; Gendron, Cooper, & Townley, 2001; Hood, 2000; Hood & Scott,
1996; Tambulasi, 2007; Watkins & Arrington, 2007).
The management accounting concerns that have emerged from New Public Management’s
rhetoric have been implicitly underlid by the idea that the public sector is too prominent or
inefficient, the private sector being better at delivering a similar service. Various forms have
been promoted and diffused worldwide to instil a management culture borrowed from the
private sectors, such as Public-Private Partnerships (Broadbent & Laughlin, 2003b; Grimsey
& Lewis, 2005; Shaoul, Stafford, & Stapleton, 2012), privatisation (Carter & Mueller, 2006;
Craig & Amernic, 2008; Freeman, 2006; Josiah, Burton, Gallhofer, & Haslam, 2010; Jupe,
2009; McCartney & Stittle, 2006; Morales et al., 2014; Rahaman, Everett, & Neu, 2007;
Uddin & Hopper, 2001, 2003), the Private Finance Initiative in the UK (Asenova & Beck,
2010; Khadaroo, 2008) or just subcontracting relationships (Johansson, 2003; Mouritsen,
1999).

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Management control in the public sector is the utmost form of democratic activity and
vitality, since this imposes a full transparency of public authorities’ actions. Dealing with
taxpayers’ monies and deciding on citizens’ and residents’ day-to-day life, controlling public
authorities’ action appears as the natural offshoot of the reasons for which they were initially
elected. Based on what these controls reveal, citizens can express their satisfaction or
dissatisfaction with how the country is run, namely through their votes. Controls in the public
sector rest upon specific financial management and budgeting as well as specific public policy
controls. In order to clarify the management accounting concerns at play in the public sector,
this chapter is very progressive. Borrowing from Public Administration Science and Public
Policy, it first develops the realm of the public sector, answering the question of what falls
within the public sector. Next, it exposes the main manifestation of management accounting
in the public sector: budgeting. Lastly, public policy controls are exposed, including costing,
performance management and execution control
the main controls in place in the public sector and the challenges these raise.

1. The Public Sector’s constituencies

In macroeconomics, the public sector is generally summarised as the State whose role in
economic policy is promoted by Keynesians and contested by neoclassical economists
(Jensen, 1990; Suzuki, 2003). Yet, the notion of State as a summary of the Public Sector is
more than problematic because it is incomplete and inaccurate. The public sector is much
broader and has different manifestations in every country.

1.1. The State and local governments

When the notion of the State is apprehended in economics and management, it is
characterised by certain amount of vagueness, covering multiple realities. The first notion of
the State that comes to mind is that of the national State incarnated by its public service and
civil servants (Arnaboldi & Azzone, 2005; Boje, 2001; Fabri & Fressoz, 2011; Smyth, 2015;
Vinten, 2007). Even though this reality seems to be clear, it only applies to countries where
decision-making belongs mostly to the central government, i.e. highly centralised countries,
such as China (Gallagher, 2006; Minzner, 2011) or Russia (Roger D. Billings Jr, 2001;
Timoshenko & Adhikari, 2009). Even countries historically known for being highly
centralised are not anymore, devolving public policy to local governments, such as
Scandinavian countries (Monsen, 2006; Serritzlew, 2005; Tilton, 1974; Vinnari & Skærbæak,
2014), France (Sauviat, 2016), Austria (Stalebrink & Sacco, 2007) or the UK (Burns,
Hambleton, & Hoggett, 1994; Jeffrey & Reilly, 2002).
In these traditionally centralised countries that have since the 1980s engaged in a
decentralisation process, polity is shared between the central government and local
governments, each of them having their own civil service. Depending on the country’s
political and administrative structure, local governments cover differentiated realities thus
resulting in differentiated responsibilities over polity. In each of these historically centralised
countries, a form of a subsidiarity principle applies whereby the most local level is deemed by
default competent for polity and renders to the higher level what it cannot do on its own
(Estella, 2002; Grana, 2018; Kliver, 2013).
Depending on the number of political levels, the size and the population of these local
governments’ territory, competencies do vary. Thence, in the United Kingdom, power is
devolved to nations, such as England, Wales, Northern Ireland and Scotland (Spence). Within
nations, municipalities are devolved decision-making in numerous areas, such as education,
public transport or social transfers (Burns et al., 1994; Jeffrey & Reilly, 2002). In a country
like France, more administrative levels operate, each of them having its own competencies

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(Dreveton & Rocher, 2010; Sauviat, 2016). Beneath the central government is the region in
charge of economic development and public railway; below is the county (département) in
charge of public transport other than rail, education and social policy. At the bottom of the
administrative hierarchy are municipalities in charge of primary schools, culture and sports
and housing. In Scandinavian countries, beneath the central State are municipalities
responsible for locally implementing and executing most dimensions of the public policy
decided upon by the central government (Sauviat, 2016).
At the other extreme of the administrative spectrum are federal countries characterised by the
existence of a central state and government in charge mostly of international matters –
Defence, Foreign Policy, Currency – (Alstine, 2002; Burgess, 2006; Scott, 2011). Such
federal states are the United States of America, Germany, Australia, Belgium, Switzerland,
India or Brazil. Depending on the depth of federalism in the country, federated entities’ public
service takes different forms. For instance, in Switzerland, where federalism is most
advanced, the public service is orchestrated at the canton level whilst the federal public
service is minimal. In Belgium, federated entities are called regions and are in charge of
guaranteeing that federal policy does not undermine local language and culture. Accordingly,
regional governments are by default controlling federal policy’s local applicability and supply
if it is considered they are endangered (Husson, 2016). Similarly, in German federalism,
Länder through the Bundesrat control that federal policy does not trespass on local
governments’ competencies (Gunlicks, 2003; Heinz, 2016; Umbach, 2002).
Between these two extremes – centralised vs. federal countries –, numerous options exist,
sometimes borrowing from one model and sometimes from the other. Such is the case in
Spain where provinces are by default responsible for most of public policy matters excepting
– Catalonia and the Basque Country – these two provinces benefit from greater autonomy
enabling them to collect and administer tax at their convenience, regardless of what decisions
are made by the central government (Ruano, 2016).
In sum, what is generally understood by the State covers many different realities resulting in
differentiated forms of accountability demands and needs for management accounting. When
power is distant and centralised, accountability demands are greater than in localised power
and decision-making (Rose & Miller, 1992; Uddin & Hopper, 2001). This implies that the
civil service and its achievements in a municipality and at the central government level are not
perceived in the same way and that different accounts are demanded.

1.2. Public Services and civil servants

Usually, the so-called State whither the public sector is mistakenly collapsed, rests upon the
civil service and servant’s work. Coming from French language, this notion means the Public
Service meaning in the service to the public (Bezançon, 1997; Chevallier, 2015). In this
respect, the civil service is conceived of, organised and managed under the sole purview of
servicing citizens, residents and more broadly the entire territory.

1.2.1. Four models of delivering public services

Traditionally, the civil service comprises of all these kingly activities aimed at unifying the
territory and protecting the nation: Police, Justice, Defence, Foreign Policy. In Western
countries, the civil service has much been associated with the Welfare State, basically taking
four forms (Esping-Andersen, 1992, 1996, 1999).
These four models are positioned on a scale. On one extremity, the first model, incarnated by
Sweden, is qualified as social. Public policies as well as the constitution of society have
rested upon social cohesion. Therefore, social services have been strong and efficient. On the
other extremity of the scale, Esping-Andersen positions the United Kingdom as a liberal
model. There, society rests upon the possibility of economic capitalism and liberalism.

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Individual responsibility is the core issue. Accordingly, social services and public services are
quasi-inexistent and are of relatively low quality. In between, he positions two other
countries: France and Germany. France is positioned near the United Kingdom as a liberal-
conservative model. Society rests upon the myth of social cohesion at the same time as it
claims individual responsibility as a value. He observes two kinds of social services. One
operates as in Sweden and rests upon social cohesion. The other operates like in the United
Kingdom. Esping-Andersen notes that the first model applies to people who are not social
outsiders, whereas the second applies to actual outsiders. Like the United Kingdom, France
forsakes its poorest people. Lastly, between France and Sweden, the Esping-Andersen
positions Germany as a social-conservative model. This country faces a similar situation to
France but seems to privilege social cohesion, even if resources are not sufficient. The
diagram below summarises the typology.

Figure 4.1. The four models of civil servicing

Since the collapse of the USSR and the institutionalisation of globalisation, each country has
been arrayed in accordance with four cultural models in Europe: Nordic countries, Anglo-
Saxon countries, Latin countries and Germanic countries, as summarised in the figure
hereafter.
Social Social Liberal Liberal model
model conservative conservative
model model
Nordic Sweden
countries Norway
Finland
Denmark
Iceland
Germanic Germany
countries Austria
Switzerland
Belgium
Luxembourg
Latin France
countries Italy
Spain
Portugal
Anglo- United
Saxon Kingdom
countries Republic of
Ireland
Netherlands
Poland
Hungary
Czech
Republic
Slovak
Republic

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Figure 4.2. The four models developed

It proceeds from Esping-Andersen’s model that the public service’s shape and action scope
varies across countries. Notwithstanding differences, its aims, managing and structuring
remain relatively homogeneous worldwide. This is especially vivid at the civil servants’ level.

1.2.2. Civil servants in the service to the public

Civil servants are people choosing to work for the public sector and to be in the service to the
public. This is manifested in numerous areas of their work conditions and status.
Civil servants’ salaries are known for often being less than those paid in the private sector.
Such is generally the case for senior civil servants and not as much for those occupying the
highest positions. In the case of these latter people, salaries can be higher than in the private
sector, which is justified by two factors (Dekker, 2015). Firstly, their pay is high in order to
avert risks of corruption. Secondly, having greater responsibilities, these civil servants may
prefer working for the private sector where they would be paid more. In order to retain
talented decision-makers and policy-makers, their pay is especially attractive. Apart from
these high-ranking civil servants, salaries are usually less than in the private sector for mostly
one ideological reason: supposedly, civil servants should be proud to serve the public and
contribute to polity’s executing. That is, lower salaries supposedly accompany an ethic of the
public service that should drive civil servants’ commitment. This has a series of major
implications in terms of organisation and management.
Firstly, salary is not comparable to a market wage and therefore operates as an allowance paid
for the time spent on working for the public. Accordingly, there is little if not any room at all
for negotiation. Likewise, there is supposedly little room for performance-based
remuneration. In other words, conventional labour laws do not apply to civil servants.
Secondly, whilst servicing the public, civil servants are not associated in the decision-making
process, since this latter is an expression of polity as decided upon by the Parliament and
executed by the government. Civil servants are supposedly not consulted in any way re the
conduct of polity For this reason, unions have traditionally not been allowed in the civil
service in most countries. In the 1970s, unions have started being allowed and been active to
protect civil servants’ career paths and avert arbitrary decisions against them. Having no say,
civil servants have traditionally been appointed when they are needed without being able to
agree and choose their destination. This notion of working where they are needed has also
been traditionally associated with the idea that a civil servant should be periodically moved
from one place to another in order to avoid clientelism and corruption as they are getting
known to the population (Claston, 2011; Lawton & Rose, 1994).
Thirdly and correlatively, as civil servants are not free of their moves and appointments, a
specificity of the public service is that they are being looked after as long as they are on duty.
Supposedly, in exchange of their commitment and of the inconvenience of being continually
moved, civil servants’ positions are guaranteed over a lifetime. That is, by no means, a civil
servant, contrary to a public-sector employee, can be made redundant, unless they are
convicted of breaching the laws driving the public service. Likewise, most of the costs they
incur working for the civil service are supposedly refunded (accommodation, meals and
transport), because they would probably not have incurred them if they had been working for
the private sector. This leads certain public-sector departments to provide their agents with
duty accommodation where they are not paying any rent and utility bills, because they are on
service, as on call (Lawton & Rose, 1994). In other words, what could be perceived as
benefits and advantages unduly reserved to civil servants is just the counterpart of a status

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they choose and whereby they relinquish everything a private-sector employee could expect
(high compensation, promotions, career path choices, etc.)

1.3. Independent Governmental Agencies

The Public Sector’s second component is the collection of public agencies operating on behalf
or in the name of a government. In contradistinction to the civil service, be it central or local,
governmental agencies paradoxically benefit from a greater autonomy. Although their role is
defined and their budget is voted by the Parliament, their resources are constitutionally
guaranteed. Likewise, the independence of their judgment, decisions and actions protected by
the Supreme Court (Latour, 2009; Owens & Wedeking, 2011; Singer, 2000; Thiel, 2012;
Thomas J. Miceli, 2009). As a result, they can appoint employees and management without
being held accountable before any governmental authority. Even though agencies’ role and
structure differ from one country to another, there are similarities in their essence and
functioning. Most of the time, however, such governmental agencies serve as a counter-power
to political or economic institutions. Depending on their realm, they contribute to
guaranteeing democratic procedures, especially when governments are tempted to toughen
regulations undermining civil rights, or they can exert some judicial control over the economy
in order to avoid excesses or crises (Thiel, 2012).

1.3.1. Agencies as a political counter-power

Within the political realm, two sets of Independent Governmental Agencies exist: those
controlling public policy and those protecting civil rights. In either case, they operate as
counter-power to the government. In places, their activity may be perfectly in line with
governmental policy and therefore execute it whilst, if they disapprove choices made by the
government, they tend to avert its policy’s excesses. In this respect, the best-known
Independent Governmental Agencies in the world are those known through American
pictures, such as the FBI, the CIA, the NSA or the NASA. For instance, in 2017, President
Trump was investigated by the Federal Bureau of Investigation because of possible collusion
with the Russian government during the 2016 presidential campaign and was not able to
interfere in the course of the investigation (Baldwin & Andersen, 2017; White-House et al.,
2017).
Likewise, the EU counts on numerous agencies aimed at independently executing polity or at
warning against breaches of civil rights’ protection by EU governments (Chamon, 2016;
Simoncini, 2018; Thiel (van), Verhoest, Bouckaert, & Lægreid, 2016). Such agencies
articulate polity recommendations on their respective competency realm. These are
transmitted to the European Commission and Parliament that can decide to further proceed on
their transforming into action or not. If these recommendations are followed by EU
institutions, the competent agency is then in charge of controlling its execution. Such is for
instance the case of the European Space Agency whose role consists of devising
recommendations for European space programmes and the development of Ariane (Inc._IBP,
2016). The European Commission and Parliament are not obliged to follow these
recommendations. In case they do, most times a new rocket is on the Launchpad, the ESA can
verify the consistency of programme execution.
More often, though, Independent Governmental Agencies do guarantee the citizens’ civil
rights are protected and not breached by governmental authorities. In this respect, their role
consists of issuing reports on their realm’s polity and its impact on civil rights. Depending on
the level of consecration these rights have in the Constitution, the specialised agency may be
competent to issue its own regulations with which governmental decrees cannot interfere or
may be competent to sue authorities trespassing on citizens’ civil rights (Wilson, 1991). For
instance, these agencies can recommend that the European Commission should prosecute an

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EU member-state’s government if a national law or decree undermines the liberty of press,
women’s rights such as. restrictions on abortion right or minorities’ rights as with anti-LGBT
actions in Poland and Hungary (Mulder, 2016; Slootmaeckers & Touquet, 2016).

1.3.2. Agencies as economic regulators

A second body of Independent Governmental Agencies has been created to regulate the
economy in an agile way. The assumption is that the “invisible hand” does not systematically
operate and that the economy does not always self-regulate. Accordingly, some public
response to excesses is needed. Strongly inspired by Public Choice economics, such agencies
operate as a surrogate for governmental and parliamentary authorities deemed inefficient at
reacting. Because the legislation process is lengthy and its outcomes unpredictable, laws or
decrees may arrive so late that an excess observed has caused major damages to the economy
and people. Therefore, it is often preferred having recourse to agencies whose sole
competency is to issue and enforce their own regulations applying instantly. As these
agencies’ functioning is not democratic but bureaucratic, appropriate regulations can be issue
just in time and be enforced just when they are needed (Simoncini, 2018).
In addition to their regulatory role, these agencies are oftentimes devolved a consultative
power with a compelling voice. In this case, the government must consult them prior to
issuing a regulation or submitting a law proposal before the Parliament. The agency’s report
on the project operates like a jurisprudence and commits the legislator or the regulator
(Munday, 2016). Such is often the case with Competition Law where the national (non-EU) or
EU competition agencies delivers an advice on a law project (Brammer, 2009). Likewise,
these market agencies are often consulted by business organisations prior to making some
economic commitments that could affect the economy’s or capital market’s functioning
(Ottow, 2015). The advice given by the agency imposes itself to economic actors as quasi-
legal (Ottow, 2015). In the US, such agencies are the Securities and Exchange Commission
giving a self-imposing advice on merger and acquisition projects or on companies’ initial
public offering (Seligmen, 2013; Shapiro, 2009). These agencies’ independence is especially
reinforced by the fact that most of their decisions and advices cannot be appealed (Chamon,
2016; Munday, 2016; Wilson, 1991).
A third role Independent Governmental Agencies can play is jurisdictional, whereby they act
as a first-instance specialised court dealing with economic matters. As in contradistinction to
conventional jurisdictions, following common rules, these independent agencies’ members
are not appointed,. They are not appointed by governmental authorities and are therefore not
held accountable to them; rather, they are nominated by committees composed of MPs and
representatives from various professional bodies acknowledging their particular competence
and authority (Pollack, 2002). The assumption for having recourse to specialised magistrates
is that their specialism makes it possible to commit quick and efficient decisions on urgent
matters; the economy cannot wait (Simoncini, 2018). In this serving as jurisdictions, these
agencies’ decisions can be appealed, in which case appeal is treated in priority (Pollack,
2002).

1.4. State-owned companies

The public sector’s fourth component lies in publicly owned companies, in a non-American
sense. Since the 1980s, most countries, be they developed or developing, have engaged in a
process whereby governments have regularly and steadily been privatising formerly publicly-
owned companies (Funnell, Jupe, & Andrew, 2009; Grolle, 2009). The assumption behind
privatisation, still inspired by the Public Choice, is that the public sector is less efficient than
the private sector at delivering goods and services (Jupe, 2009; Jupe & Crompton, 2006) or is

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colonised by corruption, clientelism and other forms of nepotism (Josiah et al., 2010; Orchard
& Strutton, 1994; Uddin & Hopper, 2001, 2003).
Notwithstanding this neoliberal legacy, publicly owned companies still exist and remain
prevalent in numerous countries’ economy, which raises the question of their raison d’être.
Traditionally, there are three main reasons for making a company fall within governmental
action scope. Whatever the rationale for making a company a public service is, a political
logic is at play rather than economic. That is, although it can appear counter-intuitive or
economically counter-productive a company be public, it may well be politically justified. It
is this political dimension that needs to be understood. In other words, owning companies is
not necessarily evil for a government, be it national or local: this responds to local, specific
political concerns: a publicly owned company serves a public policy purpose and objective.
Firstly, a company can be run publicly rather than privately when it operates on what
economists have called “non-contestable markets” (Baumol, 1982). Those characterise
industries where entry costs are so high and return so unpredictable that private actors are
unlikely to undertake such an investment (Olson, 1974). Given the sums of money required,
these investments often appear as very specific. Not just is it a major loss quitting the market
in case of failure but also it is very difficult to resell these assets, deemed too specific to be
repurchased by another private actor (Lyons, 1995).

Case n°1. A nuclear power plant

A specific asset worth nil
In 2001, EDF, the French utility company, borrows 5 billion euros from Goldman Sachs
France to establish a nuclear power plant in Reunion Island. The loan is collateralised with
a mortgage on the power plant and a pledge on the discounted future revenues it would
generate. The loan was regularly repaid but posed a problem when Goldman Sachs
decided to quit France and sell its assets and loans on the secondary market. Cargill
Capital Markets manifested an interest in these and offered to purchase them. In the very
case of EDF’s nuclear power plant in Reunion Island, this was purchased for zero. The
Due Diligence Officers in charge of this case explained:
“It is true that EDF is solvent and is unlikely to get bankrupt. It is also true that the
French government would bail the company out in case of any problem. However, if the
company decided to stop repaying its debt, what would we do? We would end up having a
nuclear power plant we can’t do anything with. Who would buy a nuclear power plant?
Nobody would, especially on Reunion Island. There, the population is not big enough to
really make it profitable and electricity prices are regulated by the French government.
For all these reasons, we will consider this loan is worth nothing. I know it is difficult to
get the fact that a 5-billion working collateral is worth nothing. But this asset is too
specific and liquid at all for us. Unsellable.”

Secondly, a private company could take the activity over and charge citizens for the service.
The concern however is that the costs incurred by the private company may result in users
being charged high amounts of money for the service. Confronted with this situation,
governmental authorities can choose between two options. Either they pay a fee to the private
company for undertaking this activity and subsidise its use. Or they decide that is shall be
publicly run. In the former case, the main issue is the difficulty to control the costs eventually
incurred by the private company, the terms and conditions of this privilege granted to a
private business to run an activity in a monopoly situation. Also, controlling service quality

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may be very difficult and expensive. In other words, there is no guarantee that the public
service is being run in an economic, effective and efficient way (Davies, 2016).
In the other situation, governmental authorities consider that, because of the risks associated
with the private running of a public service, this should be publicly managed
(Ernst_&_Young_LLP, 1994). The assumption is that, by keeping the public service public,
governmental authorities ensure the continuity and quality of service delivery at the same time
as its costs can be managed. Consequently, even though users pay for the service, this latter is
publicly subsidised to a large extent. Such is usually the case of public transport in most
European regions, where local governments have shares in companies otherwise privately
owned (Cuervo-Cazurra, 2018). This allows them to be on these companies’ board and
partake in decision-making, and this always under the purview of maximising the cost-
quality-continuity combination for tax-paying citizens. Resultantly, most of the time, public
transport companies are semi-private, with a significant share resorting to local governments
(Dienel & Schiefelbusch, 2009).
Thirdly, public authorities can decide that certain industries or companies have an activity
falling within the remit of industrial policy and thereby deserve to be publicly owned (Arrow,
1974). Contribution to industrial policy can be understood as an activity deemed especially
strategic for public authorities, so that having a non-publicly owned company may undermine
sovereignty. If this activity is led by a private company, public policy will be contingent on
what this company’s management decides. For instance, in Australia, utility companies are
privately owned. In 2015, the government complained that utility bills had skyrocketed and
become unbearable for the population. These companies being privately owned, the federal
government was unable to influence price-making. Contradistinctively, in most European
countries, especially France, utility companies are state-owned, so that prices are regulated
and energy is very affordable (Gémes, 2015; Usumanu, 2017).
Or, when company activity is strategic for public authorities’ sovereignty, there is a risk that,
being initially privately owned, it falls into the hands of a foreign country. The danger
confronting public authorities is that the exercise of their sovereignty be influenced by a
foreign country. In order to avert such critical situations, it is not unusual that these fall within
the public realm (Buchanan, 1998; Fonte, 2011; Mitchell & Fazi, 2017). Such cases have been
concerns in Europe (Le Corre & Sepulchre, 2016), the United States (U.S.-
China_Economic_and_Security_Review_Commission, 2017), Australia and New Zealand
(Huang & Austin, 2015) since 2010, as Chinese investors have purchased significant shares in
companies perceived as strategic for these countries, especially in the energy industry (Mines
in Australia), farming and agriculture (New Zealand and Europe) or electronics with
applications to Defence (the US). In response, these countries’ governments have either
issued new laws and regulations averting such cases to occur again and have endeavoured to
partly renationalise some of these critical companies.
When public authorities own or control companies, this is not necessarily in full. When a
company appears as critical for a government, what is needed is either a majority share
enabling to benefit from external investors’ funding with little control or a minority share
enabling to vet decisions. Depending on the type of other stockholders these companies are
likely to have (investments funds or other national industrial organisations), public
authorities’ share may vary. There is no golden rule of what is public authorities’ optimal
share. What is certain is that it is not necessarily 100%.
Lastly, it also appears that public authorities may partly or totally nationalise private
companies for internal political reasons and no geopolitical or economic justification. Such
can happen when a major national company is confronted with financial distress. In this case,
a possible bankruptcy would result in massive redundancy plans in the country with all the
social, economic and political consequences this can have for a government. Even in

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neoliberal countries, such as the United States or the United Kingdom, it often happens that
governments bail out or nationalise defaulted private companies. For instance, early 2008,
confronted with Northern Rock’s bankruptcy, the British government decided to nationalise it
so as to avoid that nationals would lose their lifetime savings. This could have caused
people’s incapability of repaying their mortgages, thereby leading to the burst of the estate
market, making the country enter into a major financial and economic crisis (Brummer,
2008).

Case n°2. EADS – Airbus

A state-controlled company
In 1999, four European countries jointly decide to launch a pan-European aerospace
company. France, Germany, Spain and the United Kingdom launch this company together,
each of them holding an equal share in its equity. The newly founded company was in
charge of three areas resorting to public policy: the European space programme, software
and security systems for military aircrafts and the manufacturing of civil aircrafts. Very
soon, the British government withdrew from the project, selling its stocks (Newhouse,
2008). In 2001, an increase in the young company’s equity is engaged, until outstanding
stocks represent 74% of its capital, the French and the German State owning 11% each
and the Spanish State 4%. The outstanding capital is owned to a large extent by other
European companies operating in the Defence industry. The three European governments
maintain their 26% ownership in order to keep control over the company: this share allows
them four board seats on the board of directors as well as the possibility of vetting
decisions (Airbus, 2018). By owning a sufficient number of shares in this company, the
three states ensure that their Defence and aviation policies remain under control.

Just as with these companies’ capital structure, companies deemed strategic for a government
are different from country to country. The strategic dimension pertains to national political
and geopolitical priorities. This said, companies operating in the Defence industry as well as
utilities are symbols of national sovereignty and independence. These are generally publicly
owned or controlled. In a country like the United Arab Emirates, whose strategic priority is to
be the international civil aviation hub, it is crucial that not just the Dubai and Abu Dhabi
airports be publicly owned and controlled but also airlines – Emirates and Etihad – (Cole,
2013; Wilson, 2007). What is strategic for the United Arab Emirates is not as much for other
countries such as Malaysia or South Africa where strategic concerns are different.

2. Financial management and budgeting

More so than in private sector organisations, budgeting and budgetary control are central to
the public sector, appearing as the utmost parliamentary activity. It has historically been
through voting the budget and controlling its execution that parliaments, representing citizens,
have enabled the advent of democracy in most countries since the British Revolution (Hill,
1991). Contradistinctively to strategic planning in the private sector, what is the most central
are expenses, these being the visible application of public policy choices, resources
consequently representing how much is needed for this.

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 2.1. Expenses as public policy priorities
Expenses in the public sector represent public policy choices and the priorities articulated and
decided upon by the government and the Parliament. Each of these priorities has a practical
implication for citizens’ life and financial consequences for taxpayers. Accordingly, it is
crucial to understand how these priorities are translated into financial terms and more
specifically into expenses. These comprise of civil servants’ wages, materials and equipment,
overheads, machines and buildings as well as subsidies and tax returns. Some of these
expenses can be easily known in advance as they are fixed, regardless of public policy
priorities. Some others, linked to economic circumstances, are difficult to anticipate and
forecast and are variable.

2.1.1. Civil servants’ wages

In the public sector, the main expense relates to civil servants’ wages. Owing to the civil
service’s particular status guaranteeing the quasi impossibility of making agents redundant,
wages cannot be easily managed and controlled. Accordingly, in most countries, they are
considered a fixed expense (Dann, 1996). Contrary to private-sector organisations, the
number of civil servants cannot be easily adjusted depending on activity level. This is
especially visible in what is usually called public sector reforms through which successive
governments endeavour to reduce the weight of public expenses in the economy by reducing
the weight of wages (Bergh, Dackehag, & Rode, 2017; Liguori & Steccolini, in press; Modell,
2001).

2.1.1.1. Assumptions, principle and functioning

Owing to what is relinquished when joining the public sector, it is no surprise that most
countries’ civil servants are employed for a lifetime (Aguar do Monte, 2017; Maczulskij,
2013). As job security is the non-financial counterpart of these sacrifices: money, career
choices and professional mobility. It is therefore very difficult to reduce the number of civil
servants without affecting the spirit of the civil service. When governments endeavour to
“modernise” the public sector, they often discover that the task is far from easy. Reducing the
number of civil servants cannot be done as in the private sector, where a redundancy plan can
be decided upon and implemented (Kurunmäki & Miller, 2006, 2011). At best, such a
modernisation can consist of non-replacing civil servants after they retire (Dickson, Postel-
Vinay, & Turon, 2014). This has a series of practical implications for budgeting wages.
Firstly, a public sector reform aimed at reducing its weight in the economy is fully effective
after a entire generation of civil servants has retired. The effects of not replacing them in part
or in full start to be visible only after all of their positions are left vacant. Secondly, owing to
the predictability of career paths in the public sector and quasi automatic increase in
responsibilities and pay over time, once the first generation of civil servants has retired, their
wages are neutralised, not those of the younger generation employed for a lifetime with the
same guarantees as their predecessors. In other words, the effects of retirees’ non-replacement
can only be visible after the younger generation itself has retired.
This major concern was especially vivid in the context of the Greek crisis: in June 2013, the
Greek government decided to make 20% of its civil servants redundant in order to reduce
their deficit. The Supreme Court as well as the European Human Rights Court invalidated this
decision because it breached a constitutional principle that a civil servant is not an employee
but someone accepting to submit him-or-herself to the common good. As a consequence, the
government was obliged to find a different way of saving money and fulfilling its creditors’
requirements (Morales et al., 2014; Pavlatos & Kostakis, 2015).

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Paradoxically, when public policy spending is intense, recruiting valuable civil servants may
be difficult, which can be explained by two factors. On one hand, intense public policy may
be the counterpart of strong economic activity. In this case, talented people would privilege
better paid positions in the private sector (Aguar do Monte, 2017; Yassin & Langot, in press).
On the other hand, the public sector is known for growing counter-cyclically in order to avert
the impacts of economic difficulties on people (Carpenter, Doverspike, & Migue, 2012;
Maczulskij, 2013). In this situation, the number of applicants can be very high without them
necessarily offering the skills needed by the civil service (Carpenter et al., 2012; Elderei,
2017).

2.1.1.2. Budgeting civil servants’ wages rests upon five pillars.

Firstly, given the civil service’s current composition and career evolution, it is crucial to
anticipate which civil servants will see an automatic wage increase owing to their longevity.
This requires a very accurate knowledge of where every single civil servant is at in their
career and in their promotion process. Nowadays, algorithms and IT facilitate this. This by the
way can explain why total wages in the civil service increase year after year. This is the most
predictable part of the public sector’s budget.
Secondly, what needs to be perfectly known is the number of civil servants retiring during the
course of the following year. This implies an accurate knowledge of their implication in the
civil service and their right to retire. In most countries, after civil servants retire, their
pensions are no longer accounted for by the state. In some countries, such as France, this is
not the case: retired civil servants’ pension is paid for and accounted for in the nation’s budget
(Charpentier, 2009). These retired civil servants’ wages can be subtracted from the budget.
Thirdly, even though governments decide to recruit fewer civil servants over time, the quasi
automatic promotion system in the public sector results in lower-scale and start positions
being vacant at some point in time. A civil servant starting at the bottom of the hierarchy will
necessarily, through promotion, join a higher-ranking position. Accordingly, filling lowest
ranking positions remains a constraint for governments, these civil servants being the ones
operationally enabling public policy. For instance, in public transport, bus drivers will always
be needed (Dienel & Schiefelbusch, 2009), just as postmen and postwomen in postal services
(Miller, 2017), leading to recurrent recruitments.
Fourthly, the definition of new public policy priorities necessarily leads to needing new skills,
often resulting in recruiting new civil servants. Accordingly, each time a government decides
on a new polity, it is required to provide the Parliament with an estimate of the number of
equivalent full-time positions needed to conduct it.
Fifthly, confronted with the difficulty of managing civil servants’ wages and controlling this
everlastingly growing expense, most the civil service in most Western countries has had
recourse to sessional staff. These are agents recruited for a limited period of time and serving
as private sector employees would. Their job is incidentally for the public sector. Such a
practice has been generalised since the early 2000s as governments have been “modernising”
the public sector, knowing some skills are not needed for forty years but for a shorter time
(Kurunmäki & Miller, 2006, 2011; Skaerbaek, 2009). This has enabled to avoid hiring
specific skills whose holders would have been on public salary for a lifetime. The formula
below summarises wages’ budgeting in the civil service.

Wages = Promoted – Retired + Recurrent recruits + New recruits + Sessionals

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Figure 4.3. Budgeting civil servants’ wages

The manageability of wages in the civil service is very low and appears as a difficult task for
governments. Owing to the concern of employing civil servants for a lifetime, it appears more
and more that some positions, even though they are filled, will not be on a civil servant’s
status. In most developed countries, sessional staff becomes more and more in number and
weight (Bergh et al., 2017; Liguori & Steccolini, in press; Modell, 2001). Also, through the
partial or full privatisation or subcontracting of activities, governments displace civil servants’
wages to a different line on the budget, averting the incurring of a lifetime commitment’s
costs.

2.1.2. Overhead and fixed costs

Apart from wages that operate like quasi-fixed costs, or expenses difficult to manage, the
public sector’s second main fixed expenses are in overheads These correspond to all these
buildings, machines and equipment necessary for the conduct of public policy. Traditionally,
the public sector has owned in its name all these infrastructures incurring massive fixed costs.
Historically, the principle was mainly twofold.
Inherited from the Ancient Regime in European countries, everything concurring to the king’s
activities were belonging to the crown and could not be relinquished or alienated. Owning
these in the crown’s name was the privileged means of sovereignty exercise. The more assets
the crown would own, the stronger it would be. Accordingly, and this is nowadays still vivid,
public ownership laws (called Public Domain Laws) prescribe the fact that public ownership,
by belonging to the crown (or presidency in non-monarchic regimes), sees occupation rules
very strictly defined and enforced, so that not everybody is allowed to occupy such premises
without an official entitlement. Very concretely, this means that, even if a country is
defaulted, no bailiffs can seize public properties and compel to their selling. Such was
observed with the Greek crisis in 2008 but also with the Latin American crises since 1997:
overseas investors would not be in a capacity of being reimbursed by defaulted states’
properties. Owing to public ownership, these defaulted states could preserve the exercise of
their sovereignty and the continuity of their public policy notwithstanding the lack of funding
(Collins et al., 1997; Esquiroi, 2008; Morales et al., 2014).
The second factor proceeds from the first one and relates to states’ and governments’
independence and sovereignty vis-à-vis private actors. It would be easy to imagine that states
would outsource numerous activities for the reason these can be efficiently, effectively and
economically undertaken by the private sector. It could also be envisaged that the public
sector is the private landlords’ tenant for the occupation of buildings and properties used in
the conduct of public policy. The risk confronting the public sector is twofold. Firstly, there is
a risk of unpredictable and unmanageable costs of public policy if private actors decide to
increase their rent, compelling the public sector to pay or leave. Secondly, whatever lease
agreements’ terms and conditions are, a private landlord can always decide to recuperate the
property for their own usage or for any other, such as selling or leasing to other tenants.
Therefore, in order to avert these risks, the public sector has traditionally owned most if not
all of the assets necessary to the independent conduct of public policy (Jensen, 2012; Mitchell
& Fazi, 2017).

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 Case n°3. The Champs-Élysées Post Office
Public service’s discontinuity
Until 2010, the French Post was owning the buildings in which it was operating. Post
offices were owned in the public company’s name. On January 1st 2011, as the public
company was about to be privatised, the government decided to sell and lease-back some
properties, including the building on the Champs-Élysées Avenue in Paris. The new tenant
set a monthly rent amounting c.15,000 euros. As this post office was the largest in France
and therefore that with the highest activity level, affording such a rent was not a problem.
With inflation and the increase in property prices in Paris, in 2010, the rent reached over
30,000 euros. The post office’s activity was not sufficient to cover this rent and all other
expenses associated with it (wages, equipment, materials and other overheads).
Management endeavoured to renegotiate contract’s terms and conditions, which the
landlord rejected. As the need for a post office in this touristic area was very vivid, postal
and governmental authorities found themselves confronted with a dilemma: pay or leave.
Paying this financially unbearable rent would result in increasing the cost of public policy
at the taxpayer’s expense. On the other hand, leaving would mean that public policy is
discontinued and that the public service fails. Authorities opted for the section solution:
they quit and relocated in a cheaper building in a side-street a few blocks away. The new
premises were smaller and less prestigious than before, but rent was back about monthly
15,000 euros.

Concretely, buildings and properties owned by the public service are those hosting the
following types of activities (the list below is not exhaustive):
- Public Schools;
- Public hospitals;
- Tax Offices;
- Police Stations;
- Fire Stations;
- Military Bases;
- Public Cultural Institutions (museums, theatres, etc.);
- Public Stadiums;
- Train stations;
- Harbours;
- Etc.

Likewise, machines and equipment are needed by the public service for polity, the principles
being very similar to those guiding property. These may be needed when public policy
requires a transformation activity of materials into a final good or service. But also, these may
be needed in the maintenance activity orchestrated by the public service. As with property’s
public ownership, the principle is that civil servants must be available on call in case of
emergency whilst public sector employees are not necessarily. In order to ensure that the
public service can be run even in the time of a crisis, public ownership of equipment and
machines is deemed important (Orchard & Strutton, 1994). Such machines and equipment can
be represented in the non-exhaustive list below:
- Military vehicles and machinery;
- Fire department’s vehicles, garments and equipment;
- Ministerial and presidential vehicles;
- Toolkits in schools or hospitals;

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 - Blackboards in schools;
- Hospital beds and medical equipment;
- Snow-removing machines for winter;
- Seaside rescue boats;
- Etc.
In the civil service’s budget, fixed and overhead expenses are forecast more or less as in the
private sector. An additional constraint imposes itself on public authorities, as these assets are
owned in the name of polity and are managed through taxpayers’ monies: their aging and
need for maintenance and the subsequent anticipation of materials to purchase. Likewise, a
new public policy priority may result in need for new properties, which must be anticipated.
Future properties’ acquisition and maintenance costs fall within the remit of the public
service’s budget. The formula below summarises wages’ budgeting in the civil service.

Overhead = Current Properties’ management cost +New Properties + Maintenance cost +

New equipment

Figure 4.4. Budgeting overhead and fixed costs

2.1.3. Tax refunds and fiscal policy

The third dimension of public policy management accounting lies in what economists coin
budgetary policy whereby public authorities organise fiscal and social transfers from solvent
agents to some who are less. Transfers do not have an existence per se, since they are
accounted for in polity’s budget as wages and overhead costs.
Within the context of democratic activity, it resorts to the Parliament to decide on the nation’s
fiscal policy the government is in charge of executing. Supposedly, MPs are elected to
conduct a certain fiscal policy over their mandate’s term. Accordingly, for the duration of this
term, the Parliament votes in the nation’s budget tax decreases and returns, accounted for as
public expenses. Such is the case for two reasons. Firstly, a tax decrease or return results in an
amount of money which is not collected and diminishes public authorities’ fiscal resources.
Secondly, when tax is not collected, this represent a cost of opportunity for polity and is
associated with the public policy account that will find itself unfunded.
The most-known cases of fiscal resources’ decrease appear when a new majority at the
Parliament decides on a major income tax or value added tax reduction plan. Such was the
case when the US Congress approved President Trump’s plan consisting of reducing company
tax from 34% to 25%. The missing 9% would be accounted for as an expense needed to be
funded (through cost cutting in polity). One percent in tax decrease may result in billions of
dollars, pounds or euros missed, which need to be anticipated.
The most-known tax return at work is that of non-residents when they leave a country.
Pursuant to the international principle of no double taxation, when a tax is paid in a country, it
is not owed in a different one. Consequently, the country where this tax is not owed must
either reimburse it or not collect it at all. In either case, the amount eventually owed to non-
residents needs to be anticipated and accounted for as an expense. An example of such tax
return on non-residents is that of VAT refund in airport duty-free shops where non-residents,
allegedly exempt of this tax, can claim it back on purchases made in the country. This needs
to be budgeted through the anticipation of the number of non-resident travellers and the
average amount of their purchases in the country and duty-free shops.
Apart from this internationally known principle, tax return may take numerous forms,
depending on the country, but always have the same impact on public budgets: an increase in
expenses. Donations to political parties and other charities can lead to tax deduction or

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exemption for donors. This can be in full or in part, leading to an equivalent amount not being
collected or being reimbursed by the tax office (Anheier & Salamon, 1994, 1996, 1997;
Havens, O'Herlihy, & Schervish, 2006; Rathgeb-Smith & Grønberg, 2006). For instance, in
France, 66% of donated amounts are tax-deductible (Archambault, 1997). In the United
Kingdom, any pound donated to a registered charity is matched by the tax office, de facto
resulting in the same public expense (Havens et al., 2006; Sargeant, 1999; Trussel & Parsons,
2007).
A trend encouraged by the spread of corporate social responsibility and sustainable
development has led individuals to undertake green investments supported by public
authorities. Depending on the country, the financial effort made in the name of environmental
policy varies. This can consist of VAT deductions from the price of “green” equipment or the
deduction of such investments’ costs from taxable income or income tax for people
undertaking these. Such “green” tax returns are aimed at contributing to the nation’s
environmental policy by encouraging environment-friendly behaviours, such as home
insulation, solar panel installation, heat pumps, electric cars or bicycles, etc. (Aidt, 2010;
Mannberg, Jansson, Pettersson, Brännlund, & Lindgren, 2014; Shazmin, Sipan, & Sapri,
2016).

Case n°4. “Green” tax returns in France

Tax-return accounting
In anticipation of the organising of the 2016 COP21 conference in Paris aimed at
negotiating international actions against global warming and climate change, the French
government has implemented massive “green” tax refunds. From 2013, households
undertaking environmental investments aimed at improving their house’s energy rating
would benefit from a 30% income tax deduction. Those environmental inclusions
especially concerned wall and roof insulation, double-glazing as well as low energy
consuming heating systems. The administration working for the Ecology Ministry
estimated that about 2 millions households would undertake c.15,000€ green investments
between 2013 and 2016, therefore budgeting this tax-return policy’s cost at c.30 billions
euros over three years, i.e. c.10 billions euros annually.

In the budget, the tax return amount, exemption and decrease costs as well as their cost of
opportunity must be anticipated and accounted for. Based upon economic forecasts, the
Ministry of Finance administration can estimate the number of companies, households and
non-residents likely to claim tax back at the same time as the amounts they for which are
likely to apply. These also include tax losses that could be ascribed to changes in economic
circumstance. For instance, an economic crisis leading to higher unemployment may result in
lower income tax from newly unemployed people. For those tax returns disconnected from
public policy choices, economic forecasts are sufficient. However, when tax returns proceed
directly from public policy choices, polity’s direct and indirect impact must be estimated over
the project’s duration: number of taxpayers directly concerned, agenda and a schedule of their
costs. It is this estimate that comes to feed to the budget. The formula below summarises
fiscal policy’s budgeting.

Fiscal policy = Recurrent tax returns + Economy’s negative impact on planned tax collection
+ Tax return by public policy + Fiscal cost of opportunity by public policy

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Figure 4.5. Budgeting fiscal policy costs

2.1.4. Activities’ outsourcing costs

The rigidity imposed by the civil service’s structure and functioning associated with New
Public Management’s doctrine has led since the early 2000s numerous governments to
outsource the conduct of part of their public policies. Such has been motivated mainly by
three series of reasons.
Firstly, as a public policy is not immutable and does not necessarily have vocation to last
much outwith a Parliament’s term, it seems unnecessary to hire civil servants for this specific
purpose. This reason is accentuated by the principle guiding the civil service, taken by New
Public Management’s promoters as a constraint: hiring civil servants would continually
increase public expenses over the new civil servant’s lifetime. Rather than committing later
majorities and governments, new public policies may require sessional workers or private
subcontractors (Funnell et al., 2009; Grolle, 2009; Parker, 2012). This first reason is often
associated with the idea that public policy’s remit should limit itself to kingly activities.
Secondly, New Public Management’s and privatisation’s proponents allege that the private
sector can achieve higher than the public sector, operating in a more efficient, effective and
economical manner (Herath, Wickramasinghe, & Indriani, 2010). The assumption underlying
this reason is that the competition private companies have to face compels them to work at a
cheaper rate than the public sector would. Conversely, it is implicitly assumed that the public
sector’s bureaucratic nature prevents it from doing well what is not kingly activities (Abbott
& Doucouliagos, 2009; Herath et al., 2010; Reiden, 2001; Shaoul, 1998; Skaerbaek, 2009;
Tinkelman & Mankaney, 2007). This reveals a strong belief in market forces’ capabilities in
lieu of the public sector.
Thirdly, some deviant behaviours noticed in some countries’ public sector has raised beliefs
in its impotency and incapability owing to all possible forms of corruption. Because in the
1980s and 1990s, the public sector in some countries has been polluted by nepotism,
clientelism or bribery, some have presented it as intrinsically corrupt (Ashkanasy, Falkus, &
Callan, 2000; Bergh et al., 2017; Broadbent, Dietrich, & Laughlin, 1996; Carnegie & West,
2005; Carpenter et al., 2012; Dann, 1996; Elderei, 2017; Farrell, 2005; Sharma & Lawrence,
2009; Taha, 2013). This third reason subscribes to the Public Choice ideology that the public
sector is an unnecessary evil (Buchanan & Musgrave, 1999; Niskanen, 1986).
Within the context of more and more numerous calls for public policy’s outsourcing, three
forms are especially known, each of them endeavouring at answering the Make or buy
question.
The main form consists of subcontracting public policy to private companies. Consistent with
the notion of public goods associated with polity, it is not unusual that the cost incurred by
private actors be higher than the price paid by users. In order to make this policy transfer to
the private sector profitable, public authorities pay a fee complementing the price paid by
users (Johansson, 2003). This fee itself can take on two forms. On one hand, it can be a lump
sum paid and revised annually, enabling the subcontractor to generate a surplus. On the other,
it can be a variable fee paid on the eventual use of this public service (Funnell et al., 2009;
Grolle, 2009). The best-known example of privatisation resulting in public authorities paying
a fee to subcontractors is that of the British Rail (Cole & Cooper, 2006; Crompton & Jupe,
2003; Jupe, 2009; Jupe & Crompton, 2006; McCartney & Stittle, 2006).
The second form can consist of launching limited companies for the specific purpose of
conducting a certain public policy. As discussed in the section devoted to state-owned
companies, these limited companies can be fully public or hybrid (Ernst_&_Young_LLP,
1994). These publicly-owned limited companies have spread since the 1990s in response to

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calls for a New Public Management and have led to hybrid situations: profit-making
companies in the context of strategic public policy. Such state-owned private companies
enable private a combination of public and private equity, the assumption being that public
funding can be leveraged by private funding and therefore be of benefit to the public
(Kurunmäki, 2004; Kurunmäki & Miller, 2006, 2011; Miller, Kurunmäki, & O'Leary, 2008;
Parker, 2012). The expenses incurred by governmental authorities pertain to their
stockholder’s activity, through possible subsidies, bailouts or contributions to equity increase
(Cuervo-Cazurra, 2018). Usually, such is the case of public transport or water utilities
(Argento & van Helden, 2009; Crowther, Carter, & Cooper, 2006; Dienel & Schiefelbusch,
2009; Ogden, 1995; Rahaman et al., 2007; Wouters, Kokke, Theeuwes, & van Donselaar,
1999).
The third form is that of outsourcing public policy to non-profits and contribute to their
financing through public subsidies (Jenkins, 2006; Minkoff & Powell, 2006; Ostrower &
Stone, 2006; Rathgeb-Smith & Grønberg, 2006). This way of outsourcing to non-profits can
take on two forms. The most common form consists of calling for applicants and paying an
annual subsidy to the one winning the market. In the other, less common form, the non-profit
organisation conducts its mission on public authorities’ behalf qua surrogates for the public
sector and contributing to a form of public realm privatisation. In this respect, the non-profit
whither polity has been devolved charges public authorities based upon its activity level,
thereby engaging in commercial transactions (Hardy & Ballis, 2013).
Privatisation, which often occurs with social work and other activities charities can take over,
exacerbates accountability demands articulated by public authorities (Freeman, 2006;
Furneaux & Ryan, 2015). This process results in stringent demands for ‘public accountability’
(Freeman, 2006; Sinclair, 1995). Non-profits are confronted with an imperative to take
responsibility for public policymakers whose decisions they are applying. The legal literature
introduces the notion of ‘surrogacy’ because non-profit acts in the name of the public sector
thereby facing the same obligations towards beneficiaries or clients but without having the
same rights or authority (Dorf, 2006).
A surrogate for public authorities, the non-profit organisation acting in their name is expected
to render an account to those authorities, their ‘public accountability’ thereby embracing
features of what Sinclair (1995, p.222) calls ‘political or Westminster accountability’.
Imposed by legal authorities, reports are demanded from citizens accounting for the use of
taxpayers’ monies and the conduct of polity. This ‘political accountability’ finds itself
necessarily resting upon ‘technocratic’ means of accountability (Joannidès, 2012; Mashaw,
2006). Such formal means of accountability appear detrimental to informal and relational
accountability (Hardy & Ballis, 2013). That is, accountability demands appear as quasi-legal
and judicial pressures exerted by public authorities on non-profits and operate at two levels.
First, non-profits must prove that they have used taxpayers’ monies consistently with the
political promises made by the government to citizens (Furneaux & Ryan, 2015; Mashaw,
2006; Morgan, 2006; Morris, McGregor-Lowndes, & Tarr, 2015). These points have long
been theorised in interdisciplinary and legal research on non-profits but have thus far drawn
little academic interest in accounting scholarship. To date, the seminal piece of work is on
Westminster’s authority over the Church of England and related charities (Laughlin, 1988,
1990), followed more recently by publications on the effects of Statement of Recommended
Practice (SORP) on UK non-profits (Connolly & Hyndman, 2001; Connolly, Hyndman, &
McConville, 2013; Dhanani & Connelly, 2012).
Second, given the privatisation of governmental activities and the associated development of
government-to-non-profit relationships, stricter accountability demands arise concerning how
the mission has been conducted. Non-profits’ accountability consists of proving not only that
money has been righteously used but also that the reason governmental authorities have

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granted them funding is actualised, abiding by public policy standards (Rathgeb-Smith &
Grønberg, 2006). Such requirements are especially vivid when non-profits have a strong
ideological agenda, if not advocacy activities, which is often true with religious
denominations and associated charities (Hardy & Ballis, 2013; Jenkins, 2006; Minkoff &
Powell, 2006). Public authorities tend to authoritatively demand accounts of mission
completion and of political relative neutrality; public funding is implicitly conditioned on
limited activism or militancy from the non-profit under scrutiny (Jenkins, 2006). Based on
these bureaucratic obligations imposed on non-profits, the discharging of accountability is one
of the utmost duties of their boards (Ostrower & Stone, 2006). One of these duties in
particular consists of designing and implementing adequate accountability systems aimed at
responding to these ‘technocratic’ demands from governmental authorities.
Unlike public policy done directly by the public service, budgeting outsourced activities is
simpler and costs generally more predictable. When the form chosen consists of paying an
annual lump sum to a private company or a subsidy to a not-for-profit organisation, the
amount is known in advance, even if it can be renegotiated each year, depending on economic
circumstances and activity level. Given the budgetary cycle, these sums can be anticipated.
What is more difficult to anticipate are the costs incurred by public authorities in their role as
stockholder in a hybrid company. Some of such company’s activities may develop so fast that
its stockholders are regularly solicited to contribute in increase in its equity. Conversely,
when a publicly owned hybrid company is confronted with an unprecedented crisis, it may be
needed to bail it out, resulting in unexpected high amounts of public funding, such as AIG and
Northern Rock when they failed (Brummer, 2008; Cunningham, 2013; Graham, 2008).
Precisely because these are unexpected, they cannot be explicitly budgeted but may be
accounted for as provisions for risks. The formula below summarises the budgeting of
outsourced activities.

Outsourcing = Annual fees to private companies + Annual subsidies to charities

+ Stockholder’s obligations + Provision for risks

Figure 4.6. Budgeting activities’ outsourcing

2.2. The public sector’s resources

Contrary to private companies or charities, once the public sector’s missions and polity
priorities are clarified can the resources necessary for this be defined. These naturally proceed
from what public authorities decide as their activities for the year to come. As with public
expenses, resources are multiple, some being especially known to the public whilst others are
less. The best-known resources on which public authorities can count come from tax and fee
collection. Less known are resources generated from financial activities and servicing the
private sector or other countries. Therefore, privatisation, often seen as the solution to the
purported public sector’s inefficiency, though a source of income, may also pose a series of
problems. Privatisation however often occurs at times of what is usually presented as a deficit
budget.

2.2.1. Taxes and fees

Whichever political form characterises a country – federal, confederal, centralised or
decentralised –, taxes and fees are collected by the tax office, a.k.a. Inland Revenue
Department in some countries (e.g. the U.S., New Zealand). In most cases, tax is collected by
the central tax office (e.g. the Australian Tax Office) and more rarely by decentralised tax

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offices (e.g. Catalonia in Spain). Basically, seven types of taxes and fees are collected to
finance polity priorities: company tax, household, Value Added Tax (a.k.a. known as Goods
and Services Tax), stamp duty and Council rates, excises, and tax on energy. What is
understood as fiscal policy relates to the interplay between all these taxes and fees and reflects
a nation’s priorities. Some countries encourage households and labour by taxing companies
and financial activities. With globalisation and the ease wherewith companies and private
investors can leave a country and relocate overseas, there has been a fiscal turn since the
2000s in many Western countries consisting of lowering tax on corporations and financial
activities (Justman, Thisse, & van Ypersele, 2005; Morer, Ansel, Michelik, & Girandola,
2017).

2.2.1.1. Company tax

Traditionally, company tax consists of a tax based on company’s profit margin as it is
accounted for in the income statement. This income tax represents a percentage of the surplus
a company makes through its operational, financial and extraordinary activities. Traditionally,
the income tax has revolved around 33% of this profit. The trend observed and consisting of
countries decreasing company tax owes to the fact that some countries are perceived by
corporations as more fiscally attractive than others. Some indeed do not apply a 33% rate but
a much lower one, such as Ireland with 16%, the Netherlands, Belgium, Luxemburg or
Liechtenstein with 25% (Dima, Dima, & Barna, 2014; Oates, 2001). This fiscal attractiveness
of certain countries oftentimes results in fiscal optimisation strategies from companies,
consisting of accounting for income and profit in countries where taxation rate is low.
Thereby, countries in which these companies conduct activities generating profits find
themselves deprived of fiscal resources without which they cannot finance their public policy
priorities. Such fiscal optimisation strategies can take different names and forms, such as tax
evasion, earnings management or earnings smoothing.
Regardless of issues in fiscal competition, what is important is that governments count on
company tax as a major resource for financing public policy. As this company tax is based
upon the profit made by companies, it is obvious that the amount of tax effectively collected
is dependent on the level of macroeconomic activity, measured as growth (Adkisson &
Mohammed, 2014; Stoilova, 2017). Accordingly, a major concern for governments is to
facilitate corporate activity and make economic growth sustainable in order to secure
resources.
When budgeting resources from company tax, public authorities need to count on credible and
realistic forecasts of economic growth. As countries are now open economies affecting and
affected by the rest of the world, these forecasts of economic growth do not only concern the
nation. Public authorities need to rely on forecasts for national and global economic growth
(Hajamini & Falahi, 2018; Roşoiu, 2015). It is common that governments articulate their own
economic forecasts in addition to those produced by intergovernmental organisations, such as
the OECD, the World Bank, the IMF, etc. (Ericsson, 2017).
Economic forecasts are aimed at estimating the plausible activity level for the period to come.
In anticipating resources generated from company tax collection, public authorities proceed in
two ways. In the first place, the general corporate activity level is estimated at a
macroeconomic level. Applying the taxation rate in force to this estimated level leads to a
rough estimate of company tax collection. This rough estimate is then weighted by abnormal
situations, such as company bankruptcy or company launch (no collection) but also tax-shield,
tax-shelter or tax-return (reduced collection), etc. The formula below summarises the
budgeting of company tax.

Company tax = Corporate profit forecast x tax rate – Tax return (tax basis x tax rate)

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 – Bankruptcy – Launch

Figure 4.7. Budgeting company tax

2.2.1.2. Household tax

The second best-known tax collected by public authorities is from households and is usually
known as income tax. Not all countries tax households’ income, but most do. The philosophy
behind income tax is that citizens and residents must contribute to the public good in
proportion of their financial capabilities. Inherited from the English Revolution, income tax
appears as a symbol of democracy and democratic activity: consenting to taxpaying has
appeared as a measurement of how much a regime is accepted or contested by citizens. The
assumption is that, as long as citizens consent to paying their taxes, the regime can remain in
place and governments are legitimate. When citizens no longer consent thither, this announces
a profound crisis and the risk of a massive protest and a possible revolution (Furet, 1981,
1996; Hill, 1991).
Some countries do not have an income tax, such as the United Arab Emirates for a long time
or Saudi Arabia and Qatar still today. These cases may characterise countries in which regime
legitimacy is not democratic. Accordingly, public authorities do not need any signal of
democratic acceptance or vitality. Rather, governments in place may need to avert any form
of protest and democratic claims (Badiou, 2008, 2012). Regime legitimacy rests upon its
capability of looking after its population without citizens being forced to express any type of
concern. This forces such countries to find alternative resources. In Middle Eastern countries,
these alternative resources are oil and gas annuities (Miller, 2016).
In order to avert any risk of revolution, household taxation must remain bearable. Therefore,
most countries opt for a progressive income tax rate. According to this principle, higher
income is taxed at a higher rate than lower income. Supposedly, the same percentage of tax
represents a different effort for people on high or low income. Tax progressivity takes on
different forms from one country to another, depending on their fiscal culture and notion of
social justice (Gaisbauer, Schweiger, & Sedmak, 2015; Rawls, 2001; Sedmak & Gaisbauer,
2015; von der Pfordten, 2015).
Owing to tax progressivity, budgeting income tax cannot rest on mere macroeconomic
forecasts for GDP or GDP per capita. This latter metric only provides an average amount.
Accordingly, these aggregated macroeconomic forecasts need to be weighted with social class
matters in two respects. Firstly, governmental authorities need to have a fair knowledge of
how society is composed in order to identify and anticipate the structure of the income tax
collected. Secondly, given macroeconomic forecasts, governments need to anticipate how
wealth will be shared across households prior to any transfers. This is aimed at anticipating as
accurately as possible the amounts in tax payment that are likely to be collected for the period
to come. As with company tax, households can benefit from tax shields, deductions and other
exemptions that need to be anticipated too. In most countries, such exemptions can consist on
donations to charities, which are subtracted either from the tax to be paid or from the taxable
income. The formula below summarises the budgeting of household income tax.

Income tax = GDP per social class x weight of each social class x tax rate – Tax shield

Figure 4.8. Budgeting household income tax

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 2.2.1.3. Value Added Tax
The third known tax collected from public authorities is the Value Added Tax, a.k.a. Goods
and Services Tax. This tax is ultimately paid by the end user, provided this latter is based in
the same country as the one where the good or service was purchased. This rule applies to
most countries in the world except the European Union, where each country is considered a
state within a sort of a federation (Siemens (von), 1921). Paid by the end customer, VAT is
often summarised as a consumption tax paid by households. In other words, any service or
good sold within a country to its residents is subjected to VAT. Ultimately paid by the
customer, VAT is not directly paid by companies. In its philosophy, VAT is a tax on what
results from the transformation process. Supposedly, at each stage in the transformation
process, the profit margin made by a company is taxed. In this process, companies pay their
suppliers, including VAT, at the same time as they collect VAT from their corporate clients.
More or less, tax collection and tax payment are balanced, hence companies are not really
impacted by the effect of VAT (Siemens (von), 1921).
Tax collection is contingent upon consumption level but can find itself very lucrative for
public policy’s financing. It therefore confronts governments with a dilemma. On one hand,
being a consumption tax, VAT appears as unjust, mostly affecting those households whose
resources are spent on consumption more than on savings or investment. That is, VAT
allegedly affects households on low income in proportion more than households on higher
income. The former spend most of their earnings in day-to-day consumption whilst the latter
do not spend the same proportion of their income. Resultantly, the purchase power of those
people on low income is more strongly affected than that of others, thereby creating a form of
injustice (Siemens (von), 1921).
On the other hand, its grounding in local consumption supposedly makes tax evasion difficult
at the same time as this generates high resources. For governments, temptation can be high to
apply a high VAT rate whither taxpayers are captive. This temptation may be aggravated by
the fact that, in most countries, this tax payment is not perceived by customers. When selling
prices are all inclusive, although the amount of VAT paid is mentioned, customers do not
really realise they paid a tax.
Given the highlighted injustice caused by VAT payment, numerous countries have opted for
differentiated tax rates, depending on the goods: first-necessity or vital goods are taxed less
than others. Differentiating tax rates according to the type of product is aimed at reducing the
impact of the economic and social injustice a consumption tax raises.
When budgeting resources generated from VAT collection, public authorities need to rely on
economic models highlighting the class weighting in GDP as well as consumption propensity
for each class. In case of a single VAT rate, such a model is sufficient to articulate the total
amount of tax that can be collected. If, which is more likely to occur, differentiated VAT rates
operate in the country, the economic model needs to highlight the type of goods likely to be
purchased by each class with a special emphasis placed on low income, because this class
comprehends more consuming taxpayers (Siemens (von), 1921).
In sum, budgeting VAT requires a fair understanding of class weighting in the country as well
as consumption structure for each class, viz. a convincing and detailed consumption model.
The model is fed with the anticipated growth rate for each component of overall estimated
consumption for the year to come. The formula below summarises VAT’s budgeting.

VAT = GDP x consumption propensity x class weight x tax rate

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Figure 4.9. Budgeting VAT collection

2.2.1.4. Excises
Nowadays, in most countries, certain types of goods are subjected to specific taxes, often in
addition to VAT. Albeit, in history, excises have existed before VAT was created for the first
time in France in 1966. Since the Middle Ages, excises were tax on specific goods imposed
by the King on people in order to finance royal wars (Hart, 2000). In the twenty-first century,
excises apply mostly to two types of goods and services deemed out of first necessity.
The first and best-known category is that of goods falling within the remit of health policy by
undermining consumers’ health. The risk on people’s health is such that, if individuals
consume these goods, they may end up being treated by the Medicare and then be a cost for
society. In all countries, the first good falling within these excises’ remit is tobacco. This first
category of goods, in countries where they are allowed, also comprises of alcohol and some
drugs (e.g. Marijuana in Colorado).
The second category of goods subjected to excises are luxury goods subjected to a surtax
aimed at reducing the injustice on low-incomers caused by VAT. The notion of unnecessary,
luxury goods is contingent upon the philosophy at play in the country. That is, some countries
would consider that spirits and liquors are luxury goods whilst others will emphasise sportster
cars, boats (e.g. yachts) or artworks. In others, it could be chocolate or anything else.
Supposedly, excises apply to what economists commonly call superior goods, goods whose
consumption increases with resources (Bergstrom, 1982; Chaloupka, Kostova, & Shang,
2014).
In sum, apart from tobacco and alcohol, luxury goods pose two types of difficulties. Firstly,
precisely because they are unnecessary goods, their consumption does not follow clear
economic rules. Secondly, as these goods concern a minority in the population, the associated
excises are not a major resource for governments. These still exist mainly for political
reasons: reducing social injustice and inequalities and showing to the public it is done.
Accordingly, in budgeting excises, governments mostly focus on taxes generated from
tobacco and alcohol. As these goods directly concern public health, these excises also relate to
public policy aimed at reducing their consumption, which is most of the time publicly
regulated or controlled. With these excises, governments can determine an acceptable level of
consumption and impose a tax rate on it.

Excises = Acceptable consumption x Tax rate

Figure 4.10. Budgeting VAT collection

2.2.1.5. Stamp duties

Most countries collect fiscal resources from stamp duties resulting from a specific demand
from a taxpayer on public authorities (Alpe & Whitworth, 1956; Jamieson, 1991). Contrary to
these aforementioned other taxes, there is no unique logic or justification for stamp duties.
Consequently, these do not comprise of the same items from one country to another. That is,
some countries charge for the issuance of some official documents, such as Birth, Death and
Marriage certificates (e.g. Australia), ID card or driving license (Australia, New Zealand),
Decree Nisi or Decree Absolute in case of divorce (The United Kingdom) whilst others do not
(most continental European countries). Likewise, some countries raise a tax each time
property ownership changes, as with sales, inheritance or bequeath (France). Notwithstanding

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national specificities, every country does collect tax from its immigration policy: applications
for a visa, residency or citizenship.
Usually, stamp duties serve to finance local governments whilst other taxes contribute to
central governments’ resources. Accordingly, in most countries, stamp duties also rest upon
the sole fact of being located on a given territory. Such taxes can take different names and
forms and be differently computed. For instance, Switzerland is the sole country on earth
applying a capitation: a tax paid by each resident or citizen for living in the country. Other
European countries apply a dwelling tax collected by municipalities (e.g. France and
Belgium). In other countries, such stamp duties are called Council Rate and correspond to
taxes paid for local governments’ common expenses, such as roads, waste removal, street
cleaning, etc. (e.g. Australia or New Zealand). Likewise, countries characterised by heavy
lorry traffic can impose on a traffic tax paid by each vehicle driving on their roads (e.g.
Switzerland, Belgium, Luxemburg, the Netherlands).
Resources generated from individual interactions with public authorities can be hardly
anticipated. Such interactions occur incidentally and are not meant to be recurrent. Therefore,
budgeting these is extremely difficult. Notwithstanding this difficulty, those stamp duties
collected from immigration policy can be anticipated, as governments determine how many
foreigners are allowed or expected. Together with Immigration authorities, the government
can determine how much can be collected from each category. Similarly, stamp duties relating
to location, paid annually, can be anticipated on the basis of the expected population for the
following year. To some extent, such taxes are contingent upon territory attractiveness and
proceed from attractiveness policies. The formula below summarises stamp duties’ budgeting.

Stamp duties = Past year’s tax from interaction with public authorities
+ Expected immigration x Stamp by category
+ Expected population x Location tax

Figure 4.11. Budgeting stamp duty collection

2.2.1.6. Financial Transaction Tax

In the aftermath of Lehman’s collapse perceived as the main cause for the Global Financial
Crisis, certain governments – amongst which German, France, Belgium and the Netherlands –
have implemented a tax on financial transactions. The purpose of this tax was to avoid overly
speculative behaviours on capital markets and thereby reduce the risk of financial crises. Tax
rate did not need to be high, but sufficient to operate as a counter-incentive to extensively
trade securities. Some proponents of this tax were suggesting that resources it would generate
should feed a fund aimed at bailing out defaulted countries; others were claiming that these
new resources should result in reducing other taxes impeding country attractiveness for
business. These debates have resulted in countries raising and utilising this tax separately.
Debates as to how this tax on financial transaction should be collected and utilised came long
after it was first proposed. Initially, such a tax was not aimed at regulating capital markets and
investors’ behaviour but at contributing to international development. Nobel James Tobin
suggested that the resources generated from this tax, representing 1% of each financial
transaction’s amount, would serve to feed the World Bank’s development programmes.
Instead of committing countries to paying 0,8% of their GDP for international aid to
development, knowing that very few of them do honour their promises, this tax would secure
developing countries (Tobin, 1978, 1996).

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Owing to its founder, this tax has been nicknames Tobin Tax and long critiqued, presented as
an utopia. Until the 2008 financial crisis, this tax’ proponents were associated with leftist
movements, that have influenced Occupy Wall Street and others in the world (Gitlin, 2013;
Samuel, 2012). Claiming economic realism, its opponents were alleging that such a tax could
be realistically applicable only if all countries in the world were applying it. To them, if just
one country did not apply this tax, financial transactions would move thither, thereby known
as a tax heaven for investors. Resultantly, countries implementing this tax would lose major
resources from trading activities: investors would leave, thereby leading to major redundancy
plans and high unemployment rates (Weaver, 2003).
Budgeting resources from Financial Transaction Tax rests upon macro-financial models
estimating national market capitalisation and trading activity. Usually, such models can be
found in three types of institutions. Firstly, market authority agencies articulate such models
for the conduct of their own activities. Secondly, investment institutions do devise their own
models to anticipate their own gains for the year to come. Thirdly, economic and financial
intergovernmental organisations do forecast capital markets’ activity, e.g. the International
Monetary Fund, the World Bank or the Organisation for Economic Cooperation and
Development. It is less common that governments devise their own models; they would rather
rely on these already existing (Buchanan, 1979). The formula below summarises the
budgeting of resources from Financial Transaction Tax.

Financial Transaction Tax = Market Capitalisation x Transaction Volumes x Tax rate

Figure 4.12. Budgeting resources from Financial Transaction Tax

2.2.1.7. Environmental taxes

Concomitant to companies’ environmental awareness and concerns expressed through
Corporate Social Responsibility and environmental accounting, developed in chapter 10,
governments have implemented environmental taxes. Such taxes are directed at those whose
activities are reputed to be especially polluting and damaging for the environment. Whilst
CSR appears as an economic integration of environmental concerns taxation relates to
political awareness, as expressed in concerns about Global Warming (Reid & Toffel, 2009;
Stanny & Ely, 2008).
Depending on country preoccupations and concerns, environmental taxes can take on multiple
forms. European countries have long implemented taxes on energy, taxing more those
energies reputed for being especially polluting: oil and gas, diesel or electricity are taxed
differently, based on their polluting contribution (Howard, 2017). Other countries with highly
polluting industries, such as mining in Australia, have implemented a carbon tax based on the
amount of CO2 produced (Callon, 2009; MacKenzie, 2009; Wettestad & Gulbrandsen, 2017).
As these environmental taxes are underlid by the assumption that economic activity is
polluting, budgeting them rests upon the anticipation of polluting industries’ activities, such
as chemical, pharmacy, manufacturing or transport and on their expected environmental
disclosure. Those companies disclosing high pollution will be taxed more on these triple
bottom line’s figures. Accordingly, budgeting resources from environmental taxes shall rest
upon an estimate of the amount of pollution units relating to economic activity forecasts for
these businesses. In other words, governments rest upon their own figures triangulated with
those from economic agencies. The formula below summarises Environmental taxes’
budgeting.

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 Environmental Taxes = Estimated economic activity for polluting industries
x estimated pollution units x tax on pollution unit

Figure 4.13. Budgeting resources from Environmental taxes

2.2.2. Non-fiscal resources

The public sector’s resources are not to be found only in tax collection but also in gains from
commercial and financial activities. A growing number of governments operate as service
providers either for other governments or businesses appearing as their clients. Such non-
fiscal resources can take on two forms: commercial on one hand and financial on the other.

2.2.2.1. Revenues from commercial activities

To some degree, it may be surprising that the public sector has commercial activities, these
being usually associated with profit-making companies. It is not incompatible that the public
sector conducts such commercial activities within the context of polity, hybridity being de
facto part of the civil service’s identity (Boland Jr, Sharma, & Afonso, 2008; Jacobs, 2005;
Kurunmäki, 2004; Kurunmäki & Miller, 2006, 2011; Miller et al., 2008). Hybrid identity
consists of commercial activities being part of polity and to some extent the visible
manifestation of its efficiency or specific expertise. Their purpose is triple. Firstly, they
generate resources useful for polity. Secondly, they diffuse national specific expertise.
Thirdly, they may help national private companies gain contracts or enter into new markets by
benefitting from these activities’ externalities.
Public-sector commercial activities can embrace a series of items, such as manufacturing,
services to companies or other governments or utilities. Not all industries are in essence
concerned by such commercial activities. Those commercial activities directly relate to a
specific knowledge or expertise a country has and wants to diffuse either across society or
around the globe. Most of the time, such expertise relates to an industry or activity deemed
especially strategic for a government, which justifies the fact that some companies be publicly
owned (as discussed earlier in this chapter). The assumption is that such public expertise,
once acknowledged by others may result in national companies active in this industry
receiving firm orders from national clients.
Historically, airlines have been publicly owned national companies not just transporting
people but contributing to national branding. By delivering a high-quality service, these
airlines would act as ambassadors for national hospitality. Nowadays, although numerous
airlines have joint-ventured or merged and are now privately owned, in some countries they
remain public. The most eloquent examples are Emirates, Etihad or Qatar Airlines, publicly
owned and serving as ambassadors of Middle-Eastern generous hospitality and service
(Wilson, 2007).
Other commercial activities whereof the civil service can be in charge may relate to the
educating or other countries’ elite. For instance, WestPoint educates officers from various
armies (Hoskin & Macve, 1988; Min, 2017), selling tailored programmes for these countries.
So does French Officers school Saint Cyr-Coëtquidan with the French-speaking world
(Montagnon, 2002). Outwith military education programmes, countries can commercialise
other forms of expertise in industries such as nuclear. In this respect, French civil engineers
are acknowledged world experts at assessing radiation risks and radioprotection in nuclear
power plants. In 2010, after the Fukushima tsunami and explosion of the Tepco nuclear power
plant, France was commissioned by Japanese authorities to supervise site securing and
reconstructing (Mahaffrey, 2015). More common to most countries is chambers of commerce

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activity: they advise overseas businesses locating activities in their jurisdiction and charge
them for this. Chambers of Commerce also charge local businesses willing to expand or
needing an introduction to others. Owned by Finance ministries in most countries, chambers
of commerce do have a commercial activity, acting qua facilitators or enablers for private
companies (Bennett, 2011).
Budgeting these commercial activities and associated revenues operates exactly in the same
terms as planning and forecasting. The formula below summarises this.

Revenues from sales = Expected demand – Expected costs of sales

Figure 4.14. Budgeting resources from commercial activities

2.2.2.2. Revenues from Financial activities

Many countries have launched their own investment funds or public banks managing public
monies and investments. Three justifications and forms are known to date.
The best-known model is that of countries generating surpluses from natural resources’ trade.
The monies generated are invested in public funds re-investing these resources: this is
Sovereign Funds’ role. In some countries, such as Norway, surpluses generated from
sovereign funds serve to finance either polity, social transfers or superannuants’ pensions
(Cummine, 2016). Other oil producing countries, such as the United Arab Emirates, do utilise
their sovereign fund’s surpluses to diversify their economy in preparation of the aftermath,
i.e. when they run out of natural resources. This is how Abu Dhabi has massively invested
surpluses generated from the sovereign fund into arts, culture and tourism with e.g. the
Louvre museum (des Cars & Nahyan, 2013).
The second model is that of countries whose commercial balance with the rest of the world is
positive, viz. countries exporting more than they import. The monies cashed by their national
companies result in local company tax or VAT contributing to national surplus budgets. In
order for these surpluses not to be dormant, these are re-invested on capital markets. Dealing
with public monies, these sovereign funds tend to invest national surpluses in risk-free assets,
i.e. treasury bonds issued by other countries. Holding other countries debt also serves as a
diplomatic levy in negotiations. By providing other countries with new monies, these
nationally owned investment funds can obtain some political advantages from these overseas
governments they finance, as for instance China’s sovereign wealth fund does (Greene &
Turner, 2011).
The third model characterises other countries, i.e. countries that cannot count on a manna
from natural resources or a positive commercial balance with the rest of the world. Most other
countries would fall within this group. Part of their financial activity consists of acting qua a
publicly owned private equity fund through public investment banks. Traditionally, postal
banks were doing this, contributing to locally funding small businesses or innovative
businesses deemed too risky by private funds (Sherrer, 2017).
In either model, revenues consist of instalments from treasury bonds, dividends from invested
businesses, interest paid by local debtors or gains from the sale of invested companies’ equity.
Accordingly, budgeting revenues from financial activities takes the same form as in financial
institutions and rests upon conventional portfolio management (Fabozzi & Markowitz, 2011).
The formula below summarises this.

Revenues from financial activities = Bond interest + loan interest + expected capital gains +
expected dividends

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Figure 4.15. Budgeting resources from financial activities

2.2.2.3. An account of privatisation

Subsequent to the neoliberal wave that has dominated polity and government around the
world since the early 1980s, most countries have privatised public companies. Developed
countries have done so first, followed by developing countries often urged by international
creditors to do so. Such has been the case in Latin American countries where the International
Monetary Fund and the World Bank, dominated by monetarist ideology, have been forced to
privatise their public jewels (Funnell et al., 2009; Stiglitz, 2003; Stiglitz & Rosengard, 2015).
The assumption underlying privatisation waves has been that the public sector should not
interfere into economic activity (Hayek, 1979). This would take on several forms, the most-
known being that of downsizing the public sector, reducing it to strictly kingly activities (e.g.
Defence, Foreign Affairs, Justice, Security). Another form this assumption has taken is that of
arguing that publicly owned companies avert the invisible hand from operating and regulating
the economy, almost accusing them to cause economic distortions and crises. This assumption
has been grounded in the belief that free market economy rests exclusively on private activity.
The advent of New Public Management since the early 2000s has reinforced this ideology. It
has led government representatives to believing that public companies are less efficient than
those owned privately. Nepotism, clientelism and all possible forms of corruption in such
companies would justify that they should be privatised.
In some situations, privatisation can be justified but not always. Privatisation has worked in
the case of companies capable of competing with the private sector on their markets without
any effect on public policy. Such is the case when publicly owned companies operate in an
industry that is not strategic for public authorities. This can concern companies that were
nationalised as a way of bailing them out, privatised afterwards, once they have become
viable again.

Case n°5. Renault’s privatisation

A viable business
In 1945, after World War II the national alliance government including social democrats,
conservatives, Christian democrats and communists, decides that the French automaker
Renault should be nationalised. During the war, company owners had been actively
supporting the Nazis, reporting Jews and opponents to the occupier. The company had
also organised the deporting of people to concentration camps by providing the Nazis with
vehicles. After World War II, company owners were trialled and convicted of
Collaboration, the utmost form of national betrayal. The sanction decided upon by French
authorities was that the company would from then on serve the nation and its interests. For
this, it was decided that it would be nationalised. During about 50 years of public
ownership, successive governments have utilised this company as lab for managerial
experiments as well as a social barometer (Dreyfus, 2001; Thévenet, 1996).
In 1994, it appeared that public ownership was an impediment for strategic alliances on
the automotive market where bitter competition was requiring operational agility and
increasing financial needs. The French government was confronted with a dilemma: keep
Renault public with a risk of incapability of taking the international competition turn;
privatise it with the risk of losing this social lab and barometer. The government chose the
second option, privatising the company. A few years after its full privatisation, Renault

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 was in a capacity of engaging in partnerships and alliances with Volvo and then Nissan
and Mitsubishi (Cröger, 2016; Rakowski & Patz, 2009). In 2017, Renault appears as the
world leader on the automotive market (Ghosn, 2018).

Although some situations have been successful, as evidenced in the case of Renault, many
others have revealed dysfunctions in formerly publicly owned companies and led to losses in
skills. Such is especially vivid in the case of privatised companies whose activities supposedly
serve public interests. The risk is that the search for economy, efficiency and effectiveness
leads to managerial decisions undermining public policy. Decisions can be made without
public authorities having a say. Such is manifest in the case of economically non-profitable
activities a privatised company terminates at the expense of public policy’s national
continuity. Or, in the name of economy, efficiency and effectiveness, redundancy plans can be
orchestrated, resulting in massive unemployment and social dramas in entire regions (Carter
& Mueller, 2006; Funnell et al., 2009; Jupe, 2009).

Case n°6. British Rail

A dramatic privatisation
In 1948, British Rail was a public national company, operating trains, railway, harbours
and other activities relating to transport and accommodation. In 1982, the Margret
Thatcher government, influenced by the ambient Public Choice ideology, privatised all
those activities not directly relating to rail. In 1994, the John Major government followed
the work commenced by his predecessor and privatised British Rail split into franchises
operated by the private sector. Privatisation was complete in 1997.
At the time of privatisation, on February 4th 1997, poor track maintenance and
overcrowding, a train derailed in Bexley. The Bexley derailment appeared as the symptom
of British Rail’s dysfunctions aggravated by private ownership. Whilst public ownership
would invest in infrastructures and maintenance, the private sector has delayed these,
increasing derailment risk and attending to passengers’ safety.
Privatisation was promising that the privatised rail network would be operated more
efficiently and effectively than previously. Albeit, due to insufficient private investments
in technology, trains as well as stations have encountered major breakdowns, causing
recurrent passenger delays. British Rail trains were not in time.
Privatised British Rail, expected to be run economically, would close down numerous
regional stations and lines. Trains would not call anymore at numerous boroughs deemed
unprofitable for the private company. Regional areas have been more and more isolated
from big cities and the rest of the country. At the same time as operational performance
was lowered, prices dramatically increased for passengers. All in all, British Rail
passengers would pay more for a worse and more insecure service than they would when
the company was publicly owned (Cole, 2013; Cole & Cooper, 2006; Jupe & Crompton,
2006).

Privatising economically viable companies or activities is always a contestable and contested

economic decision. When a government privatises a profitable public company, the resources
generated are cashed once and not secure. If these are utilised to finance some public
investments in infrastructures, privatisation can operate as a financial transfer from a non-

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strategic activity towards the public good. In this case, privatisation is not too contestable.
Privatisation can however be contested when profitable companies on the long-term are sold
to generate short-term resources, thereby depriving the government from perennial and
sustainable resources. Resources from privatisation are received once and are not expected to
be reiterated. Such was the case in France in 2001 when the socialist government decided to
privatise publicly owned motorways. Opponents would argue that the tolls drivers were
paying to utilise these motorways were perennial and secure long-term resources relinquished
after privatisation (Carter & Mueller, 2006; Funnell et al., 2009; Jupe, 2009).
Also, it often happens that the government of a severely indebted country be urged to
privatise public companies so as to reimburse creditors, as Greece has been since 2008
(Morales et al., 2014) or Latin American countries since the 1986 Mexico crisis (Collins et
al., 1997; Neu, Everett, & Rahaman, 2009; Neu, Leiser, & Ocampo, 2008). Profitable and
economically viable activities end up being privatised to pay for non-productive expenses,
thereby hindering public policy democratically decided through polls.
Whatever the rationale for privatisation and the economic context are, budgeting takes the
same form as capital budgeting in private companies prior to a takeover or an IPO. That is, as
with private companies being listed, to be attractive to investors, initial stocks’ selling price
must offer a discount. Resultantly, the resources generated from privatisation are less than
company worth, as summarised in the formula below.

Revenues from privatisation = Public Company’s market capitalisation - premium on stocks

Figure 4.16. Budgeting resources from financial activities

2.2.3. Notes on a deficit budget

With the 2010 European debt crisis, several EU members have suggested that a Golden Rule
for public finances should be issued, whereby a nation’s budget could by no means be in
deficit. Whilst this Golden Rule was approved by countries whose budget had surpluses
(Germany, the Netherlands, Austria, Finland) countries having no surplus would reject the
idea. The dispute between proponents and opponents to such a Golden Rule was highlighting
the lack of clarity as to what a deficit budget means (Tănăsescu & Oliva, 2018).
Taking double entry bookkeeping principles seriously reveals that a budget is necessarily
balanced. On the balance sheet, assets equal liabilities; on the Income Statement, resources
equal expenditures. Even if these financial statements are provisional, they are balanced in
their essence. Likewise, a public budget is always balanced: expenses systematically equal
resources. Since governments set polity priorities and directions, anticipating the cost incurred
by their programmes, they determine the necessary resources to finance these. The main three
types of resources on which the public sector can count, when budgeted, serve to finance
public programmes.
What is called a deficit budget in the public sector is a primary budget where recurrent
resources and self-financing capacity are not sufficient to cover recurrent expenses. When
such is the case, governments tend to borrow money. As in the private sector, when debt,
jointly with equity, serves to finance investments and is reimbursed through the cash flows
generated, this is considered good financial management. Likewise, in the public sector, debt
is not a problem in itself, it becomes a problem when long-term debt serves finances short-
term and recurrent expenses. This highlights the fact that a government is living beyond its
means. The risk associated with such financial management practices in the public sector is
that, at some in point in time, the borrower becomes insolvent.

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Although there is no single path to public default, some recurrent patterns can albeit be
identified. Given the amounts of money needed by the public sector when it borrows,
conventional banks cannot respond, counting on their clients’ deposits. Likewise,
governments cannot count on funding from the Central Bank, this latter being independent
and, in most cases, not allowed to lend money to governments. Public authorities can count on
two options. The first option consists of borrowing directly from another government and
repaying it according to the contract terms and conditions. Given the amounts needed, this
option can only occur occasionally for a specific programme. It is rather the second option
whither governments have recourse: the issuance of treasury bonds on capital markets.
Until the European debt crisis, these treasury bonds were considered the risk-free asset and
were therefore serving as a basis for pricing other assets, as evidenced in the CAPM
(Markowitz, 1952). The principle underpinning treasury bonds is the borrower annually pays
a fixed interest unto loan maturity. At maturity, the principal is reimbursed. Treasury bonds’
viability rests upon a series of implicit assumptions. One is that the public investments shall
generate a residual value at the end of the project sufficient to pay for the principal. Unto
maturity, this public investment is supposed to generate cash flows paying for the annual
interest. Another assumption is that, with inflation, the value of the principal owed at maturity
will be less than it was when it was issued. The third assumption is that sovereign default is
impossible: in case of problems, public authorities can privatise the public sector, reduce
public spending or increase taxes.
A reason why the Public Choice has become the dominant paradigm in public economics lies
in the mismatch between politics and economics. A government is elected for a limited term
and, even if it is re-elected, it will be in office for a shorter time than loans. That is, a
government issues debt and cannot be held accountable for this at maturity. Resultantly,
according to Public Choice proponents, there is an incentive for governments to so borrow as
to exceeding reimbursement capacities. As, once voted in, each government does the same,
public debt so increases as to being unbearable. After a few decades, if no public-sector
reforms are undertaken, sovereign bankruptcy shall occur (Buchanan & Musgrave, 1999;
Orchard & Strutton, 1994).

Case n°7. The European debt crisis

Toxic loans and the Public Choice
The European debt crisis revealed another phenomenon specifically characterising local
governments and aggravating the Public Choice’s predictions: toxic loans. Needing lower
amounts than the nation, local governments are more likely to apply for loans from banks.
European banks would lend money to local governments at conditions apparently
advantageous: no or little repayment for the first years and indexed interest afterwards and
until maturity. These loans’ main characteristics was that repayment, even the coupon,
was entirely disconnected from governments’ term, instalments commencing afterwards.
This gave local governments the impression they would count on free loans, since their
successor would repay, not them. This phenomenon was aggravated by the fact that these
loans’ interest was unpredictable, often indexed on the exchange rate between two
overseas currencies. The most common practice was an interest indexed on the forward
exchange rate of the Swiss Franc against the Yen. As this exchange rate skyrocketed in
2010, the interest rate many European local governments were to repay became 25% of
the principal for the first instalment and then 40% for the second. The debt, born by the

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 next government, became unbearable, causing municipalities’ and other governments’
insolvency (Bayoumi, 2017).

Be the primary budget in deficit or in surplus, it includes the amounts that can be borrowed
and the expected instalment from this loan as well as instalment from previous debt and
principal for those arriving at maturity. The formula below summarises this.

Public debt = New loan – New loan instalment – Old loan instalments – Old loan principal
payment

Figure 4.17. Budgeting resources from financial activities

More appropriate than a principle saying that the budget must be balanced would be one on
the way it is and the weight of debt. This has been the case since 1993 with the Maastricht
convergence criteria explicitly setting an upper limit to public debt, 60% of the GDP and
sanctions for government breaching this principle. Discussions around public debt should not
just focus on cost cutting but should also emphasise how a government can collect income
and generate secure revenues for the future, not just through tax and fees.

Case n°8. Preparing the nation’s budget

40% of parliamentary time
A major feature of Western democracies is that the Parliament, in its capacity of citizens’
representative, must decide on the Budget. That is, the Parliament’s first role consists of
deciding polity priorities and programmes, including public spending and taxes. Such has
been the case since the English Revolution (Hill, 1991) and prolonged with the French
Revolution and the US Declaration of Independence (Furet, 1981, 1996).
Nowadays, the Parliament takes the budget very seriously. In June, the government
submits to MPs their intentions re polity for the following year. Parliamentary committee
spend the summer putting polity priorities into numbers, highlighting expenses and
required tax payments to arrive at a balanced budget.
Early September, after this first round of preparation, the committee submits this first draft
to the government. The Finance Minister examines this budget and makes decision with
the President or the Prime Minister as to polity priorities: which activities must be funded
first and which ones are secondary. Clashes may occur between various ministers, each of
them defending their own programmes (e.g. education, military, international aid to
development, police forces, public transport, etc.)
The government takes another month to prepare an alternative budget. Early October, the
budget is presented by the government to the House of Parliament. It is first discussed in a
specialised committee on the nation’s budget (Kyle & Peacey, 2002). The tentative budget
approved by the committee is then presented and discussed in a plenary session. Given the
amounts of money at play and the implications programmes can have for the country,
budget negotiations at the Chamber lasts about two weeks.

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 In a country whose Parliament only counts one Chamber (e.g. New Zealand or Israel),
once this budget is approved, it becomes effective. In countries where the Parliament
counts two Chambers (most countries), the approved budget is then submitted to the
second House. There, it is discussed for another fortnight and bares numerous
amendments submitted both to the government and the first Chamber. The government
usually takes two weeks to articulate their own comments and amendments on the
budget’s second draft. Mid-October, the first Chamber receives this second draft amended
by the government and votes its approval. This approved budget is submitted anew to the
second Chamber where it takes c. two weeks to approve or amend it. If the budget is
approved in the same terms by both Houses of Parliament, it becomes effective. If, as it
often happens, the second Chamber does not approve the same budget as the first House,
this latter has together with the government the last word. This occurs two weeks later,
early November (Robert, 1994). All in all, five months are spent on preparing the nation’s
budget, this exercise being the utmost form of democratic activity and vitality.

3. Public policy controls

Controls in the public sector emphasise a democratic need to know how taxpayers’ monies
have been utilised by public authorities. Depending on public money use, voters can re-elect
their representatives or vote for the opposing party. Public policy controls supposedly foster
public transparency and accountability to citizens (taxpayers). Management accounting helps
determine duties and responsibilities with clear boundaries. As in private companies and non-
profits, controls are underlain by the pursuit of public accountability, this latter taking the
same two forms: financial and operational. With the advent of the New Public Management
philosophy, the capability of managing public policy costs and service quality are subject to
controls. Whilst budgetary control and national audit aim at verifying that public monies have
effectively been used for what governments announced and that there is no spoilage cost and
management control emphasise governments’ operational accountability.

3.1. Cost accounting and control

Consistent with the Public Choice philosophy claiming that the public sector, in its deepest
essence, spoils taxpayers by running expensive programmes, most countries have engaged in
the modernising of their national management accounting systems since the early 2000s.
Inspired by New Public Management principles, these modernised management accounting
systems have endeavoured to measure polity’s economic efficiency (Kurunmäki, Lapsley, &
Melia, 2003; Kurunmäki & Miller, 2006). Claiming that the public sector should take
inspiration from private companies, New Public Management proponents seem to believe that
what can be managed is what can be measured (Gendron et al., 2001). Accordingly, public
management accounting systems are now expected to produce accurate figures of public
policy costing and outcomes expressible in monetary terms.

3.1.1. Costing the public sector

Activities’ costing even in the private sector is not always easy, although this task may seem
to be in the first place. Intuitively, as in the private sector, it does seem that costing public
policy lies in the intertwining if not the summation of labour, materials and equipment as well
as overhead costs. As in the private sector, the problem lies, not so much in the identification
of all these costs but in the selection of relevant costs and an appropriate costing system.
Depending on stage in product life cycle and initial investments’ absorption, overheads are

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allocated to a lesser or greater extent to units manufactured. Likewise, costing poses a series
of problems in non-manufacturing companies, especially when intangible assets are at stake.
Costing the public sector crystallises these difficulties already raised in private companies. As
the public sector deals with public monies and its management relates to democratic vitality, it
is implicitly assumed that this should rest upon absorption costing, whereby all costs,
including initial investments, hidden costs and sunk costs. But also, owing to increasing
governments’ risk aversion, expressed in the Precaution principle, not just all known induced
costs should be accounted for but also unknown costs (de Loo & Lowe, 2017; Hammit,
Rogers, Sand, & Wiener, 2013). To some extent, these costs relate externalities. That is,
governments should be capable of identifying all possible costly externalities and account for
them as part of polity cost. These aforementioned two difficulties lead to considering two
types of programmes and two approaches to polity costing.
The first type of programmes would be recurrent programmes whose cost is relatively
predictable, because in advance the traditional cost of running them is known in advance and
new investments can be anticipated. Such can be the case of kingly activities: public schools
(Agyemang, 2009; Bracci, 2009; Broadbent, Jacobs, & Laughlin, 1999; Edwards, Ezzamel,
McLean, & Robson, 2002), foreign affairs, justice and prisons, police and military (Andrew,
2007; Chwastiak, 2006; Collier, 2006; Funnell, 2006; Gallhofer & Haslam, 1991, 2006;
Hamilton & Ó hógartaigh, 2009). These traditional public policy programmes’ costs can be
accounted for in a relatively conventional manner, as developed in this chapter’s previous
sections).
The second type of programmes rests upon two components. On one hand, there are those
new programmes launched for the first time as costing systems are required. On the other
hand, there are these non-recurrent programmes. The first category comprises of new policies
implemented by a government newly appointed, including costs incurred by the improving or
upgrading of existing programmes (e.g. splitting classes into small groups, which results in
hiring more teaching staff and occupying more classroom space). The second category
consists of unexpected events or activities handled by public authorities. To date, mainly three
types of programmes have fallen within this category: the bailing out of defaulting national
private companies, such as Northern Rock (Brummer, 2008), the national insuring of natural
disasters’ casualties (Vakis, 2006), overseas military actions for peacekeeping or
peacemaking in conflict areas (Davis, 1995).
For these reasons, it appears that unexpected events handled by the public sector raise costs
that cannot be anticipated either. Overseas military operations’ cost is contingent on the
difficulties faced on the battle field, the number of soldiers and materials to be sent as well as
the amount of time they are staying. But also, in many cases, the overseas army that fought
locally is also in charge of reconstruction, whose costs depends on the extent of damages
undergone. All told, such costs, which can be very high, can never be anticipated and
estimated. That is, the concerned government must find resources instantly to be in a capacity
of financing them. The sole possibility for anticipating such costs’ occurring relates to
geopolitical intelligence whereby militaries and diplomats can envisage regions likely to be
concerned by conflicts calling for international intervention
(Government_Accountability_Office, 2018). Such a situation can confront governments in the
US, in the UK, France or Russia, known for sending forces overseas. Contrary to private
businesses, governments do not need to provision such geopolitical risks. Whilst the total cost
of a public policy programme can be estimated, what may pose some difficulties is the cost
per unit, since so doing would necessarily require a comprehensive model for allocating these
fixed and overhead costs, as evidenced in the example below.

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 Case n°9. Costing a soldier
Issues in adopting a costing system
In a country’s budget, the total amounts granted to Defence are known, covering
militaries’ wages, the acquisition of new equipment and the maintenance of existing ones.
Dividing this by the number of soldiers does not allow to estimate how much a single
soldier costs. Owing to career structure, the cost of a soldier should certainly be
considered from the Cadets’ school unto death, be it at war or during peacetime. The list
costs is not exhaustive but will comprehend the following:
- At Cadets’ school:
Cadets’ school training (Cadet’s compensation, equipment, food and beverage,
medical surveillance, instructor’s wages, buildings, etc.)
- After school, during peacetime:
Flat wage, promotions-related wage, uniform, equipment, material, barracks,
accommodation, medical surveillance, drills, etc.
- During wartime:
Bonuses for overseas operations, equipment, material, uniforms, transport,
accommodation, medical assistance, possible repatriation, etc.
- Post-war costs:
If the soldier dies at war, allowance to the family and children’s education, family
accommodation, funeral, remembrance ceremonies, training for reintegration into
civil society, etc.
All the above costs are quite clear during peacetime as these are relatively predictable.
World War I illustrated the problem of soldiers’ costing (Gallhofer & Haslam, 1991, 2006;
Keynes, 1919). It was not too difficult planning and accounting for those. A problem
arises during wartime: training can be predicted, unless it has to be shortened because the
war’s start. Such was the case of European officers who joined military schools between
1914 and 1916. In this case, the cost of training is less, but induces unexpected costs,
those costs relating to sending officers to the battlefront without sufficient training. They
might not make the right decisions, thereby leading to extra costs (materials lost,
commanded soldiers’ dying or missing). Given the short duration of their military training,
they were not perfectly accurate at utilising their weapons and ammunitions, causing
massive wastes. This was aggravated by the fact that, in real-life, targets were armed and
were moving.
In the war’s aftermath, other costs for a soldier are borne by the defeated country: cost of
reconstruction, as incurred by Germany after World War I. Such was Germany’s case
when the Peace Treaty signed with France was anticipating an annual fee to be paid to the
victorious country. These would last until 1985 and include pensions and medical
treatment to veterans, the total cost of reconstructing villages and public infrastructures.
To these costs were associated reparations for the moral pain caused to France and all
those families who lost relatives at war. All told, the total cost of a soldier in the defeated
German Army was far more than just the cost of wages, overheads and materials.

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 3.1.2. Measuring policy’s impact
The logic of cost control in public services also implies that the public policy’s outcomes be
anticipated and measured. These positive externalities need to be first inventoried. Once this
is done is it necessary to assign to them a metric, relating to public policy’s announced
objectives. Within a New Public Management logic, these measures should ideally be
financialised, hence polity’s efficiency can be assessed with greater clarity. Owing to
management framework, prior to launching new programmes, ministries are now required to
conduct impact studies and prepare a schedule of impact. In order to be convincing for the
parliament ultimately voting the budget, these impact studies must be extremely detailed and
accurate.
These impact studies can be conducted by four types of bodies. In a series of cases, it is the
ministry itself that conducts them, basing their estimates on proofed econometric models. In
this case, model credentials mean study credibility. The main risk associated with this option
precisely lies in that the ministry is both judge and party in this matter. The models used may
be overly optimistic and the promised impact may not eventuate. Therefore, many countries
privilege the second option consisting of impact studies ordered from independent
governmental agencies whose role is to produce an independent opinion and advice on public
policy. As these agencies are totally independent, their advice counts. The third option
consists of calling on scholars known for the works on the subject matter. Be they paid extra
money or not for their impact study, what is advertised is their expertise at a particular
subject. Their conclusions are not contestable and rarely contested. Pursuant to the New
Public Management philosophy, the impact study is outsourced to external consultants,
deemed experts at the subject matter and independent from governmental authorities.

3.2. Operational performance management

Operational performance management appears as an important feature of public policy
controls, inasmuch as this is what enables to follow up polity’s operationalising. At elections,
candidates, devise their programme for the next term and articulate promises to get citizens’
votes. Operational performance management is aimed at ensuring that the electoral promises
made have eventually been kept and that the expected outcomes highlighted in impact studies
have eventuated.

3.2.1. KPIs as a political matter

Identifying appropriate KPIs for public policy is a strategic and political exercise for the
public sector. Such KPIs relate to what counts to an organisation and its stakeholders.
Accordingly, KPIs must be the most accurate possible measure of what is deemed central to
the organisation. As with the Balanced Scorecard these KPIs must not be too many in number
and need to be focused. When discussing non-financial items or showing how finance should
occur as the consequence of strategic orientation and operational choices, it appears that KPIs
should be as few in number as possible and user-centred.
Whilst management accountants in the private sector can purport to identifying objective
KPIs, directly relating to strategic orientations such is not quite the case in the public sector.
Therein, devising KPIs remains a political exercise, since these play a dual role. On one hand,
they serve for the public service’s day-to-day management. In this respect, as in any other
organisation, they must enable management decision-making (Anthony, 1965, 1988;
Anthony, Dearden, & Bedford, 1984; Kaplan & Johnson, 1987; Kaplan & Norton, 2008). On
the other hand, KPIs in the public sector must serve the government in office by showing
ministerial achievements, usually in a flattering manner. This can be explained by the fact
that, when a government in place is running again at the next polls, they are always asked
what their achievements have been. If these are in line with the promises made during the

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previous campaign, and if voters want the same policy to be conducted, they may re-elect
them. Conversely, if promises have not been kept or achievements not satisfactory, citizens
may decide to vote for another party or coalition. In other words, the disclosing of results
associated with KPIs for polity appears as the utmost form of political accountability to
citizens (Broadbent et al., 1996; Broadbent & Laughlin, 2003a). Therefore, controlling the
civil service, ministers and their representatives are also in a position enabling them to choose
those KPIs that best reflect what they want to tell their electorate. Some KPIs are more likely
to highlight weaknesses or loopholes whilst others are more likely to confirm expected
achievements. Within such a political-strategic context, it is understandable that the choice of
KPIs for polity is a highly political and sensitive exercise (Benito, Montesinos, & Bastida,
2008).
Assuming that the choice of KPIs is a form of political activism or campaigning, it also
appears that these must be intelligible to citizens. The intelligibility imperative can be met at
the expense of KPI accuracy. As what matters to governments in office is to disclose the
promised results, the KPIs chosen are likely to be approximate measures of what has
eventually been done and achieved. Therefore, in political debates, either on television or at
the House of Parliament, the results disclosed by a government in office are often challenged
by the opposition. Very often, opponents to the government present their own KPIs. The
metrics associated therewith are often less flattering than those presented by the government.
Inspired by the Public Choice doctrine, New Public Management proponents have claimed
that performance management in the public sector is especially important to determine the
righteous use of taxpayers’ monies and enable democratic control over governments. As is
often the case, this ambitious programme can be perverted by political activism and may lead
to creative behaviours (Benito et al., 2008), if not proving counter-productive. Given the
power of the visual enabled through the use of political KPIs (Quattrone, 2009), the political
sphere may find over-relying on numbers, facts and figures, thereby highlighting a process of
accountingisation (Kraus, 2012). In order to prove in good faith their action and results,
ministers and ministries’ spokespersons would tend to feed their discourses with a profusion
of numbers that may distract the audience from the general political point made. It has been
noticed that political discourses have lost direction and meaning, because they mostly reflect
debates on numbers and their honesty. It is therefore no real surprise that citizens have over
years lost interest in the public thing and political debates, even abstaining from polling
(Badiou, 2005).

3.2.2. Issues in over-reliance on metrics

Such overemphasis placed on metrics supposed to highlight the performance of a policy
decided by a government is especially vivid in areas particularly critical to the country. For
instance, metrics relating to education performance subsequent to the annual disclosure of
PISA results leads to debating numbers of pupils commanding literacy, not pedagogy.
Likewise, subsequent to the Arab Springs, the revival of mass and illegal immigration into
developed countries has entered into public debates through figures of how many people have
been stopped at borders or deported, not of actions taken for peacemaking in refugees’ and
migrants’ home countries (Rosen & Young, 2016). Most public policy areas are concerned
with KPIs’ political dimension and over-reliance on metrics at the expense of polity itself.
Not just are core issues in public policy overlooked when the public sector is concerned with
proving its achievements through performance measures. As with anything, excesses and
exaggeration are possible risks. In the case of the public sector, where decision-makers are in
a capacity of being judge and party, severe misalignments between disclosure and reality as
perceived by citizens can arise. Paraphrasing Lincoln on Democracy, such is the case when
over-emphasising metrics leads to manage numbers by numbers for numbers. In the public

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sector more than in private-sector organisations, there is a risk that the metrics employed
become an end per se and be not just an aid for governments and policymaking. At the
grassroots level, these public policy controls may become problematic, because they require
new expertise and duties from local civil servants, oftentimes disorganising the public service.
The implementing of controls borrowed from the private sector has often resulted in civil
servants, experts at one field, acting as hybrids (Kurunmäki & Miller, 2006, 2011; Miller et
al., 2008). They have been devolved some control tasks and duties outwith their expertise
area. This poses two series of problems. Firstly, being a good professional in one field does
not necessarily mean that the civil servant has the necessary managerial skills for public
policy control. This professional, e.g. an acknowledged professor in medicine head of a
hospital department, does not necessarily have management, accounting or finance skills.
Secondly, when an expert at one field is required to take over managerial duties, this
mechanically results in less time spent on their core competency and activity. Such distracting
from their core occupation may result in them progressively losing their initial skills. For
instance, a surgeon doing more computations than operations may lose gesture accuracy and
become deskilled over time (Chua, 1995; Coombs, 1987). Ultimately, there is a real risk that
core skills be lost and service quality lowered. Opponents to managerialism and
accountingisation in the public sector warn agains these risks implied by performance
management in the public sector (Mueller & Carter, 2007; Saravanamuthu & Filling, 2004).

Case n°10. A Police Constable’s performance

Political and counter-productive KPIs
It is central to democracy that citizens subject themselves to the legitimate authority that in
return guarantees their security. In the Middle Ages and until the English Revolution, such
was Lords’ role towards peasants in their jurisdictions. With the advent of modern
democracy, this has become the State’s role (Weber, 1922). Every government is
confronted with crime and other forms of delict. A candidate’s credibility to win polls lies
in his or her programmes against criminality and a government’s results are assessed on
the basis of its capability of lowering crime.
Since the early 2000s, in most developed countries, security has been placed in most
developed countries as the utmost political demands on governments. These demands
have been increasingly articulated to prove police forces’ involvement and performance in
fighting crime. Aggregated measures have been articulated, whereby figures of crime
reduction have been periodically disclosed by the Home Office (Caless & Owens, 2016).
In police stations, commissioners are required to report to the Home Office their teams’
performance, which implies that Police Constables’ performance be assessed. In fact, KPI
setting poses a series of practical and operational problems. Quite often, the following two
KPIs have been chosen and then relinquished (Caless & Owens, 2016).
- number of arrests
Number of arrests by PC and by police station can be presented as a metric for effective
fight against crime. Any person suspected of breaching the law can be arrested and
investigated, increasing performance by a unit. It has appeared that, in order to
outperform, many PCs were encouraged to arrest people with no really good reason:
children for jaywalking, car drivers for default lights, or foreigners to check their
documents.

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 - number of solved cases
As arrest does not necessarily mean that the person has eventually breached the law,
committed a crime and been convicted, number of convictions has slowly arisen as an
alternative measure of PCs’ performance. What is emphasised is the number of people
arrested who have been prosecuted and eventually convicted. In order to achieve high,
many PCs have been encouraged to privilege cases that can be relatively easily solved.
This has implied that cases requiring heavy teams and resources and long-term
investigations were discouraged. Instead of endeavouring to dismantle drug trafficking
networks or chasing a serial rapist in a district, PCs were encouraged to give tickets for
wrong car parking or excessive speed.
It has resulted from these KPIs that Police Constables were high performers with excellent
records. At the same time, independent agencies have denounced major dysfunctions in
police core activity and highlighted a dual phenomenon. On one hand, notwithstanding
increased performance, police forces were less and less popular among the public. On the
other hand, the insecurity feeling has grown amidst the population. This was explained by
the conjunction of two factors. Firstly, by solving simple cases at the expense of the
population, police forces have increased their own unpopularity. Secondly, in order to
disclose high performance figures, victims of assaults were encouraged by PCs not to
lodge complaints, under various pretext, such as insufficient evidence. It was revealed that
these complaints would have related to cases that could not be solved (e.g. a stolen
handbag, a robbery in absence of CCTV surveillance, etc.) Ultimately, police forces were
accused to not to serve the public (Caless & Owens, 2016; Oliver, 1996).

3.2.3. Execution control

The third dimension of public policy controls consists of execution control. Unlike
performance management and measurement, execution control does not focus on
achievements but on processes, viz. how public policy is conducted. This is very similar to
process controls in private companies: what matters is how things are done, how this fosters
quality, what lessons can be learnt thence and what are possible avenues for improvement
(Kaplan & Norton, 2008; Simons, 2000).

3.2.3.1. Focused and specific investigations

In the public sector, execution controls have traditionally presented as surprise visits to an
institution and observation of how things are done. The assumption was that a planned or
scheduled visit may give inspectors a biased view of how public policy is eventually
conducted. Historically, school inspectors would visit teachers in their classroom and observe
how they teach a certain subject, look into the class diary and interview pupils, colleagues or
principals. Over time, it has appeared that such surprise controls could prove problematic. In
places, they could disorganise a well-functioning activity or represent a waste of time. Such
would be the case when a school inspector decided to visit a teacher while this latter is out on
a class excursion (Garvey, 2017). For these reasons, execution controls are now scheduled,
controlees being notified in advance, so as to ensure their availability.
The object of execution control through inspection varies from one policy to another.
Processes are different in a school to those in a hospital or a fire station. Therefore, specific
and focused controls are exerted. But also, what deserves to be controlled is contingent upon a
government’s strategic priorities. For instance, France, the United Kingdom and the US have
often been denounced by NGOs for inhumane detention conditions in their prisons whilst
Norway and the Netherlands have been presented as role models. Accordingly, execution

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controls in French, British and American jails may focus on convicts’ health and rights’
protection. Differently, controls in Norwegian or Dutch prisons may emphasise high-quality
continuity (Chabbal, 2009, 2014). As the focus of execution control is specific to each public
policy programme, there is obviously no general rule as to what is being investigated and how
this is done. Albeit, some recurrent patterns as to who controls exist, conveying mainly three
forms: independent agencies, the Parliament and parliamentary committees, and citizens.

3.2.3.2. Independent agencies

As discussed earlier in this chapter, the first form known in the twenty-first century is that of
controls exerted by independent agencies reporting their observations and articulating
recommendations for improvement. These independent agencies can be of three orders.
First of all, independent governmental agencies can be in charge of these controls. In this
case, investigators have been independently appointed by their institution without any
governmental interference and voice. These inspectors are entitled full investigation rights
and can count on all necessary means and resources to conduct their investigations. They only
report to the agency’s Managing Director who signs the report and discloses it. Depending on
content gravity, disclosure can be mediatised or left discreet. In most democratic countries,
especially Western, each public policy area can be controlled by a specialised agency (Thiel,
2012). When observations or conclusions are severe or highlight major dysfunction, it is not
unusual that it enters into the public sphere and leads to a political debate. The concerned
ministers and their opponents can argue on the basis of these reports’ contents: those ruling
the country are demanded accounts of the way they conduct operations.
The second form such controls can take consists of investigations conducted by NGOs whose
voice counts in the world. As with controls exerted by independent agencies, these are the fact
of NGOs operating in a specific public policy realm. Although there is no legal or
constitutional obligation that governments allow such controls, they often do. The sole fact of
allowing such controls is evidence of democratic vitality. By allowing such controls and
possible unpleasant reports from investigators, governments prove that they accept criticism
and operate in full transparency. If the reports disclosed by the NGO proves problematic, its
contents can be publicly debated. Such specialised controls are particularly known in the areas
of penitentiary policy with Amnesty International or Human Rights Watch, environment
policy with GreenPeace, or immigration policy with local NGOs following how refugees or
migrants are treated upon entry into a new country.
The third form of control is exerted by international, intergovernmental agencies. As these are
extensions from intergovernmental organisations whereof the country is an active and
contributing member, they are allowed in national territory. Their inspectors independently
conduct investigations and write a report they submit to the General Secretary. Unlike these
other reports that are made public and are then discussed in the political sphere, those
prepared by intergovernmental agencies are not. These reports serve a diplomatic purpose and
are discussed by the organisation’ General Secretary and the head of state or national
government in private. As it is known that these reports are classified, no double talk occurs,
as could be the case with other forms of reports. It is then the government’s choice only to
disclose or not the observations and recommendations made by investigators. If these are
disclosed, they fall within the remit of public debate and can be discussed by the opposition.
Usually, democratic regimes tend to make these reports public, even when they are not too
flattering. Such reports are issued by specialised agencies and can cover any dimension of
public policy, depending on the main issues confronting the country. The UNHCR
periodically investigates countries hosting refugees or migrants and reports on this to national
governments in the concerned countries (e.g. France, the United Kingdom, Italy, Greece or
Australia). Agencies from economic and financial institutions, such as the IMF or the World

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Bank can do this with countries benefitting from their loans (e.g. Argentina since the 2001
default, Greece, Spain and Portugal since the European debt crisis).

3.2.3.3. The parliament and parliamentary committees

The second known form of execution controls proceeds from parliamentary activity and MPs’
activism. In their capacity of citizens’ representatives, MPs are supposedly entitled full rights
to control how the government conducts public policy. Unlike independent agencies, MPs’
rights enable them to all on the government and ask its members accounts of public policy
conduct without prior notice. These interpellations can take on different forms. The best-
known form is that of public interpellating on the occasion of a session at the House of
Parliament. Most democratic countries’ constitutions establish that an MP can publicly
interpellate the Prime Minister or a minister on a policy matter relating to their jurisdiction. In
return, parliamentary laws force the interpellated person to respond to the question asked.
Usually, parliamentary interpellation occurs in reaction to a report released by an independent
agency, whichever its status is (governmental, non-governmental or inter-governmental). An
MP, specialised in the topic addressed by the agency, is informed of the conclusions drawn
and recommendations articulated and asks the concerned minister for more specifications.
Although this interpellating occurs without prior notice, the concerned minister responds on
the spot, developing an argument proceeding from his or her reaction to the report received
from the agency. The first dimension of parliamentary control of public policy execution
consists of public questions and answers at the House of Parliament, often relayed by the
media. If, for whatever reason, the interpellated minister, does not respond to an MP, this can
become the day’s headlines on the news and highlight governmental weaknesses. Therefore, it
is very unusual that, in a Western democracy, a minister, when interpellated, would not
respond. When the response given is perceived as double talk or insufficient, the demanding
MP engages in a dialogue unto being fulfilled (Kyle & Peacey, 2002).
The second form parliamentary control consists of trialling and auditioning any personality a
parliamentary specialised committee deems especially qualified. To conduct their controls,
MPs gather in specialised committees, each of them relating to a specific public policy
programme. In this capacity, they can count on civil servants, personal assistants and other
experts to answer any question they may need to ask. It is most common that a parliamentary
specialised committee convokes these people to a public trial. Any citizen willing to attend is
allowed in, as this questions and answers participate in democratic vitality. The specialised
committee can count on reports written by experts from various origins and backgrounds and
ask specific questions. Contrary to public interpellations of ministers, these auditions are
occasions where technical questions can be asked and technical answers thither can be given.
Although convoked people are not compelled to respond to MPs’ questions as they would in
court, they tend to do their best to fulfil panel requirements. Those people potentially trialled
can be senior civil servants, administration directors, private entrepreneurs, NGO
representatives or anyone deemed qualified on the subject. These public auditions enable
parliamentary specialised committee members to make their own judgment as to public policy
conduct. Based on this judgement, they can interpellate government members and engage in a
public debate with them.
The third form taken by parliamentary execution control over public policy consists of official
visits to the field, as public investigators would. That is, a handful of MPs interested in a
specific public policy subject can decide to visit an institution and meet with local actors to
make their own opinion as to how public policy is executed. As for independent investigators,
surprise visits expose MPs to unexpected events, such as people unavailability or dysfunction
in a public administration. Therefore, most of the, parliamentarians’ visits are planned or
scheduled, hence there is always a qualified organising committee locally expecting and

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looking after them. Some critical public policy items requiring an urgent response from the
government may result in surprise visits to the field. Such is often the case when it comes to
detention conditions or refugee policy after an agency disclosed a report highlighting major
dysfunctions (Chabbal, 2009, 2014; Kyle & Peacey, 2002). Based upon these observations,
MPs can interpellate the government before the House of Parliament and expect responses.

3.2.3.4. Citizens
As every single control is exerted on behalf and in the name of citizens (not just taxpayers),
these may be invited to partake in some control activities. this can take on numerous forms.
The best-known of these is the publicity of trials and investigations whereby citizens willing
to attend are allowed to. In some countries, these citizens are entitled to ask questions as MPs
would. In some others, they are not but can observe follow the discussions and make their
own judgement.
The best-known form of public policy execution control by citizen occurs through polls. With
their votes, citizens iterate their confidence in the government in office or, on the contrary,
manifest their disapproval. In this latter case, they exert an ex post execution control by either
re-electing the same people or voting their opponents in. Since the early 1990s, a new
phenomenon has characterised most developed countries, votes for extremists. After the
collapse of the USSR, right-extremists have collected a growing number of votes. Since the
2008 global financial crisis and its discontents, Capitalism has been dramatically called into
question, resulting in the uprise of a new extreme-leftist movements jointly to the alt-right,
such as Occupy Wall Street (Carter, 2005; Gitlin, 2013; Hainsworth, 2008; Samuel, 2012).
This is the utmost form of control the Public Choice has been highlighting: approval or
disapproval through vote, with the belief that radical votes express a stronger rejection of
current public policy.
Another form of execution control exerted by citizens consists of having some participating in
various trialling or auditioning panels. These citizens are then selected to partake in
parliamentarians’ control activities. In this capacity, they are entitled the same rights as MPs
in terms of access to the field and rights to be answered by the concerned people. What
however differs from MPs’ rights is that these citizens, not elected and therefore not
representing their peer citizens, are not allowed to publicly interpellate the government before
the Parliament House. Other non-constitutional means are possible, such as interpellation
through a commentary published in a newspaper and calling for a response or any public
utterance before the media and calling for a response from an official. This often happens
when it comes to civil rights protection or guarantee, such as abortion right, same-sex
marriage, minorities’ protection or in change in legal majority age. The best-known example
is that of the civil rights movement in the United States between 1941 and 1968 (Lawson,
2008; Luders, 2010).
A third form of execution control citizens can exert lies the use of their petition right. In some
countries, such as Switzerland or Italy, when a petition regularly signed by 10% of the
electorate is submitted to the parliament, this has to be discussed as a law project. In the Swiss
case, this petition must be submitted by the parliament to a public consultation taking the
form of a referendum. In the Italian case, the petition must be discussed before the Parliament,
so that a law can be resultantly voted. Apart from these two specific cases where citizens’
petition right is set in the constitution, numerous other forms exist. One of them consists of
the fact that MPs, being elected in a county, can receive proposals from their voters. If they
feel that they can support the proposal by submitting it to the Parliament in their own name,
citizens can have their control right represented and born by someone. In countries like
France, such has long been the case with citizens urging their local MPs to review laws

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organising hunting and fishing in regional areas. In the twenty-first century, with the advent
of social media, and as evidenced through Occupy Wall Street in the US the Indognados in
Spain or Nuit Debout in France between 2009 and 2016, citizens can petition electronically
and attract governments’ or parliamentarians’ attention re subjects that matter to them. In the
case of these new social movements, leftist representatives have relayed people’s aspirations
before the parliament and in political debates (Staggenborg, 2015).
The last form is well-known under the derogatory term lobbying and characterises the
European Union as well as the United States (Baumgartner, Berry, Hojnacki, Kimball, &
Leech, 2009; Zetter, 2014). In Brussels and in Washington, group representatives (citizens,
industries, companies, non-profits, etc.) are headquartered, attend parliamentary debates and
public auditions, and regularly submit proposals to parliamentarians or EU commissioners.
These proposals consist of entirely laws or regulations written, using legal terms and
presented as they would look if voted. In these cases, as in that of citizens addressing their
local MP, the parliamentarian or commissioner concerned appropriates the project and
supports it before his or her peers for discussion and vote. In the US, the best-known lobbying
activities relate to the tobacco industry, the National Rifle Association or Evangelical
movements. In the European Union, lobbies are expressly allowed into the European
Parliament and the European Commission where they can have offices and are accredited
spokespartners. In this capacity, they are regularly solicited on public policy mattes likely to
have an impact on them. These lobbies to the European Union can be syndicates, unions,
charities or any other organised body (De Raeve, 2017).

Conclusion

This chapter showed how public sector accounting and controls are conceived of and
practiced in democratic countries. Since the English Revolution, it has appeared that
controlling how taxpayers’ monies are utilised and how public policy is executed are the core
of democratic activity and vitality. Therefore, discussing management accounting and control
in the public sector is always a politically sensitive question, systematically highlighting
different worldviews or notions of government.
Borrowed from the Public Choice, itself inspiring the New Public Management movement,
controls in the public sector have highlighted increasing calls for governments’ public and
political accountability to citizens. This has raised new questions pertaining to the scope and
span of controls in the public sector. Whilst the New Public Management movement suggests
that public sector controls should borrow from those at work in the private sector this chapter
has endeavoured to highlight some of the limits and problems such controls would raise. Such
has been done through the highlighting of the main arguments presented by their proponents
and opponents.
Regardless of political or ideological disputes, it does appear that management accounting and
controls in the public sector are aimed at proving to taxpayers that their monies have been
used for the purpose they were collected: public policy objectives. In return, as polity
influences people’s lives, governments are held accountable for the effective conduct of the
policy for which they were elected. This includes all types of operation and execution
controls.
All told, in the case of the public sector, strategic management accounting consists of
identifying what counts as public policy priorities and follow through. It also appears that the
choice of a control or an accounting system is in itself politically sensitive, insofar as different
things can be emphasised. In sum, depending on who, government or opponents, needs
management accounting figures, the management control system eventually needed and

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utilised differs. This reinforces one more time the idea that management control and
accounting can in no way and by no means produce neutral and objective figures. These are
always oriented towards an end.

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