Humans join forces to accomplish shared goals. Or as the saying goes, “If you want to go fast, go alone. If you want to go far, go together.” States are in essence just that,

States are in essence just that, organisations that allow us to pool our resources to achieve a shared goal. While there are many theories about the emergence of states, most would agree that legitimate states today are defined by their ability to provide safety and various services to the individuals residing inside their territory and, as a consequence, contribute to their prosperity.

Yet in order to deliver on this promise in the long run, governments must not just create the right outcomes for citizens, but do so in a sustainable way. Impact in the short-term is not worth much if it cannot be sustained over generations.

This means that government policies and programmes must produce a positive net result for the state, after costs and investments. If the balance between costs and benefits of all government action is skewed the wrong way for too long, the long-term viability of the state will be undermined.

There is just one problem. The vast majority of governments around the world rely on crude accounting methods which make such considerations impossible.

Fixing the finances

Shockingly even in the OECD – the club of rich, industrialised countries – the overwhelming majority of governments use single-entry bookkeeping to control their finances. “Cameralism”, as this method is called in government accounting jargon, is a primitive way of keeping track of finances. There are good reasons why no business of any substantial size uses it anymore. Single-entry bookkeeping does for instance not allow for the tracking of assets or liabilities. Both are crucial to the long-term financial sustainability of any organisation, including states.

But maybe it is just too hard?

Not so. New Zealand and a small number of others have shown it is possible to manage a country’s public finances with a balance sheet, a cash flow statement and a profit and loss statement. It is perhaps no coincidence that New Zealand is also one of the few countries to use actuarial methods to calculate the lifetime value of social policies. These are not just niceties that get accountants excited. These financial management tools allow the country to take the long view with regards to social and welfare policies and to do what’s best for their citizens, rather than doing what’s best for an annual budget.

Without modern bookkeeping and accounting no major organisation can be run sustainably, let alone an enormous government. Without those financial management tools leaders cannot know the true costs of policies and cannot evaluate whether they are generating or destroying value.

Bang for the buck

But if the benefits of modern accounting methods are so obvious, why have states been so reluctant to adopt them?

Governments, unlike companies, under normal circumstances face only limited competition. For the most part they are monopoly providers of services. Don’t like the street cleaning services your local council is providing? You can voice your discontent and try to get things changed, but it’s much harder than switching to another grocery store. You can also exit and move to another country, but it’s an option only really open to the select few.

Introducing modern financial management into government takes a bit of effort. But as social challenges – and the policies that are meant to respond to them – increase in complexity, states will be left with little choice. Their citizens’ safety, prosperity and liberty for generations to come depends on them doing so.