Government: ‘The insurer of last resort’

By Erika Pozo

The pandemic has given rise to what financial regulators would deem a catastrophic event, testing the solvency and resilience of companies worldwide. While the financial crisis back in 2008 severely stressed international financial institutions, this pandemic has put a significant strain on many vulnerable sectors and, indeed, our public finances.

The crisis has effectively affirmed the role of our government as the insurer of last resort, stepping in to prevent systemic failures and preserve vulnerable businesses and jobs. It is clear that there is an implicit expectation worldwide that governments will intervene and mitigate the damage from emerging risks, be it a bank collapse, health crisis or natural disaster, which is why it is imperative for government to have a comprehensive risk management system of its own, like those imposed on financial institutions such as insurers, to ensure that contingencies are in place for catastrophic eventualities such as this one.

Developing a risk management strategy is imperative and should be an initiative tackled inside the walls of government as well as outside in the wider business community. Government should look to support and encourage companies to strengthen their financial resilience to better prepare themselves for future eventualities, thus reducing the ultimate reliance on public economic packages. Government-funded schemes and programmes targeted to educate and promote risk awareness would be highly beneficial to the smaller business community and would assist small businesses and the self-employed build their resilience. With the UK’s first National Preparedness Committee meeting very recently, it is clear that we should be working towards embedding a risk management culture.

We cannot ignore the reality that government has a finite limit to the resources it can call upon to pay its obligations. With the government having borrowed heavily to finance these extraordinary fiscal interventions, and securing a further £500m borrowing guarantee from the UK, which could mean extra borrowing, we have lost our financial sovereignty. Rebuilding our public finances will now be challenging. With the level of our public debt burdening future generations, restoring our public purse to a sound financial position will require a long-term comprehensive plan, in order for our children and grandchildren to be able to tackle the legacy of debt its governments have engineered.

Furthermore, the extension of the budget for a further 12 months, whilst a convincing argument, has raised a few eyebrows. With a budget deficit expected this year, the evident lack of enthusiasm for effective forecasting and review of departmental costs can be

deemed as reckless as the administration’s spending habits. A zero-based budgeting approach, for the remaining 12-24 month period would have helped contain costs and maintained departmental managers closely aligned with budgetary expectations. However, the manner within which the budget seems to be monitored and controlled gives inevitable rise to wastage and neglect during a time in our economic history where conservative spending is needed.

The 24 month performance to 31 March 2021 will see the public balance sheet significantly stressed, with the debt-to-GDP ratio reaching historic unprecedented levels. The questions being asked from all across the political spectrum are; how will this debt be managed and repaid, and ultimately how many generations will be affected?

We must establish what level of public debt is acceptable to pass on to the next generation, as opposed to what is legally permissible, as failing to consider the long-term effects will entrench intergenerational unfairness and constrain future governments in the decisions they will be able to make. It is also vital to assess the long-term benefits and sustainability of the spend. Are we developing ‘good debt’ by investing in long-term sustainable options, such as diversifying into sectors within the green economy and upskilling our workforce, or are we committed to ‘bad debt’ that will not enhance our quality of life or deliver anything of value to our future generations.

With no long-term vision setting out financial objectives which protect the tax-payer, there is widespread concern over our financial strength and the stewardship of our economic resources. A long-term financial plan within a risk management framework must be developed and communicated in a transparent manner. This would help regain public confidence and raise the level of acceptance of any fiscal changes that may be required.

Erika Pozo is a finance professional. She stood as a candidate for Together Gibraltar at the last general election.