The Potential Gains from Creative Accounting in English Local Government

Abstract

In each of the years in the period 81/82 to 85/86 the Government has set individual expenditure targets for English local authorities. Penalties, in the form of withdrawal of grant, were incurred if these targets were exceeded, and this suggests an incentive to reduce expenditure. However, targets were based on previous years' budgets, so there has been a simultaneous incentive to maintain high levels of reported expenditure in order to secure higher targets in the future. By use of dynamic programming, I explore in this paper the pattern of budgets required by local authorities in the years 82/83 to 85/86 in order to maximise grant receipts, whilst maintaining constant expenditure in real terms. It is found that increases in grant of up to 50% can be engineered by shifting reported expenditure between the years in question.