Always in the front line: the impossible demands of crisis response

By on 08/02/2022 | Updated on 16/02/2022
Governments must act to protect national economies from shocks such as extreme weather and financial crises – but a turbulent era, taxpayers and public servants are paying a heavy price. Illustration by Katy Smith

Since 2008, governments have protected businesses through crisis after crisis, stepping in to safeguard people’s livelihoods and national economies. At the Global Government Finance Summit, Adam Branson heard finance leaders warn of unsustainable demands on the public sector – and question whether government can carry every risk

It was a good line, but also one intended to make a serious point. “We have experienced one crisis after another,” said Leena Mörttinen, Finland’s permanent under-secretary for international and financial markets affairs. “We had the global financial crisis, then in Europe it turned into the Euro crisis. And now, it’s the pandemic. The next one is probably aliens!” 

Mörttinen was speaking in the session entitled ‘Threat assessment: matching risk and resources’ at the 2021 Global Government Finance Summit – an annual gathering for civil service finance chiefs – and her comments emphasised the need for governments to constantly prepare for the next crisis. As the pandemic has made clear, some countries are better able to address new crises than others; and with health, climate change, finance, politics and social issues all generating large-scale disruptions in recent years, governments need to be looking in several directions at once.

So, how did the participants – senior leaders from the finance departments of nine national governments – think that countries can best improve their preparedness? How can they best assess and address risks across the policy portfolio? And how can finance professionals prepare themselves to address the economic and financial consequences of risks managed in the first instance by other parts of government? 

For Mörttinen, potential threats tend to fall into three now well-known categories: social, environmental, and economic. The problem, she said, is that treasuries and finance ministries need to address all three areas concurrently, avoiding pressure from interested parties to prioritise a single issue. “There should be a common, shared view of how to reach all of those at the same time,” she said.  

“That’s a particularly big challenge at the moment, because it seems to me that people are talking past each other. Somebody says the social issues are the most important ones: for example, in Finland we have an aging population and we have to do something about that. And some people say: ‘No, the most important thing is the ecological issue’. And then we have these huge pressures on public finances at the same time, due to the fact that we’ve experienced so many crises.” 

Who carries the risk?

Indeed, as Mörttinen pointed out, many governments have built up huge public debts by spending vast sums on tackling previous crises. Little by little, she said, the state has taken on more and more responsibilities – from supporting weak banks during the financial crisis, to paying company salaries through the pandemic.

Leena Mörttinen

“We used to be very careful to say that the public sector’s role is to make sure that citizens are doing well, that people have safety nets. And we funded those safety nets using tax revenues created as companies grew, with markets pricing the risks and investors carrying the potential failures of mispricing themselves,” she said. “Unfortunately, following this [pandemic] crisis and particularly the financial crisis – which was very tough, and where public measures were necessary – there’s been an unfortunate side-effect: an erosion in the belief that the market can do its job and is always right.”

The danger, Mörttinen explained, is that a dependable public sector – launching rescue missions to insulate businesses from each new crisis – distorts competition and leads to inefficient allocations of capital. Businesses should be scoping and preparing for the risks they face, and investors should understand the consequences of their own risk-taking. But if they know that governments will always help them out, they can save the money and leave themselves exposed to dangers – safe in the knowledge that the taxpayer will compensate them if the worst does happen.

As Mörttinen suggested, there’s always a new crisis brewing: she listed plenty of potential stormclouds, including the threats of rising inflation and ecological catastrophe. However, she was also clear that governments need to expect the unexpected; to prepare for the unpredictable, high-impact events known as ‘black swans’.

Overlooking the ‘known knowns’

Alex Metcalfe, global head of public sector at knowledge partner the Association of Chartered Certified Accountants (ACCA), agreed – but in watching out for black swans, he suggested, civil servants may be overlooking more obvious threats. “It’s about what my colleagues call ‘grey rhinos’ – so highly probable, high-impact events that we are neglecting,” he said. “The nightmare is a series of grey rhinos.”

Alex Metcalfe

Plenty of people sounded the alarm well in advance of both the financial crisis and the pandemic, with the latter in particular sitting at the top of some countries’ risk registers. The error, said Metcalfe, is to assume that stability is the baseline: “I’m thinking back to my own days working in a ministry of finance, and building econometric models,” he said. “To try and inform: ‘Oh, inflation will be fairly stable and things will be alright’ – until they weren’t, and then we tried to figure out what to do.” 

Mörttinen was clear that governments must retain the financial space to respond to emerging threats. “It’s our job to be able to prepare for the risks and accept that there are uncertainties ahead,” she said. “We should try to ensure government’s access to finance in all conditions. In Finland, we experienced a severe debt crisis in the beginning of the 1990s, and that was a painful lesson. I believe that we should not take anything for granted… This is why sustainable public finances and highly efficient debt management are key. ” 

Peter Lim, director of fiscal policy at the Ministry of Finance in Singapore, agreed. “You cannot just rely on cheap debt to solve all your problems – if you do, you create downstream problems and secondary problems, and make it worse over time,” he said. “So I think it’s upon us as economists and other parts of the society to try to make sure we have an honest conversation; and there will be some pain and trade-offs along the way.” 

An appetite for action

More positively, Lim argued that the political context has changed – with the pandemic instilling greater public recognition of the need for governments to act, and individuals to make sacrifices, for the common good. “Many of the external trends have not got better,” he said: we shouldn’t expect any slowing in the train of crises. “But I sense that something has happened during the pandemic, because of the fragility that people face. I think there’s an intrinsic desire by quite a wide swathe of society to do something better for the future. ”

Peter Lim

This is not a job that people should “leave to the ministers and politicians,” he added. “I think every one of us needs to try to reshape and take part in the conversation on what the new narratives and new agendas are. We know the old system of doing things, in terms of carbon intensity or inequality, is insufficient or wrong.” Indeed, polling and election results around the world suggest that electorates are increasingly ready to vote for politicians promoting environmental sustainability, as a recent GGF feature explained.

Lim’s words chimed with Christian Dahlhaus, head of division for the German Recovery and Resilience Plan (RRP) and Task Force COVID-19 at Germany’s Federal Ministry of Finance, who saw great value in fostering national conversations about the risks we face. It may not be possible to know exactly what will happen, he said, but the general categories of challenges are largely apparent and need to be communicated and talked about openly. “We don’t have all the answers to future challenges, but we can develop a resilience strategy,” he commented.  

This conversation “has to be upfront. It has to be forward looking. You have to get prepared,” he said. Finance ministries can work with other departments to create joint strategies, he added, while raising public awareness: “It’s important that we deepen our understanding of the underlying currents in this fast-changing world, and strengthen the resilience of our economies and societies via forward-looking policies.”

And there is no time to lose. “I think the big challenge is how to put this into practice in the short term,” he concluded. “We are always talking about the long term, but the tectonic plates are moving fast and we want to avoid eruptions.”

The 2021 Global Government Finance Summit was held online in late October 2021. This is the third of four reports on the Summit’s sessions, covering the session named ‘Threat assessment: matching risk and resources’. The first covered the discussion on how COVID marks a ‘global inflection point’ in many economies; the second explored how to fix governments’ broken financial systems; and the fourth covered the roles and development of finance leaders. To ensure that people can speak freely at the event, we check quotes with the speakers before publication.

  • Global Government Finance Summit 2021 attendees
  • Noureddine Bensouda, General Treasurer of the Kingdom, Morocco
  • Gil S. Beltran, Undersecretary, Department of Finance, Philippines
  • Pablo de Ramón-Laca, Director General – Treasury and Financial Policy, General Secretariat of the Treasury and International Finance (Spanish Treasury), Ministry of Economic Affairs and Digital Transformation, Spain
  • Peter Lim, Director – Fiscal Policy, Ministry of Finance, Singapore
  • Leena Mörttinen, Permanent Under-Secretary, International and Financial Markets Affairs, Finland
  • Markus Sovala, Director General, Statistics Finland, Finland
  • Christine Walker, Assistant Comptroller General – Financial Management Transformation, Treasury Board of Canada Secretariat, Canada
  • Christian Dahlhaus, Head of Division, German Recovery and Resilience Plan/ Task Force Covid-19, Federal Ministry of Finance, Germany
  • Wenshan YEO, Director – Economic Programmes, Ministry of Finance, Singapore
  • João Boa Francisco Quipipa, Economist and Government Advisor, Angola
  • Elaine Boyd, Associate Director of Audit Quality and Appointments, Audit Scotland, Scotland
  • Maggie McGhee, Executive Director – Governance, ACCA
  • Alex Metcalfe, Global Head of Public Sector, ACCA
  • Jennifer Duncan, Vice-President Government Innovation, Mastercard
  • Dr. Shefiu Abiodun Muritala, Accountant General – Lagos State, Nigeria
  • Haji Ibsa Gendo, Director General, Ministry of Finance and Economic Development, Ethiopia

About Adam Branson

Leave a Reply

Your email address will not be published.