Risks and opportunities for governments in 2011

• Triggering a double-dip recession through fiscal consolidation tops list of risks
• A new cross-border study explores the top 10 business risks and opportunities globally for governments and public sector organisations

Generating a double-dip recession through fiscal consolidation is the number one risk for the government and public sector, according to a new cross-border study conducted by Ernst & Young.

Based on a series of in-depth interviews with government and public sector commentators and more than 100 government and public sector representatives in 15 countries, ‘Turn Risks and Opportunities into Results’ explores the top 10 business risks and opportunities globally for governments and public sector organisations.

Risk continues to dominate the agenda. The issues of reduced spending limited economic growth, sustainability and security, having all contributed to this era of uncertainty that citizens are experiencing around the world, but with these changes also come opportunity.

On a global level, concerns about a second stemmed largely from fears that fiscal consolidation in Europe and the US – following government bailouts during the financial crisis – would lead to a major reduction in government spending with potentially negative economic effects. However, growth in the emerging markets and recovery in many developed economies despite the ongoing debt crisis is reducing the risk of a global double-dip recession.

In the wake of the economic crisis, the rebalancing of power in global governance structures has become increasingly clear. The expansion of the G8 to the G20 will likely encourage specific groups of countries to play an increasing role in global governance, including ad hoc alliances and regional groupings.

Philippe Peuch-Lestrade, Global Government & Public Sector Leader at Ernst & Young says, “Initially, in many countries, governments implemented across-the-board cuts due to a need to act quickly. This was a necessity at the time but now governments should really pursue selective cuts designed to decrease spending where possible, while at the same time increasing investments in areas that will encourage economic growth.”

Promoting CSR practice for alternative public service delivery models

Delaying climate control and sustainability initiatives was ranked as the second most significant risk and is expected to have a lasting influence over the next few years. Other risks that will rise in importance include insufficient investment in education, failure to manage costs of pensions and health care for an aging population, and weaknesses in public governance and poor accountability.

Public debate on sustainability has been sidetracked by the global economic crisis. The resulting policy uncertainty and failures to provide consistent price signals make it unlikely that the investments necessary for the development of a green economy will be made.

Explains Peuch-Lestrade, “To manage climate and sustainability risks, governments need to guarantee transparency in carbon policy and introduce new regulations that will shape consumer preferences. Governments must remove uncertainty surrounding these initiatives as soon as possible as uncertainty is a disincentive to investment.”

Concludes, Jan Peter Balkenende, Partner at Ernst & Young Netherlands and Former Netherlands Prime Minster, “The changing nature of the nation-state, the growth of CSR and the public sector debt burden will drive significant changes in many countries’ public sectors. The concept of the modern nation-state is becoming less relevant, meaning that the role of governments will change and do things in a new way. There will be a shift from traditional concepts of the nation-state to a more international approach, and more cooperation with various partners in society.”

Ernst & Young interviewed a panel of 12 professionals in the government and public sector, asking each interviewee to identify the top risks and opportunities for government and public administrations bodies in 2011, as well as risks and opportunities “below the radar” that could rise in the top 10 in years ahead. The panellists were selected for their demonstrated insight and leadership within the sector, rather than as a representative sample.

Twenty nine Ernst & Young leaders and directors from around the globe, were also interviewed who contributed their knowledge on the risks and opportunities covered in this report. E&Y asked the interviewees to comment on these risks and opportunities with regards to how they saw them evolving over the next three years, and for their views on how governments should respond.

The panellists’ risks and opportunities were grouped and aggregated to form a strategic challenge list for the government and public sector.

The second phase of E&Y research was to conduct a large-sample survey of companies and governments in 15 countries in order to rank the strategic challenges, obtain forecasts on whether these challenges would be more or less important in 2013, and discover how leading organisations in each of the seven sectors are responding to these challenges. In 15 countries, a total of 112 interviews were conducted for the government and public sector.