The landscape of the public sector in 2026 is defined by a renewed focus on the fundamentals according to Henning Diederichs, Senior Technical Manager in ICAEW’s public sector team.
Diederichs kicked off the 2026 public sector update webinar on 17 March by highlighting the recent speech to parliament given by Gareth Davies, the Comptroller and Auditor General of the United Kingdom and head of the National Audit Office.
In the speech, Davies stressed how the maintenance of taxpayer trust and accountability depends on timely financial reporting, fit-for-purpose management information, and the skills and capabilities to inform decision making.
The local audit ‘crisis’ and the great reset
Jack Bower, Technical Manager in ICAEW’s public sector team, discussed perhaps the most pressing issue in local government is the state of local audit in England.
What began as a gradual decline in timeliness after 2015 has evolved into a total collapse. In the 2015/16 financial year, 97% of local authorities published audited accounts by the deadline; by 2022/23, that had plummeted to just 1%.
This collapse led to a mounting audit backlog that peaked at 918 outstanding audits in September 2023, an average of two outstanding audits for each local government body.
The causes are multifaceted:
- a fragmented system,
- increasing demands from financial reporting and auditing standards, and
- a severe capacity and capability crisis.
A 2024 survey (from the Local Government Association) revealed that 26% of local authority accountancy roles were unfilled, highlighting the sector’s struggle to retain talent.
To address the crisis, the government introduced backstop dates to reset the system and return the focus of preparers and auditors to the most recent set of financial statements.
While these dates successfully returned timeliness – with roughly 90% of bodies meeting the new deadlines – the cost has been a surge in disclaimed audit opinions.
Looking ahead, the focus is on rebuilding assurance, with an aim for impacted authorities to return to unmodified audit opinions by 2026/27. Central to this recovery is the establishment of the Local Audit Office (LAO), a new body responsible for coordinating and leading the system.
We are also working closely with CIPFA’s Better Reporting Group to reform annual financial reports to make them more understandable to users while at the same time reducing unnecessary burdens on preparers.
Reporting reform: efficiency, IFRS 18, and climate
Diederichs discussed reporting developments in central government and how requirements are also evolving to provide better transparency. From 2026/27, central government departments will be required to report a summary of efficiency on a "comply or explain" basis. The framework defines efficiency as spending less to achieve the same or greater outputs; it explicitly excludes "cost shunting" or reducing costs by simply achieving fewer outcomes.
The introduction of IFRS 18 will restructure the income statement into three new categories: operating, investing, and financing. While management-defined performance measures (MPMs) are part of this standard, they are considered unlikely to occur frequently in the public sector, as most non-GAAP measures in this field relate to the balance sheet or budgetary statistics. Although we are keeping an eye on whether reporting against budgets might meet the definitions (such as the Statement of Parliamentary Supply).
On climate reporting, requirements have been clarified to decouple them from the broader "Greening Government Commitments," except for greenhouse gas reporting. Scope 1 and 2 emissions can be lifted directly from previous commitments, while Scope 3 categories not previously reported must now be assessed on a materiality basis.
The public finances: debt and demographics
The broader state of public finances remains sobering according to Martin Wheatcroft, an external advisor to ICAEW. There is a persistent shortfall between government income and spending, with taxes currently at an all-time high. Public debt has grown massively over the last 20 years, and it is now particularly sensitive to inflation and interest rates because nearly a quarter of it is linked to inflation and a substantial proportion has been swapped into variable rate debt by quantitative easing (QE).
However, the most significant long-term challenge is demographics. Over the next 25 years, the number of people aged 65 or over is expected to increase by 34%, while the working-age population—those who pay the majority of taxes—is expected to grow by only 8%. This demographic shift is baked in and poses a substantial risk to the sustainability of the NHS, social care, and state pensions.
Wheatcroft also commented on the lack of plan to put the public finances onto a sustainable path, with successive governments focusing on the short-term at the expense of developing a long-term fiscal strategy to tack the many fiscal challenges facing the UK.
A year of transformation
As we move in the new financial period from April 2026, the public sector in the UK enters a year of transformation. Many central government departments are planning significant organisational restructuring and headcount reductions, while local government grapples with mergers across England. At the same time the digitalisation of public services is likely to change how they are delivered.
Accelerating the move to a low-carbon economy remains a priority for the government, while departments will also need to start preparing for the next three-year spending review coming up in 2027. The impact of the conflict with Iran is likely to be significant.
For accountants working in and with the public sector, the coming year is likely to be very busy indeed.
