Government agencies and state-controlled enterprises affect government finances negatively through the build up of interagency arrears and cross-debts. Sizeable arrears can impede effective financial management because they obscure the true pattern of financing within the public sector. Governments may fail to fulfil capital grant and subsidy commitments, such that these become obligations for future capital years. State-controlled enterprises may fail to pay their obligations to governments, whether in the form of taxes, dividends, or debt service. Often this happens after governments have failed to meet their financial obligations toward the enterprises.
At the end of 1990, it was reported that some UK universities and polytechnics were owed millions of the £300 million in fees by late-paying local authorities, some as much as one-half to two-thirds of the amounts that were due.
Mutual arrears provide a short-term answer for both government agencies and enterprises in constrained financial circumstances.