When discussing the potential impact of fiscal risks on the public sector balance sheet, we focus in this report on two summary measures of financial assets and liabilities: the familiar headline measure public sector net debt (PSND) and its more comprehensive – but less well-known and well-developed – counterpart public sector net financial liabilities (PSNFL). But arguments can be made for looking at even wider balance sheet measures, for example:
- Public sector net worth (PSNW) is the broadest National Accounts measure of the public sector balance sheet in the UK. It includes non-financial assets – such as the road network – as well as financial ones. In principle this could be relevant to the assessment of fiscal risks. For example, if the reported value of the road network fell significantly due to poor maintenance this might highlight a risk that the Government would need to carry out an expensive repair programme in the future. Unfortunately, the valuation of most non-financial assets in PSNW is not sufficiently robust to draw such conclusions reliably.
- Comprehensive net worth (CNW) is an even wider measure, currently being developed in New Zealand. In addition to financial and non-financial assets and liabilities, CNW includes ‘fiscal net worth’ – the present value of expected future revenue minus spending flows. The New Zealand Treasury hopes to use estimates of CNW to guide policy through a ‘value-at-risk’ methodology, which would require ministers to identify the maximum loss of CNW that they would be willing to tolerate at a given probability. This has the advantage of incorporating future tax and spending flows in a comprehensive way, as we do when making long-term flow projections. But balance sheet estimates will be highly sensitive to the choice of (and changes in) the discount rate chosen to convert the future flows into asset and liability measures. It will also be interesting to see how easy CNW is to communicate and whether ministers would use it to justify policy changes to the public.
- The UK’s Whole of Government Accounts offer alternative and broader balance sheet and flow measures of the public finances to those in the National Accounts, based on international financial reporting standards adapted for the public sector. These provide useful information on fiscal risks via their reporting on provisions and contingent liabilities. But the flow measures in particular seem less useful as a basis for fiscal policy decisions and analysis than the National Accounts, because of the volatility in them created by the varied treatment of different balance sheet valuation changes.