Debt control is only a means – it is not the goal of a government

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What should financial policy aim for? Recently, a debate has emerged about the merits of focusing on debt and deficits as is, or of measuring public sector net worth more comprehensively, which includes assets and liabilities. So which is better? It depends on the question.

In his latest Green household, the Institute for Fiscal Studies examines these alternatives and concludes that “the benefits of switching to balance sheet targeting would likely not be sufficient to justify the potential costs involved.” It might be foolish to make this the sole aim of fiscal policy. However, the focus is solely on debt sustainability. Government is a complex activity. Easy goals are dangerous.

A necessary prerequisite for a successful government is the avoidance of a financial crisis. For this reason, it makes sense to assess sustainability. But here too it is important to look beyond debts and deficits. Assets are also important. It is important to know what they are, not least because better management could improve government revenues, either directly or through increased tax revenues. This is one of the points addressed in an upcoming book: Public Assets – Accounting, Government and Democracyby Ian Ball and several co-authors.

As the IFS itself admits, focusing on deficits and debt can lead to bad decisions. In the UK, for example, this resulted in the sale of student loan stock simply to reduce reported debt, even though the value of the loan stock was higher for the government than for private buyers. This led to the wrong decision to cut public investments after the financial crisis despite exceptionally low long-term interest rates. It justified the private finance initiative that replaced visible debt service obligations with invisible (and more costly) future expenditures.

Some argue that focusing on net debt and deficits forces the government to focus on something important. But all too often it has just found more costly ways to circumvent its own rules. If it can’t do that, it changes them: according to the Institute of GovernmentThe UK has had nine fiscal rules and 26 specific rules since 1997. This is a joke.

But there is a much bigger point that the IFS ignores. Yes, the government needs to survive financially. I agree. But that’s just a means. It is not the end of a government. This means governing well and thereby contributing to the creation of a more prosperous society. To achieve this, it must keep a close eye on both its own balance sheet and that of the country.

The government is a steward. As Sir Dieter Helm of Oxford argues in his new book legacy, it should protect and develop a country’s natural capital in addition to its physical and human capital. Under-investment, as both the state and the UK have practiced for far too long, is terrible financial management.

To do its job properly, the government—the most complex, largest, and most enduring organization in the country—needs at least the level of information that a private company would have about its own financial condition and make public. For example, in 2021 (according to the IMF), the net worth of the UK public sector was minus 96 percent of gross domestic product. In the G7, only Italy was worse. Surprisingly, Japan’s most recent figure (for 2020) was far better at just minus 16 percent. The IFS rightly points out that such figures can be misleading. But a narrow focus on debt and deficits alone is also possible. We should discuss public sector net assets and government balance sheets, as well as debt sustainability. If we did this, we would inevitably discuss many, if not all, important policy decisions. Furthermore, we would do this quite naturally since we would be trying to measure reality.

The invention of modern accounting is one of the most significant advances in human history. Without them, today’s complex economies would be impossible. Its application to national income has also immeasurably improved our understanding of economies. But we stubbornly refuse to focus on what such reports tell us about our governments. Instead, we will only focus on the question of whether it is a default. Our ambitions must certainly be greater. Even if one focuses solely on sustainability, non-leveraged liabilities – such as public sector pensions – cannot be ignored. These must also be included.

In the preface to Public assetsI claim: “If something is to count, it must first be counted”. Furthermore, “it is always far better to be approximately right than to be exactly wrong. Ignoring reality because it is difficult to take everything into account is a big mistake.”

Instead of trusting simple rules that embarrass governments and then change them, we must face reality. Governments must survive. But they also have to do their job. Without more comprehensive accounts, they will fail.

martin.wolf@ft.com

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