Five Tips to Maximize the Impact of Assets and Liabilities on Public Financial Management

While liabilities, including debt – usually attract attention, they do not represent the totality of a government’s financial position. Recognizing the interplay between assets and liabilities in public financial management (PFM) can contribute to a stronger and more stable financial position.  

A new book,  Public Net Worth – Accounting, Government and Democracy, suggests a holistic approach to PFM and explains how governments can improve their fiscal position from a declining net worth to a positive one that is able to withstand fiscal shocks and enhance the financial performance of the public sector. 

 Here are five recommendations from the book that can help both policymakers and practitioners:

1.    Balanced Approach. Pay equal attention to both the liability and asset side of the balance sheet to get a comprehensive picture of an entity’s financial position and be able to make informed decisions . The case of Transport for London (UK), which massively under-valued the assets on its balance sheet – with actual values potentially five times higher than those reported – suggests that the entity’s financial position was much weaker than the actual case. 

2.    Liabilities Composition and Sustainability. Assess the composition of liabilities, including debt and pensions, and their long-term sustainability.  Debt factors such as interest rates, repayment terms, and the ability to generate income from assets acquired with debt should be considered to ensure that it is manageable and supports sustainable growth. Understanding the potential impact of liabilities on the government's fiscal position and its ability to meet future obligations is crucial for decision-making. The German government used “good” debt for energy transition borrowing to expand renewable energy sources and thereby reduce carbon emissions and promote sustainable development. 

3.    Fixed Assets Identification and Accounting. Accurately record and report fixed assets in financial statements to prevent misleading financial positions.  The Office for National Statistics of the UK government estimated in 2017 that public real estate accounted for some £8.5 trillion worth of assets, but the rest of the portfolio remains hidden and largely unaccounted for. The missed opportunity that has so far escaped the UK government can be very conservatively estimated at £1.5 - £2 trillion of real estate assets. Professional management of such a portfolio would every year yield many times the amount of tax revenues that HM Treasury has so far invested, as a one-off, in the government’s Levelling Up Fund.

4.    Investments and Asset Valuation.  Report accurate investments and valuation of assets to improve transparency and decision-making.  The City of Stockholm owned fixed assets that are mostly incorporated as State Owned Enterprises. An indicative valuation of the city’s real estate portfolio shows the potential market value to be at least three times that of the value in the financial statements. This is because the Swedish local governments (and most OECD countries) are required to use historical cost for measurement of their real assets. On a country-wide basis, this would indicate that real estate assets with a value equivalent to two-thirds of Sweden’s GDP are hidden, indicating the incentives for putting these assets to their most productive uses are usually missing. The potential income or welfare lost may be substantial.

5.    Non-Value Adding Investments. Limit investments that strain the government’s financial position without providing significant benefits . Careful consideration of potential returns from investments is essential to ensure that resources are utilized effectively.

Accurate identification and accounting of assets, along with strategic planning and effective decision-making, contribute to a more sustainable financial position and the benefits that come from a strong balance sheet. Assurance and audit processes also help improve trust, transparency and accountability. 

Governments seeking to improve their fiscal institutions can learn from other countries that have adopted reforms . New Zealand’s new PFM legislation played a significant role in changing the fiscal position from a negative and declining net worth, to one where there was a consistent upward trend in net worth, with an ability to withstand fiscal shocks.

Editor’s note: The World Bank Center of Financial Reporting Reforms contributes to this important agenda through its PULSAR program by providing tools such as diagnostics and guidelines on financial reporting framework design and implementation. The examples from the UK and Sweden referenced in this blog are taken from the book Public Net Worth – Accounting, Government and Democracy. The German government example is from the book Environmental, Social, and Governance Investing: A Primer for Central Banks’ Reserve Managers.