Julian Jessop explains what ‘public sector net worth’ is and why the measure’s inclusion within the latest bulletin from the Office for National Statistics issues.
Public finance geeks have been much more excited than common in regards to the latest statistical bulletin from the Office for National Statistics (ONS), which incorporates new information on a stability sheet combination often called ‘public sector net worth’. What is that this, and why does it matter?
Public sector internet value, or PSNW, is a relatively comprehensive measure of the full worth of the general public sector’s property, each monetary and non-financial, minus its liabilities. This is broader than the extra acquainted ‘public sector net debt’.
On the property aspect, PSNW additionally consists of the worth of bodily property owned by the state (akin to hospitals, faculties, roads and different types of infrastructure), in addition to comparatively illiquid monetary property (akin to pupil loans).
The protection can also be wider on the liabilities aspect, as a result of (amongst different issues) PSNW consists of mortgage ensures, monetary derivatives, and public sector pensions.
Just to complicate issues a bit additional, there are a minimum of two measures of PSNW – a narrower definition primarily based on the European System of Accounts (ESA), and a wider definition making use of worldwide accounting requirements utilized by the IMF.
There are two major variations right here. First, the IMF measure consists of each funded and unfunded public sector pension liabilities, whereas the ESA-based PSNW solely consists of these which might be funded.
Second, the IMF measure features a wider vary of the property and liabilities related to public-private partnerships (akin to PFI offers). In distinction, a few of these are nonetheless considered ‘off-balance sheet’ below the ESA guidelines.
So, why ought to this be of any curiosity to somebody who isn’t obsessive about the nitty-gritty of the federal government’s accounts? The brief level is that PSNW may give a extra correct image of the long-term sustainability (or in any other case) of the general public funds.
It can also be already talked about within the ‘Charter for Budget Responsibility’ as one in all a broader set of indicators that the Treasury ought to take into account in its administration of fiscal coverage.
Indeed, some economists have argued that the federal government’s fiscal guidelines could possibly be improved by changing the goal for public sector internet debt with some type of goal for PSNW. The checklist of advocates has included Richard Hughes, who co-wrote a paper on this issue for the Resolution Foundation in 2019 earlier than he was appointed Chair of the Office for Budget Responsibility (OBR).
This reform may have a broad attraction. Fiscal conservatives are attracted by the hope that it could encourage governments to withstand longer-term liabilities that may in any other case be hidden ‘off-balance sheet’, akin to the long run cost of some public sector pensions. It would even be tougher for any authorities to get away with dodgy PFI-style offers.
On the opposite hand, the inclusion of a wider vary of property within the fiscal guidelines would possibly create extra room for governments to borrow to take a position – particularly when rates of interest are nonetheless comparatively low – so long as the ensuing improve in liabilities is matched by a rise within the worth of the property owned by the general public sector.
For occasion, it has been steered that the HS2 rail hyperlink has been delayed as a result of the extra spending would make it tougher for the federal government to hit its present goal that public sector internet debt must be falling by 2027-28. Any such constraint can be weaker if the goal utilized to PSNW as a substitute, assuming in fact that it could possibly be demonstrated that HS2 is a worthwhile challenge. (This final level is way from sure, however adopting a PSNW goal may pressure the federal government to worth these types of initiatives extra rigorously.)
There are different potential examples. In 2019 Labour’s then Shadow Chancellor, John McDonnell, proposed the adoption of a target to enhance the ‘overall balance sheet by the end of the Parliament’. This was partly motivated by the prospect of an enormous improve in borrowing to return the privatised utilities to public possession (and implicitly assumed that these property would preserve their worth below state management).
Labour’s present plans for renationalisation are a lot much less formidable. But a PSNW rule may additionally create extra room for extra funding in faculties and hospitals, or inexperienced infrastructure.
However, whereas this seems like an excellent concept in precept, there are many issues in observe. For a begin, it’s typically tougher to place an goal valuation on bodily property than monetary property (or liabilities). Some monetary property (and particularly contingent liabilities) are tougher to worth than others, too. Who will do that, and the way dependable will the estimates be? Again, HS2 illustrates the potential pitfalls right here.
Somebody would additionally have to determine which measure of PSNW to focus on. The ONS has led with an ESA-based measure which is itself completely different to the one at the moment forecast by the OBR. But the broader IMF idea is extra complete and will choose up extra of the hidden dangers.
Finally, having a goal for PSNW wouldn’t imply we will cease worrying in regards to the quantity that the federal government is borrowing altogether. Assets like faculties and hospitals clearly present worthwhile providers and ship an financial return, however they don’t contribute on to the financing of the debt created to build them.
Put extra crudely, the markets will nonetheless pay way more consideration to the quantity of presidency bonds that they’re anticipated to purchase, reasonably than what the money occurs to be spent on.
This implies that the federal government would nonetheless want some extra typical guidelines to maintain total borrowing and debt below management. This may embrace some variation on the ‘Golden Rule’ that governments ought to stability the ‘current budget’ over the financial cycle (in order that they solely borrow to take a position), and a few type of ceiling on the debt curiosity invoice.
And in fact, simply because a brand new fiscal rule would possibly enable the federal government to borrow extra – so long as it accumulates offsetting property – doesn’t imply that this is able to at all times be the correct factor to do. We may find yourself with a load of wasteful state spending on pet initiatives which divert assets from extra productive makes use of.
In brief, it does make sense to pay extra consideration to broader measures of the general public sector’s stability sheet. The elevated curiosity in PSNW is subsequently welcome. The OBR has said it is going to incorporate the ONS model ‘in future forecasts to allow for more regular monitoring’ (you can’t goal what you can’t forecast). But this will probably be a sluggish burn, and easily transferring the goalposts wouldn’t change the basics of the sport.
By Julian Jessop, impartial economist and Fellow on the Institute of Economic Affairs.
