Julian Jessop explains what ‘public sector net worth’ is and why the measure’s inclusion in the latest bulletin from the Office for National Statistics matters.
Public finance geeks have been even more excited than usual about the latest statistical bulletin from the Office for National Statistics (ONS), which includes new data on a balance sheet aggregate known as ‘public sector net worth’. What is this, and why does it matter?
Public sector net worth, or PSNW, is a relatively comprehensive measure of the total value of the public sector’s assets, both financial and non-financial, minus its liabilities. This is broader than the more familiar ‘public sector net debt’.
On the assets side, PSNW also includes the value of physical assets owned by the state (such as hospitals, schools, roads and other forms of infrastructure), as well as relatively illiquid financial assets (such as student loans).
The coverage is also wider on the liabilities side, because (among other things) PSNW includes loan guarantees, financial derivatives, and public sector pensions.
Just to complicate things a little further, there are at least two measures of PSNW – a narrower definition based on the European System of Accounts (ESA), and a wider definition applying international accounting standards used by the IMF.
There are two main differences here. First, the IMF measure includes both funded and unfunded public sector pension liabilities, while the ESA-based PSNW only includes those that are funded.
Second, the IMF measure includes a wider range of the assets and liabilities associated with public-private partnerships (such as PFI deals). In contrast, some of these are still regarded as ‘off-balance sheet’ under the ESA rules.
So, why should this be of any interest to someone who is not obsessed with the nitty-gritty of the government’s accounts? The short point is that PSNW can give a more accurate picture of the long-term sustainability (or otherwise) of the public finances.
It is also already mentioned in the ‘Charter for Budget Responsibility’ as one of a broader set of indicators that the Treasury should consider in its management of fiscal policy.
Indeed, some economists have argued that the government’s fiscal rules could be improved by replacing the target for public sector net debt with some form of target for PSNW. The list of advocates has included Richard Hughes, who co-wrote a paper on this issue for the Resolution Foundation in 2019 before he was appointed Chair of the Office for Budget Responsibility (OBR).
This reform could have a broad appeal. Fiscal conservatives are attracted by the hope that it would encourage governments to face up to longer-term liabilities that might otherwise be hidden ‘off-balance sheet’, such as the future cost of some public sector pensions. It would also be harder for any government to get away with dodgy PFI-style deals.
On the other hand, the inclusion of a wider range of assets in the fiscal rules might create more room for governments to borrow to invest – especially when interest rates are still relatively low – as long as the resulting increase in liabilities is matched by an increase in the value of the assets owned by the public sector.
For instance, it has been suggested that the HS2 rail link has been delayed because the additional spending would make it harder for the government to hit its current target that public sector net debt should be falling by 2027-28. Any such constraint would be weaker if the target applied to PSNW instead, assuming of course that it could be demonstrated that HS2 is a worthwhile project. (This last point is far from certain, but adopting a PSNW target could force the government to value these sorts of projects more carefully.)
There are other potential examples. In 2019 Labour’s then Shadow Chancellor, John McDonnell, proposed the adoption of a target to improve the ‘overall balance sheet by the end of the Parliament’. This was partly motivated by the prospect of a big increase in borrowing to return the privatised utilities to public ownership (and implicitly assumed that these assets would maintain their value under state control).
Labour’s current plans for renationalisation are much less ambitious. But a PSNW rule could also create more room for additional investment in schools and hospitals, or green infrastructure.
However, while this sounds like a great idea in principle, there are plenty of problems in practice. For a start, it is generally harder to put an objective valuation on physical assets than financial assets (or liabilities). Some financial assets (and especially contingent liabilities) are harder to value than others, too. Who will do this, and how reliable will the estimates be? Again, HS2 illustrates the potential pitfalls here.
Somebody would also need to decide which measure of PSNW to target. The ONS has led with an ESA-based measure which is itself different to the one currently forecast by the OBR. But the broader IMF concept is more comprehensive and could pick up more of the hidden risks.
Finally, having a target for PSNW would not mean we can stop worrying about the amount that the government is borrowing altogether. Assets like schools and hospitals obviously provide valuable services and deliver an economic return, but they do not contribute directly to the financing of the debt created to build them.
Put more crudely, the markets will still pay far more attention to the amount of government bonds that they are expected to buy, rather than what the money happens to be spent on.
This means that the government would still need some more conventional rules to keep overall borrowing and debt under control. This could include some variation on the ‘Golden Rule’ that governments should balance the ‘current budget’ over the economic cycle (so that they only borrow to invest), and some sort of ceiling on the debt interest bill.
And of course, just because a new fiscal rule might allow the government to borrow more – as long as it accumulates offsetting assets – does not mean that this would always be the right thing to do. We could end up with a load of wasteful state spending on pet projects which divert resources from more productive uses.
In short, it does make sense to pay more attention to broader measures of the public sector’s balance sheet. The increased interest in PSNW is therefore welcome. The OBR has said it will incorporate the ONS version ‘in future forecasts to allow for more regular monitoring’ (you cannot target what you cannot forecast). But this will be a slow burn, and simply moving the goalposts would not change the fundamentals of the game.
By Julian Jessop, independent economist and Fellow at the Institute of Economic Affairs.