Governments are under pressure to invest more – in infrastructure, the energy transition, defence and resilience – while remaining constrained by fiscal frameworks that appear increasingly ill-suited to these demands.
Within this tension lies a simple but consequential problem: most fiscal frameworks govern only part of the state’s balance sheet.
Public debate remains dominated by debt and deficit metrics. These indicators are easy to communicate and politically entrenched, but they capture only a narrow slice of the public sector’s economic reality. The international policy-making community should use every opportunity to advance thinking on this matter. A good opportunity will come at International Monetary Fund-World Bank spring meetings in Washington on 21-26 April.
In the debate on fiscal frameworks, public assets, especially non-financial assets, are largely ignored. Non-debt liabilities, including pensions and long-term contractual obligations, receive limited attention. The consumption of public capital through depreciation is rarely treated as a fiscal cost at all. This is often defended as prudence. In practice, it distorts decision-making.
Debt is a financing measure, not a measure of fiscal health. Borrowing to fund consumption and borrowing to build productive assets are treated identically, even though their long-term economic consequences differ fundamentally. Fiscal frameworks that ignore assets therefore bias policy against long-term investment and in favour of short-term fiscal optics.
The IMF’s balance-sheet turn and the missing step
The analytical foundations for a better approach already exist. Over the past decade, the IMF has developed a balance-sheet view of public finances, building on the 2001 Government Finance Statistics Manual. Its research shows that countries with stronger public sector balance sheets and higher net worth experience shallower recessions, recover faster from shocks, and face lower borrowing costs. Financial markets, in practice, already assess sovereign risk using far more than headline debt ratios.
The IMF’s accrual-based framework integrates stocks, flows and other economic changes. It captures what governments own as well as what they owe, and how policy choices reshape that balance sheet over time.
Yet in most advanced economies, balance sheets – often compiled using information not drawn directly from the accounting system – do not anchor fiscal rules, budget formulation or political accountability. Fiscal policy continues to be guided by indicators that deliberately exclude large parts of the state’s economic position. This is not a failure of analysis, but of adoption.
Why partial accounting distorts policy
This disconnect has real consequences. First, it discourages productive public investment. When the fiscal cost of investment is recorded immediately but the value of the resulting asset is ignored, capital formation is systematically penalised. Maintenance is deferred, infrastructure deteriorates and productivity suffers.
Second, it weakens asset stewardship. Governments are among the largest asset holders in their economies – often the largest landowner, infrastructure owner and corporate shareholder – yet these assets are rarely managed with the same discipline applied to financial liabilities.
Third, it allows non-debt liabilities to grow in the shadows. Pension obligations and long-term guarantees expand without triggering meaningful fiscal scrutiny, despite representing real claims on future public resources.
Incomplete governance
Concerns are often raised about balance-sheet-based fiscal governance. Asset valuation is complex, net worth measures can be volatile and the concepts are harder to communicate than debt ratios. These concerns are legitimate but they are design challenges, not arguments for continuing with partial accounting.
Valuation uncertainty does not justify valuation blindness. Consistent asset measurement is essential for tracking depreciation, assessing asset condition and disciplining investment decisions. Failure to measure assets systematically guarantees mismanagement. Volatility can be mitigated through valuation ranges, sensitivity analysis and complementary indicators. No credible fiscal framework relies on a single headline number.
Crucially, balance-sheet-based frameworks must be symmetrical. They must recognise both assets and liabilities, investment and depreciation, capital gains and losses. Partial adoption – for example, using asset values only to justify higher borrowing – would undermine credibility rather than strengthen it.
The relevant question is not whether balance sheet governance is simple. It is whether governing with incomplete information is sustainable.
Three advanced economy stress tests
This issue cuts across institutional models. In the US, federal budgeting remains overwhelmingly cash-based – despite state, local and federal governments all producing accrual-based financial statements. These statements are rarely used to guide budget decisions, often ignore revaluation of assets and fail to treat depreciation as a fiscal cost.
While investment expenditure is capitalised for accounting purposes, once incurred, it disappears from fiscal consideration. Maintenance competes with discretionary spending caps. The result is a persistent bias against investment and asset maintenance, even as infrastructure gaps widen.
In Japan, the challenge is different but related. High public debt rightly commands attention, yet focusing on debt alone obscures the broader question of balance sheet resilience in an ageing, low-growth economy. Public assets, pension liabilities and long-term service obligations interact in ways that debt ratios alone cannot capture. In such an environment, asset quality and stewardship become central to fiscal sustainability.
Across the euro area, rules-based fiscal discipline has delivered credibility but at the cost of chronic underinvestment. Fiscal frameworks anchored narrowly in debt and deficit measures struggle to distinguish between consumption and capital formation. As debates on fiscal rules reform continue, the absence of a balance-sheet perspective remains a key structural weakness.
Different systems, same conclusion
Fiscal sustainability cannot be assessed without reference to the full public sector balance sheet. Some countries have shown that a different approach is feasible. Where accrual accounting is embedded across financial reporting, budgeting and accountability, balance-sheet information becomes operational rather than decorative. Investment decisions improve, asset maintenance is taken seriously and fiscal buffers are built over time. Crucially, such systems tend to be more resilient in the face of shocks.
This requires accounting reform not just in reporting, but in how fiscal rules, budget ceilings and performance frameworks are constructed. Without that step, balance sheets remain analytical artefacts rather than instruments of governance.
For the IMF, this represents a natural next step, building on its existing analytical work and toolkits – including Debt Sustainability Analyses and Article IV surveillance – to help governments strengthen their balance-sheet position over time. The challenge is now one of operationalisation: translating balance-sheet insights into fiscal frameworks that guide policy in real time.
For advanced economies, this shift is not about loosening discipline; it is about redefining discipline around productivity, asset stewardship and intergenerational fairness.
Fiscal sustainability is not a question of how much a government owes in isolation. It is a question of whether today’s policies leave the state stronger or weaker tomorrow.
That is ultimately a question for the balance sheet – and fiscal frameworks that ignore this reality will increasingly struggle to meet the demands placed upon them.
Ian Ball is Adjunct Professor at Victoria University of Wellington and Dag Detter is Principal of Detter & Co.
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