The message coming out of the International Monetary Fund-World Bank annual meetings in Bangkok was stark. Fiscal risks are rising, borrowing costs have increased and spending pressures are persistent. Governments should act before markets force a more painful adjustment.
But the prescription discussed is still overwhelmingly in terms of taxes, spending and debt. The traditional remedy is incomplete because it considers only one side of the balance sheet.
IMF research on debt maturity illustrates the imbalance. Two governments with the same amount of debt can have very different exposure to a shock depending on when that debt falls due. Greater reliance on short-term borrowing causes higher interest rates to pass through more quickly into financing costs, debt dynamics and the wider economy.
Just as the composition and characteristics of a country’s debt determine resilience, the same logic should apply to assets.
Properly understanding portfolios
Governments own vast portfolios of companies, infrastructure, land, buildings and financial assets. Even if the total value of assets were known – which it seldom is – it does not tell the whole story. What is more important is the capacity they provide, whether they generate revenues, require capital, carry hidden liabilities, are properly maintained, can access financing and, crucially, whether they are professionally managed.
Market value tells the owner what the asset could command economically and reveals its opportunity cost. A public building may serve its present purpose perfectly well while being on a location worth many times the cost of providing the same service elsewhere.
That does not mean it should be sold. It means keeping it in its present use is a capital-allocation decision. Without knowing its economic value, governments cannot properly compare that use with the alternatives.
Two countries with similar debt and deficits – or even similar public net worth – can therefore enter a crisis in very different positions.
Assets create options. A well-managed public company can generate income and retain access to capital. Electricity, transport and communications infrastructure determine whether an economy continues to function efficiently, even during fiscal distress and a crisis. Urban property can provide space for housing or new infrastructure, as well as non-tax revenues – if professionally managed.
A government that understands its portfolio can restructure, partner, redeploy or invest far more quickly than one discovering its own balance sheet in the middle of a crisis.
Understanding both sides of the balance sheet enables greater fiscal resilience. It is not a financial buffer, but the capacity to act when circumstances change.
Sweden learned this after its 1990s crisis. The state controlled commercial assets equivalent to roughly a quarter of the domestic corporate sector, yet ownership was fragmented and no one could see the portfolio as a whole. Before deciding what to sell, retain or restructure, the government first had to find out what it owned, what it was worth and how it performed.
Seeing the portfolio made it possible to set a strategy; professionalising ownership made it possible to execute it.
Three strands of IMF work that could shape decisions
That practical lesson now matters for three strands of IMF work that are developing in parallel. The Government Finance Statistics Manual defines how the public balance sheet is recorded. The Public Sector Balance Sheet shows what governments own and owe. The emerging Global Fiscal Actions work can identify the decisions that change those positions. Each needs a fuller, more operational asset-side perspective.
GFSM implementation should make fuller use of the wider public-sector perimeter already defined in the framework and distinguish statistical valuation from the economically relevant information needed for decisions, particularly for public corporations and urban real estate. PSBS should become more operational in fiscal decision-making. GFA should capture asset-side actions – capital injections, dividends, restructurings, concessions, property transfers and disposals – alongside decisions on tax and spending.
Together, these three strands could move the asset side from statistical reporting into fiscal decision-making. They would show not only what the state owns, but how those assets perform, what risks they carry and what governments are doing to strengthen or weaken them.
The IMF is right that governments should rebuild fiscal space before markets force them to do so. But fiscal space is more than the ability to borrow when trouble arrives. It is the capacity to respond.
The next shock will test the whole public balance sheet. Fiscal analysis should do the same.
Ian Ball is a former chief executive of the International Federation of Accountants and was one of the architects of New Zealand’s public financial management reforms. Dag Detter is Principal of Detter & Co and advises governments on public finance and public commercial assets. He previously led the restructuring of Sweden’s state-owned commercial portfolio.
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