It sounds dreadful and baffling all at the same time. How can our government be worth minus 20 per cent of GDP? Companies can't run up such appalling balance sheets, so how can a government get away with it? And why isn't everyone panicking if things are really as bad as the pounds 150bn figure suggests?
Part of the reason for the apparent indifference is that the City doesn't think net worth is an important indicator for the health of the public finances. From the Square Mile's limited perspective (checking that government can meet its obligation to bondholders) it is probably right. The actual level of measured net wealth reveals little about a government's ability to meet its bills.
However, the result is that the City and the rest of us are failing to notice changes in the level of net wealth either; changes that reflect troubling underlying trends in the management of the public purse.
You would think such startling figures would be hard to ignore; a drop in central government net worth of pounds 180 billion in six years. Admittedly the numbers are less shocking if you consider the entire public sector, rather than simply central government. As Dan Corry, senior economist at the Institute for Public Policy Research, points out: "Local authority finances have held up quite well."
However, the overall trend remains the same: downwards. In a forthcoming book, Spending Public Money Effectively, Corry considers the net worth of the entire public sector over 20 years. He finds that the real value of public sector assets is substantially lower than it was 20 years ago, while net financial liabilities (including government debt) are rather higher.
John Hills, economist at the London School of Economics, paints a bleaker picture. In the book Options for Britain, Hills argues that government liabilities should really include unfunded pension obligations. When governments take national insurance contributions off today's workforce, they promise a pension in return several decades down the line, but the money is not set aside and invested for the purpose. By including pension liabilities, Hills calculates an "overall balance" for government which is considerably lower than the official measure of net worth (see graph), and which has also deteriorated significantly as a percentage of national income since 1979.
For City economists and investors to ignore such a trend in the public finances seems bizarre, given how much fuss they make about other indicators such as government borrowing each year. Yet it is hard to blame them. Were the government a firm, investors and creditors would look closely at the balance between assets and debts (among other things), to check that UK government plc was able to meet its bills. If a firm has to make good some of its debts and it doesn't have enough assets to flog to cover the bill, it will go bankrupt.
Not so the government. Who cares if the office blocks, aircraft and nuclear power stations owned by the state are worth less than the stock of bonds the government owes? If the crunch comes for government, and bills have to be paid, taxes can be raised, or spending stopped. Bond-holders rightly worry far more about the ratio of government debt to national income, than they do about debt to assets.
However, although creditors need not trouble themselves about the current level of government net wealth, citizens should be deeply concerned about the direction and extent of the change in net wealth. For as John Hawksworth, macro-economist with accountants Coopers & Lybrand, points out, "the level of net wealth tells you very little; the trend tells you something interesting about the way in which government has been cutting its capital spending to reduce the PSBR".
The fall in the value of assets compared to debts reflects a very bad habit that the Conservative Government has got into over the last decade or so; funding current spending at the expense of capital. In the 1980s tax cuts were funded by privatisation proceeds and the revenues from North Sea oil. By the mid-1990s, with few state assets left to privatise, and the income from oil winding down, the government had moved on to a new scam: cutting capital spending and shifting it into the Private Finance Initiative instead (PFI). Either way the capital account deteriorated to keep the current account roughly in balance.
But this kind of capital to current shift just stores up problems for the future, both economic and political. Cutting investment lowers future returns, and stores up bills for repairs - pushing up the need for current spending in the future. Meanwhile, the PFI may be creating new liabilities in future, as we pay rents for the buildings and infrastructure that the private sector built. Either way, we are creating bills and problems for future generations.
And the consequences are political too. The deeply unpopular tax rises of the last few years have been partly to fill the gap left as privatisation proceeds and oil revenues ran out. But voters were told the tax cuts of the 1980s were heard-earned and sustainable; no wonder they are so cheesed off to find they are now paying more for less. The Conservatives may be about to pay the price for pulling such a trick.
In a report earlier this year Coopers & Lybrand called for net wealth to be one of a series of indicators used by government and the City to measure the health of the public finances.
By removing the current obsession with the PSBR, it might help to bring to light the tricks and wheezes that governments such as this one are so prone to use. Politicians would be wise to listen carefully. As well as making sound economic sense, it might just save them a future political nemesis.Reuse content