A Government's Net Worth

A new tool in surveillance, the public sector balance sheet, can help diagnose vulnerabilities that are not immediately visible in the budget

With the economic crises of the 1990s, economists were reminded that they could no longer rely solely on a country's so-called flow variables (among them revenues, expenditures, imports, exports, and borrowing) as a guide to economic vulnerabilities. Financial health turns out to be more complicated than the relationship between income and outgo—the flow analysis of macroeconomics that has been the workhorse of fiscal policy since John Maynard Keynes provided a structure to analyze its impact on growth, inflation, and employment. Studying the accumulated stocks of assets and liabilities of a country (public, private, and external), and mismatches among them, can be a supplemental guide to uncover distress.

What holds for the country holds for the public sector as well. Many vulnerabilities do not show up in the budget, but become apparent when a public sector balance sheet reflecting all assets and liabilities is constructed. Analyzing the government's net worth and what causes it to change can lead to understanding the need for better policies.

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