Accounting for debt

From last week’s Fin Review.

The Australian Bureau of Statistics publications on government finance measure the financial activities of governments and reflect the impact of those activities on other sectors of the economy. But statistics sometimes fail, mostly because politicians high-jack ideas to suit their agenda. Occasionally the accounting system has its own flaws.

An example of concept kidnapping is the governments boasting about paying-off debt inherited from Labor. Simply stated that seems accurate. By June this year, the commonwealth estimates that it will have liquid assets which are $28 billion greater than its gross debt. This is a sizeable reduction from the $95 billion of net debt existing at June 1996.

But the governments claim over-simplifies the truth. Debt is not the only government liability. While the government eliminated net debt, it allowed the growth of unfunded superannuation liabilities. They were $71 billion in 1999 and they are now around $101 billion. And the commonwealth also reduced its asset holdings – such as its sale of the Commonwealth Bank and Telstra – in exchange for a reduction in debt. Economists might say these asset sales were sensible, but it is not politically useful for the government to highlight their importance in debt reduction.

The measure which best captures all of these complexities is the Commonwealths net worth, the sum of all general government assets minus all liabilities. When last estimated net worth was around negative $3 billion. When it was first reliably measured, in June 2000, it was negative $56 billion. But politicians do not publicise this: it is better to promote a $123 billion reduction in net debt than a $53 billion improvement in net worth.

The more intractable problems with government statistics arise when there are conceptual flaws. These are not necessarily the fault of the ABS which is guided by international statistical standards.

One example current in the political debate concerns the troubled future fund. This column recently said that drawing down monies held in the future fund to pay for Labors broadband could reduce budget surpluses because the purpose of the spending was not financially driven but policy driven. But ABS cash flow statements have a special category for well-crafted spending. They can be classed as investments in financial assets for policy purposes. As long as a Labor government does not invest future fund monies in broadband hardware, but in companies which fund that hardware, it can avoid reducing the surplus.

The Howard government knows about this strange device because it uses it. Last year it invested $1.6 billion for policy purposes. The previous year, the figure was $1.3 billion. These advances, as the ABS calls them, total over $22 billion. And though they have a subsidy component to them, they still curiously count as a reduction in net debt.

Another way to fudge is to use private finance to fund government buildings. The commonwealth and NSW governments are ardent supporters of this practice. When a government borrows money to construct buildings it increases its debt. However by entering a whole-of-life lease with a company which has borrowed to fund the construction (at s greater interest than the government would bear) the resultant liability is not classed as debt. It is more than a suspicion that governments enter these financially disadvantageous leases to preserve their boasts about debt.

Then there is the issue about licenses. Most business licences – for restaurants, hairdressers etc – are issued on demand. If the business meets the settled criteria, the government provides the licence. There is no economic restriction on the supply of these licences. But there are many examples where the government purposefully limits licences, including for gambling and taxis.

Governments have seemingly never wanted to match the publics demand for taxis with the right number of taxi plates. And it is a matter of policy that most Australian casinos enjoy a monopoly licence. Because of the shortage of these licences, they have an artificially high market value. When the government sells them, its receipts are recorded as the sale of an asset, albeit an asset created by legislation. Many economists would see these government revenues as a tax. It represents the inflated price charged for taxis and casinos which, under law, are recovered from taxi passengers and gamblers.

Getting the concepts right is important to see the true economic impact of government actions.

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Paul Frijters
Paul Frijters
14 years ago

Tony, nicely argued. I should incorporate this post in my teaching as a set of examples of how a narrow media focus on ‘facts’ in a situation where people do not check further has created new opportunities for illusions and magic.

The only example I’m not quite sure about is the taxi market one. You’re right that governments undersupply, but I can see a good reason for that, which is tax compliance: the taxi market is one of those markets where tax evasion in an unregulated market would be very simple. That’s why you cant have free entry in the taxi market. By giving out a restricted number of licenses you give the bidders for those licenses an incentive to rat on illegal taxi service providers, as well as an incentive to declare their own incomes in order to avoid losing their licenses. If you give out as many licenses as you could, its not just the case that you’d lower revenue on the licenses but you’d furthermore reduce the incentives to rat on illegal providers and to be tax compliant. Hence I see your argument and you may be right that hiding taxation from a gullible public is the dominant motive, but an old-fashioned principal-agent problem may also be at play here.

Nicholas Gruen
Admin
14 years ago

Paul,

Thx for the note on the taxi market. First rational reason for rationing access to the taxi market I’ve seen.

Bill Cushing
Bill Cushing
14 years ago

Ah.. memories.

‘Net Debt’ started out in the late 1960s as the measure of Gross Debt (mostly C’wealth Govt & C’w/State/Local Semi-govt Securities on Issue) less the balances of these securities held in Govt Trust Funds — thus the debt owed to the private sector. It was part of a first stab (by me) at putting the public sector balance sheet into the ‘national economic accounting’ framework.

This idea was later extended to cover all (income-entitled) financial claims on the public sector net of the public sector’s counterpart financial claims on the private sector — thus the net (income-entitled) debt to the private sector. A useful idea — but it certainly has been put to deceptive use by our politicos.

Where the Future Fund turns up depends on the way it is set up — is it a public financial corporation or managed as a non-corporate general government entity? At present, it’s the latter — so its non-equity financial assets are already in general government net debt. Its holding of Telstra shares is already included in general government equity. To the extent that the Future Fund invests further in shares by reducing its non-equity financial assets, general government net debt will increase.

‘Investments in financial assets for policy purposes’ is not a ‘strange device’. It is simply there to pick up repayable (usually interest-bearing) capital transfers to other sectors that must be applied by the recipient to specified purposes. As I recall, this item has been recorded in the Budget Papers as ‘advances paid’ since the GFS presentation was adopted in 1971-72. It used largely to cover Sec 96 repayable advances to the States. These days, I think a main component is HECS (which does include a ‘subsidy’ element by not charging market interest). They are in net debt because they are an income-entitled claim on another sector.

Finance leases for public buildings are ‘disguised’ debt, as you say. For State Governments, a neat way to get Canberra to pay the capital cost via company tax deductions for depreciation. For Canberra’s own offices — still can’t see any worthwhile financial advantage there.

Governments can create a ‘property right’ by fiat. For example, a permit to exploit a natural resource (minerals, forests); an intellectual property right; a business monopoly licence (taxi plate; pub; casino). In national economic accounting terms, the market value of such a right then appears in the balance sheet of its owner as an (intangible) asset — the counterpart entry being an increase in net worth (from ‘other economic flows’). If the government charges an ‘entitlement’ fee (up front or periodic) for the ‘right’ (ie permit/patent/licence), this is a ‘royalty’ (ie property income). If the government (in addition) levies a (periodic) charge on the permitted activities, that is ‘taxation’ (eg taxi vehicle registration; poker machines levy).

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14 years ago

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