Why Public Assets are Key to Debt Sustainability: A Moral Goal

Public Assets
Posted by Ian Ball, Dag Detter, Yannis Manuelides, and Wang Yan[1]

Measures of a sustainable climate or even a healthy life are well understood and universally shared. Similar tools for measuring a sustainable economy and debt levels, using standard accrual accounting and budgeting techniques have been included in IMF manuals for more than two decades. Furthermore, IMF research has shown that countries with a stronger government net worth—total assets less liabilities—experience shallower recessions and recover faster in the aftermath of economic downturns.

Yet, the Debt Sustainability Analysis (DSA) framework used by the World Bank Group and the IMF to guide the borrowing decisions of low-income countries does not reflect these insights. The framework is intended to balance these countries’ financing needs with their ability to repay—both in the present and in the future. But it does not recognize that the public sector balance sheet positions of countries that invest the proceeds of borrowing are stronger than those that use debt to finance consumption spending. The failure to reflect this difference, by focusing on debt (as in the case of DSA) rather than net worth (as would be the case of a public sector balance sheet), not only fails to measure debt sustainability accurately, it is also misleading and has an anti-investment bias.  Low-income countries have no incentive to invest in their public infrastructure, as the borrowing is not distinguished from borrowing for consumption by the DSA. In other words, their borrowing for investment does not count!

In thinking about the links between fiscal policy and bond markets, the focus has tended to be on debt. Typically, not much attention has been paid to explaining how any increase in government debt is accompanied by government asset accumulation and hence increases the government’s net worth. Both assets and liabilities (debt) are important for decision makers. For example, the most important country-specific fiscal factor driving bond yields hence appears to be government net worth.

Perhaps it is time for markets and rating agencies to look more kindly on the increase in public debt if there are productive assets on the other side of the balance sheet. IMF data on government assets shows that when governments know what they own, they can make better use of the assets for the well-being of all their citizens. 

The total value of public sector assets globally is approximately 2xGDP. These assets consist of public infrastructure such as bridges, roads and land, buildings, property, plant and equipment, as well as financial assets such as bank deposits and foreign currency reserves. Professionally managed inside Public Wealth Funds (PWFs), these assets could generate additional government revenues estimated by the IMF to be at least 3% of GDP annually.

Comprehensive and relevant numbers are a prerequisite for sound financial management. A modern government is a highly complex institution that requires accrual accounting to ensure informed and sustainable long-term decision making and management, and independent audit to ensure that reported information is reliable. The hurdles to the adoption of tools such as accrual accounting are surmountable in most countries, but the political will to act on the information generated by such systems has historically been lacking.

For years, the price of inactivity and the absence of imagination in many countries could be discounted. However, the pressures created by the COVID-19 pandemic and the challenges of new green investing, are expected to strain public finances for a generation, and demand radical action. Given that the alternative in many countries could be a prolonged period of austerity, rethinking how governments view public assets is now a welfare moral goal, as much as one of economic growth. Making this change will be difficult for governments in both developed and developing countries. But the evidence is clear: commercial management of assets by a PWF delivers material gains.

This time of crisis calls for the most effective use of public assets—if not now, when?


[1] Ian Ball is Professor of Public Financial Management, Victoria University of Wellington and the architect of many financial management reforms in New Zealand. Dag Detter is the Principal of Detter & Co and led the restructuring of the Swedish portfolios of public assets, the first European country to manage actively its Public Wealth. Yannis Manuelides, is head of Allen & Overy’s Sovereign Debt practice. Wang Yan is a Senior Academic Researcher, Global Development Policy Center at Boston University, and Senior Visiting Fellow, Institute of New Structural Economics, Peking University. The authors write in their personal capacity and not as representatives of their institutions.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.