“The fact that something is hard to value does not mean it can be ignored”.

“Instead of trusting simple rules that embarrassed governments then change, we must confront reality. Governments do need to survive. But they must also do their job. Without using fuller accounts, they will fail”

Martin Wolf, Chief Economic Commentator in the Financial Times

Foreword by Martin Wolf

If something is to count, it must first be counted. That is the lesson of this important book.

This is not true, of course, of everything that matters in human life. Many things lie beyond measurement: a child’s smile; a parent’s love, a widower’s grief. But when it comes to contemporary life, numbers are essential: without counting, we could not have modern science; without accounts, we could have neither thriving businesses nor transparent states.

No contemporary institution is more important than the state. In high-income democracies, governments spend up to half of gross domestic product. They provide defence, justice, education, and health, offer insurance against individual and collective risks, redistribute from rich to poor and across generations, fund and build infrastructure, set standards, and regulate almost every aspect of their people’s lives. Specialised state institutions perform many other functions, including control over money and monetary policy. Surprisingly perhaps the “neo-liberal” era diminished neither the roles states play nor their expense in any significant way: they remain omni-present.

Yet, as the authors of this book point out, virtually all democratic states, notably including the most important, provide grossly inadequate information, especially financial information, on their activities. Above all, they ignore their balance sheets, in ways that would certainly not be permitted for private businesses. They focus, instead, on their revenues, expenditures, and market debt, with a single year’s gross domestic product used to provide context.

These conventions ignore public assets and most liabilities. This ignorance, in turn, causes huge problems: it makes it hard to evaluate the state’s solvency; it obscures the distinction between borrowing to finance consumption and to create valuable long-term assets; and it underplays the implications of expensive long-term spending commitments, such as public sector pensions. This ignorance makes it impossible to manage public sector assets effectively. As a result, opportunities to generate valuable resources for the state are wasted.

The solutions, assert the authors, include the adoption of modern accounting standards, with full balance sheets and accrual accounting. Only once this is done, will it be possible to manage public assets and liabilities successfully.

The implications are potentially radical. It is clear, for example, that long-term solvency demands huge fiscal adjustments in many countries, notably including the US and UK. This is, no doubt, one of the reasons why governments do not want to show the level of transparency that they demand of the private sector.

 A better justification for not proceeding with full accounting of the state’s financial condition might be that there are so many inescapable uncertainties: discount rates are uncertain, for example, as are future rates of economic growth and demographic developments; and even more uncertain are the chances and consequences of shocks, such as pandemics, wars, and financial crises. Also significant are difficulties in valuing assets, such as non-commercial property, museums and other civic amenities, or many forms of infrastructure. Important, too, is the reality that some assets are hard to realise or may be impossible to realise at all.

Yet these difficulties, while real, are a poor excuse for not making the effort. The fact that something is hard to value does not mean it can be ignored. Obviously, the effort must be made intelligently, with account duly taken of relevant distinctions, such as those between liquid and illiquid assets or between fixed and adjustable commitments. The British government’s efforts to calculate the output of public services are a perfect example of what is both difficult to do and important to attempt.

It is always far better to be roughly right than to be precisely wrong. Ignoring reality, because it is hard to take everything into account, is a big mistake, because it will understate both the risks and the opportunities, probably dramatically so. Only the truth, however difficult that may be to reach, can free us from such errors.

This book is a call for sensible change. It should be answered.

Martin Wolf
Chief Economics Commentator,
Financial Times