Health and Healthcare Systems

How public sector accounting can help in the COVID-19 recovery 

Government accounting.

Accrual accounting can support an international economic recovery from coronavirus. Image: Unsplash/Scott Graham

Willem H. Buiter
Visiting professor, Columbia University
Ian Ball
Professor, University of Wellington.
Dag Detter
Former director at Sweden’s Ministry of Industry, Sweden’s Ministry of Industry
  • The pandemic presents an opportunity for governments to consolidate their finances by looking at assets and liabilities.
  • Accrual accounting could help governments as they plan for economic recovery after COVID-19.
  • This could contribute to economic growth, generate cash flows for the public budget, and lower net operating costs.

One effect of the COVID-19 lockdowns this year is that many young adults have returned home temporarily to stay with their parents, subletting their apartments to others in need. For those who have lost their jobs, the rent paid by these tenants has doubtless provided a welcome and necessary safety net. Thanks to the modern gig economy, victims of the downturn can operate like corporations, “sweating” their balance sheets to maximize the income from their existing assets.

Given the sheer scale of spending that this crisis demands, public policymakers, too, should consider a more creative approach. The pandemic presents a unique opportunity for governments to consolidate their finances by looking not just at spending and revenues, but also at assets and liabilities. By taking an integrated approach, as would be done in a corporate restructuring, governments can steer their way toward a stronger recovery without the need for excessive austerity and the social hardship that comes with it.

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Insights from the field of corporate financial management not only can improve governments’ understanding of the trade-offs between spending cuts and tax increases. They also show that overall government indebtedness can be measured as a proportion of the physical assets a government possesses. Viewed from this perspective, a government need not rely only on projected annual GDP when generating the cash needed to service its debt. Instead of treating capital expenditures as an immediate expense, it can start to leverage its vast public wealth through a proper accounting of its long-term investments in infrastructure.

When the time comes to increase taxes or cut spending, governments will have to weigh the trade-offs according to their fiscal positions. While Ireland’s general government spending amounted to 25% of GDP in 2018, the United States spent the equivalent of 38%, and GDP share of public spending in France (representing the higher end of the spectrum) was 56%. The implication is that it would be much easier for Ireland to restore long-term fiscal health by raising taxes than by cutting public spending, whereas tax cuts would probably have to come first in France.

In any case, it is critical that governments adopt public-sector net worth as a key fiscal metric. Economies with stronger public-sector balance sheets tend to experience shallower recessions and recover faster, because they have greater space for countercyclical fiscal policy, and thus less need for ad hoc, uncertainty-inducing measures.

As with personal or household wealth, an assessment of the public-sector balance sheet should include both what a government owns and what it owes. A relevant model for the current crisis can be found in New Zealand’s Public Finance Act of 1989. With a strong public-sector balance sheet and a focus on net worth, that country has easily managed several negative shocks since its last deep financial crisis 30 years ago. There is no better time than now for more governments to recognize the importance of all elements of the public-sector balance sheet and rethink how they invest and leverage existing assets for the sake of longer-term goals.

Of course, the current crisis also should spur a reassessment of the real financial impact of debt guarantees, now that many governments are extending them to the private sector on a massive scale. There is an obvious and serious risk that some banks and firms will go bankrupt, at which point debt guarantees will be called in. The fact that these promises are currently being treated as if they were “free” is yet another reason for governments to adopt proper accrual accounting that uses an expected-credit-loss model.

Just as platforms like Airbnb and Uber can help some individuals make better use of their assets during a pandemic, a better approach to public-sector accounting can help governments free up sorely needed revenues, while also guarding against risks that are currently being ignored. Because these revenue flows would be ongoing, they are a much better solution than shedding assets at fire-sale prices every time there is a shock or downturn.

Better yet, those additional revenues can be used to reduce existing debt levels (and thus the need for new borrowing), or to build the government’s net worth, thereby providing a financial buffer with which to improve its sovereign credit rating and reduce its cost of capital. As with any corporation or individual, more efficiently managed government assets would contribute to economic growth, generate cash flows for the public budget, and lower net operating costs. Only in this case, the whole society would benefit.

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