Balance Sheet Analysis –
the UK approach
7th Annual OECD Public Sector Accruals
Symposium
Paris, 5 March 2007
Kieran Rix, Deputy Director,
Government Financial Information & Reporting
Outline
Background
Balance sheet
options
Results
Assessment
UK approach
Background
Code for Fiscal Stability (1998) committed UK government to:
Set out its long-term aims for fiscal policy & debt management
Provide at least 10 year (in practice 30 year) illustrative fiscal projections
Produce consolidated accruals/GAAP Whole of Government Accounts (WGA)
…amongst other things
Challenges
Practicalities of producing WGA for 1300 diverse bodies
Understanding three sets of information on government finances
National Accounts
WGA
Long-term projections
Presentation & explanation of what the different figures are for & what they mean
Government’s Financial
Position
Assets
Lia
bilit
ies
Past Future
Future revenue
Future liabilities
incurred in the future
Liquid financial
paid to date
Other net assets
assets
All liabilities
Future liabilities from
past activities
National Accounts: Net Debt
Other net assets
Liquid financial
assets
All liabilities
paid to date
Assets
Lia
bilit
ies
Future revenue
Future liabilities
incurred in the future
Future liabilities from
past activities
Past Future
Other net assets
Liquid financial
assets
All liabilities
paid to date
Future liabilities
incurred in the future
Future liabilities from
past activities
National Accounts Balance
Sheet
(“Net Worth”)
Other net assets
Liquid financial
assets
All liabilities
paid to date
Assets
Lia
bil
itie
s
Future revenue
Future liabilities
incurred in the future
Past Future
Other net assets
Liquid financial
assets
All liabilities
paid to date
Assets
Lia
bil
itie
s
Future revenue
Future liabilities
incurred in the future
Future liabilities from
past activities
Past Future
GAAP Balance Sheet
Other net assets
Liquid financial
assets
All liabilities
paid to date
Assets
Lia
bil
itie
s
Future revenue
Future liabilities
incurred in the future
Future liabilities from
past activities
Past Future
Other net assets
Liquid financial
assets
All liabilities
paid to date
Assets
Lia
bil
itie
s
Future revenue
Future liabilities
incurred in the future
Future liabilities from
past activities
Past Future
(“Net Liabilities”)
Long-Term Fiscal Projections
Liquid financial
assets
All liabilities
paid to date
As
se
tsL
iab
ilit
ies
Future revenue
Future liabilities
incurred in the future
Future liabilities from
past activities
Past Future
Liquid financial
assets
All liabilities
paid to date
As
se
tsL
iab
ilit
ies
Future revenue
Future liabilities
incurred in the future
Future liabilities from
past activities
Past Future
Other net
assets*
Other net
assets*
* Seldom includes non-financial assets
Results (1)
0
10
20
30
40
50
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
Net debt Indicative net liabilities Net worth
Per cent of GDP
Public sector net debt, net worth and indicative net liabilities1
1 Data for indicative net liabilities are not yet available for 2005-06. The exact figures for the indicative net liabilities are 25.2, 25.7,
22.0, 15.8, 8.8, 11.5, 16.2, and 19.8 per cent of GDP respectively.
Source: HM Treasury.
Results (2)
Assets
Lia
bilit
ies
Past Future
Future revenue
Future liabilities
incurred in the future
Liquid financial
paid to date
Other net assets
assets
All liabilities
Future liabilities from
past activities
Results (2)
Past Future
Assets
Liabilities
Past Future
156
12
122146
7,586
7,271
Results (2a)
Explanation
Comparison of accruals balance sheet and NPV of future cash flows
Elements expressed in proportion to accruals net liabilities
Sources: Dry run WGA & HMT projections (infinite time horizon)
Conclusions
Accruals balance sheet good for medium term
Over very long run existing stocks are unimportant in context of future flows
Difference between future flows consistent with LTPFR conclusions
Present Stocks & Future
Flows
Public service pension spending
0
0.5
1
1.5
2
2.5
2005-06 2015-16 2025-26 2035-36 2045-46 2055-56
Source: HM Treasury, based on Government Actuary's Department.
Per cent of GDP
Projected pension payments taking into account future service
Projected pension payments associated with liabilities accrued to 31 March 2005.
Strengths & Weaknesses
Net Debt
Certainty, ease of calculation, gross debt used
for international comparability
Backwards looking, not comprehensive
Net Worth
More complete, ESA/SNA basis widely
comparable
Current position not forwards looking, requires
estimates of some values
Strengths & Weaknesses (2)
Net Liabilities
More complete, audited, GAAP-basis
Current position not forwards looking, requires estimates of some values
Long-term fiscal projections
Forwards looking, broadly comprehensive, timing of trends is clear
Projections inherently uncertain
Quality trade-off
Completeness
Certainty
Projections
GAAP Balance Sheet
NAs Balance Sheet
NAs
Net
Debt
UK Approach
Sustainable Investment Rule based on
Net Debt
Sustainability assessed on the basis of
long-term fiscal projections
Underlying data from balance sheets
inform projections
Provisions (1)
WGA provisions data shared with
fiscal policy colleagues
Provisions can be analysed as:
1. Those where cash flows are already in
public spending (“Class 1”)
2. No existing cash flows (“Class 2”)
Provisions (2)
“Class 1” Provisions
Fiscal projections should already reflect data underlying provision
Check projections are consistent
For example:
Public Sector Pensions
“Class 2” Provisions
Future cash flows
probably omitted from
long-term projections
Include underlying
data in long-term
projections
For example:
No known examples
Contingent Liabilities
Not specifically included in long-term projections but…
Details shared with fiscal policy colleagues
Most are immaterial or minor in context of long-term projections…
…or unquantifiable
UK also considers “reportable remote contingent liabilities”
Further Information
Long-term Public Finance Reports 2003-2006
Delivering the Benefits of Accruals Accounting for the Whole Public Sector (2005)
Published with Pre-Budget Reports on HMT Website
Questions