Shades of Government Liabilities

Government accounts are generally much less comprehensive and sophisticated than the accounts of private companies.

Assets are sparsely recorded and part of the liabilities is unrecorded, and there is generally no distinction between different types of debt securities.


Assets are hard to value because many are illiquid.

The Japanese government, for example, can sell its shares in the Japan Post, but would have more difficulty selling the golden shrine in Kyoto.

In Greece, privatization receipts have been miserable during the debt crisis of the 2010s despite suggestions that there would be wealthy buyers for the country’s many islands.

Net debt ratios are therefore partial images of the government’s financial position, and they sometimes give an excessively favorable picture of its financial situation.


Financial liabilities are generally recorded accurately.

In the EU, definitions have been standardized and the so-called Maastricht definition of public debt includes not only bonds and loans but also contingent liabilities, such as the guarantees provided to state-owned companies.


Financial debt is generally reported at nominal value.

Unlike private companies, governments do not mark their assets and liabilities to market, despite the fact that their debt is being traded and that its value depends on both interest rates and the perceived probability of insolvency.

In addition to financial debt, governments are liable for payments such as pensions to civil servants and other agents entitled to receiving transfers.

They also act as insurers in case of major disasters or systemic bank failures. These commitments form what are called off balance sheet liabilities.

Off-balance sheet liabilities can be of four sorts, depending on whether they are (i) contractual or implicit and (ii) certain or contingent. For example, civil servants’ pensions are both certain and contractual.

Bank bail-outs are neither contractual nor certain, but they nevertheless result in huge public finance costs: Argentina in the 1980s, Korea in the late 1990s, and Ireland in the 2010s all suffered fiscal costs amounting to 30-60% of GDP (Laeven and Valencia, 2012).

Examples of off balance sheet liabilities
CertainContingent
ContractualCivil servants’ PAYGO pensionsCredit guarantees
ImplicitOld-age dependency costsBail-outs of banks
Natural disasters
Adapted from Polackova (1999).

Several governments produce comprehensive financial statements that provide the public with a more complete image of their financial situation.

These comprise a description and valuation of government assets and liabilities and of some off balance sheet claims and liabilities.

There are, however, several reasons why governments cannot fully emulate private financial reporting.
  • First, they do not terminate their operations overnight. It is therefore unclear whether their balance sheet should be evaluated on the basis of market or historical prices.
  • Second, many government assets are intangible and difficult to evaluate.
  • Finally, and most importantly, governments can change the very laws under which they operate, blurring the notion of a government “liability.” For example, a reform of a pay-as-you-go pension system often amounts to a legal default on previous implicit liabilities.

Nevertheless, these nonfinancial liabilities are crucial for evaluating the sustainability of public finances. In the United States, for example, accounting for pension provisions increases the gross liabilities of the federal government by nearly 50%.