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