Perspectives 2019 2020 Public Sector

Citi Perspectives 49 Value per asset segment 5 8 12 24 34 53 60 75 0 20 40 60 80 100 Public Commercial Assets Mass Affluent HNIs Pension Funds Insurance Cos Central Bank Reserves SWFs Hedge Funds (USD Trillion) Creating fiscal space and strengthening the public sector balance sheet using public wealth could be a critical tool in strengthening public finances and generating growth. Professional management of public assets could annually generate extra revenue equivalent to 3% of GDP each year, according to the IMF. Box 1: Benefits of modern accounting and public financial management Adopting accounting standards similar to those used by private companies and based on accrual accounting — which records income and expense when incurred rather than when cash changes hands — would be an important first step toward implementing a modern financial — management system. The International Public Sector Accounting Standards Board recommends accrual accounting. Most OECD countries now report on an accrual basis and show a balance sheet — which reports the value of assets and liabilities at a point in time that yields important information about financial health. But the majority still budget and appropriate on a cash basis, which means the balance sheet sits outside the budget process and for that reason is largely ignored. The absence of a proper balance sheet, fully integrated into the budget, distorts understanding of financial status because governments focus mainly on debt, without recognizing the value of the physical assets, using measures such as “net debt” or “debt/GDP” as key targets. That can lead to bad decisions — such as privatizing a water system to generate funds to finance an infrastructure investment rather than borrowing. With proper accounting, governments would focus on net worth — the value of assets less liabilities, the measure used in the private sector , instead of on debt alone. With net worth as the official key target, an increase in debt to finance an investment is matched with an increase in assets. This would then create incentives to invest in government-owned assets rather than encouraging wholesale privatization — which may be for the wrong reasons and at the wrong price. A focus on debt alone has also led to governments embracing much-criticized financial techniques such as public private partnerships (PPP), where the main advantage is keeping debt off the government’s balance sheet but often at the cost of an undue transfer of public wealth to the private sector partners. Poor or risky accounting practices can shake, and ultimately reduce the confidence and trust felt by society. Accounting affects us all, as becomes apparent whenever there is a financial crisis, be it for banks, corporates or governments. So far, only New Zealand has introduced modern accounting and integrated its balance sheet with the budget, using it as a tool for its budgeting, appropriations, and financial reporting. Since the public sector reforms in the mid-1980s, New Zealand has achieved and maintained significantly positive net worth, where most comparable governments, such as Australia and Canada, or larger countries such as the United Kingdom and the United States currently report a negative net worth.