Mr Micawber’s teaching about living within one’s income seems deeply imprinted on Rachel Reeves’s heart. The chancellor can have left no one in any doubt about her abhorrence of her predecessors’ profligacy, and her determination to clamp down on spending.
Businesses know that cashflow is crucial. But a glance at the profit and loss account does not give a proper picture of a company’s financial state, and neither does it provide an accurate measure of a country’s strength. The balance sheet provides the measure of what an organisation really amounts to and is the gauge of how resilient a business could be in times of stress.
If Reeves wanted to be a truly reforming chancellor, she should start with the country’s accounts. The results could be surprisingly dramatic.
Earlier this year saw publication of a weighty hardback advocating what is seen as revolution in Treasury circles. There were no overnight queues awaiting the arrival of Public Net Worth: Accounting – Government – Democracy (published by Palgrave Macmillan), but some commentators were enthusiastic about its arguments.
One of its five co-authors, Dag Detter, has been proselytising for this cause for decades and is passionate about it, a fact to which many Treasury officials and politicians around the world can testify, as he has tried to persuade them to listen to his arguments.
He put some of them into practice from 1998 to 2001, when he led the restructuring of Sweden’s portfolio of public assets, and, in 2015, with Stefan Fölster, he published The Public Wealth of Nations: How Management of Public Assets Can Boost or Bust Economic Growth. Our then chancellor, George Osborne, did not appear ready to take lessons from anyone, and certainly not from a Swedish former banker, so it did not in the least influence his austere approach.
But maybe the concept of a more realistic approach to government accounting is about to gain more support. Last month John Crompton, one of Detter’s co-authors of the latest volume, wrote a piece for The Wealth of Nations, the online newsletter produced by Simon Nixon, former Wall Street Journal and Times columnist.
Crompton is well-placed to call for change at the Treasury, having fitted in three stints working there during a career spent largely in investment banking. He could not be clearer about the totally perverse results produced by the current approach to keeping the country’s books and argues that, in her early moves, Reeves is demonstrating why it does not work, being focused purely on the short term, not the long.
Shrieking that she faced a £22bn black hole in public finances, she immediately cut projects such as new roads and hospitals because the fiscal rules do not discriminate between current spending and investment. Some public-sector investments may more than pay for themselves over time, and sensible accounting would take that into consideration.
Reeves did decide, though, to grant significant pay rises to some public-sector workers. Whatever the merits of the strikers’ demands and the mounting costs of the disputes, the pay rises are not accounted for realistically.
As Crompton points out, they bring with them public-sector pension commitments that could be as much as 40% of the aggregate pay increase but, because they are unfunded, do not have any impact on the nation’s balance sheet or the fiscal rules.
The weight of public-sector pension promises is one of the heaviest burdens passed on to future generations. Because it is unaccounted for, it is not provided for whereas, in a more sensible regime, the state would behave as commercial pension schemes do, establishing a fund that, over time, would grow to meet its obligations.
This ludicrous situation has been allowed to mount over such a long time that funding it would require a massive investment, but then the other side of this more realistic balance sheet would produce some positives as well.
The government owns vast amounts of land and buildings, which according to the advocates of public net worth accounting are not properly valued. They believe that a realistic valuation would prompt more effective usage.
There are persistent rumours that Reeves is considering a tweak to the fiscal rules that would give her a little more flexibility on borrowing. Perhaps she should be a bit braver and embrace a more radical approach to accounting.
