For decades, one of the main fiscal targets of the Government has been to reduce the level of public sector debt. This covers not just central government but also local councils and state-controlled companies. Debt estimates are presented every month in the public sector balance sheet, which shows the financial position at a single point in time. The balance sheet sets out the liabilities (amounts owed) and the assets (amounts owned), in line with international statistical guidance. However, there are several different balance sheet measures, some broader in scope than others. How do they differ?
The main debt measure used by the government as a fiscal target, and the one most looked at by economic commentators, is ‘public sector net debt excluding public sector banks’ (‘PSND ex’ for short), as a proportion of GDP. This is a ‘net’ measure in the sense that the public sector’s liquid assets (effectively money in the bank) are netted off against total liabilities. It largely reflects the stock of outstanding gilts (bonds issued by HM Treasury) that have funded past spending, and that comes to the widely quoted £2.5 trillion figure I mentioned above. It is typically expressed as a ratio to nominal GDP, so is affected both by changes in debt levels and the pace of economic growth.
However, beyond the scope of PSND ex, the public sector has both many more liabilities and many more assets. For example, it owns non-financial assets, such as buildings, infrastructure and vehicles, as well as financial assets such as shares (for example, the Government’s 43% holding in the NatWest Group) and money that is owed to it (such as the COVID-19 loans offered to UK businesses to provide support during the pandemic).
A wider balance sheet measure is ‘public sector net financial liabilities excluding public sector banks’ (or ‘PSNFL ex’ for short). It looks at a broader range of financial assets and liabilities than does PSND ex, such as the illiquid financial assets held under the Bank of England’s Term Funding Schemes, which fall outside the boundary of PSND ex. As there are more of these extra assets than liabilities, PSNFL ex is smaller than PSND ex – currently £2.2 trillion, £0.3 trillion less than PSND ex. Although PSNFL ex has a broader definition than PSND ex, it is still not a complete measure of the public sector’s stock of assets and liabilities, because it excludes its non-financial assets, such as the road network or state schools or NHS hospitals.
Recognising the limitations of existing measures, next week’s public sector finances release will introduce an additional and broader balance sheet measure, ‘public sector net worth excluding public sector banks’ (PSNW ex) to fill this gap, a development we have been working towards for some time. This is an exhaustive aggregate of the public sector’s financial and non-financial assets minus the total value of public sector liabilities.
This new PSNW ex measure provides a fuller picture of long-term fiscal sustainability and captures the impact of a wider range of government activities. It does not replace existing fiscal aggregates but can be used alongside them, allowing for a more complete and integrated presentation of public sector finance statistics.
Grant Fitzner is Chief Economist at the Office for National Statistics.