Transcript | 6. lecture: Net worth (Ľudovít Ódor) - University for modern Slovakia

Welcome. Our last lecture dealt with the question on how to “trick the epicure”. We will need mechanisms, which will increase costs of irresponsible actions so that the planner wins more often also within public finance. We will use three ingredients: transparency, fiscal rules and independent assessment institutions. It should not result in a “rich beef stew” but a more healthy meal, which the tax payers will be able to “digest easier”.  Me and my friend Michal Horváth from Oxford University imagine this happen as a constitutional act on budgetary responsibility.

Before I reveal the recipe, let’s talk about the basic philosophy that supports the whole concept. When analysts and economists assess economies of individual enterprises, they read through annual reports, which often contain: balance (assets and liabilities of the enterprise) and income statement (revenues and costs). Unfortunately, in the case of state we only have a clear picture of some income and expenditure items and the difference between them (surplus or deficit). Why should it matter? I will try to put more light on that based on some examples:

Is the deficit too high? It does not matter, we will sell a building for half its price and we will recognize lower deficit. Another option would be to save on expenditures by not giving subsidies to the railways in the usual amount. Even though we will have to rescue them later on, but that will be necessary only in couple of years, we do not have to think about it now. Also a better idea crosses my mind – we will not invest in reconstruction and maintenance. What a great idea! Even though the buildings are going to be neglected and ageing, we have, however, decreased the deficit. If this was not enough, we would make use of the Public-private partnership (PPP) projects that will show in the expenditures later on, or even nationalization of property in the second pillar.

Do you have the impression that I am talking nonsense, that these are only subtle corrections which do not solve but postpone the problems? You are right. No responsible economist would call those measures a consolidation of public finance. However, this is common practice in Europe. Why? Because only a few are interested in how the state property changes, the majority focuses just on the number that Eurostat recognizes as deficit, whereas that number is what the whole Stability and Growth  Pact and country assessment is based on (the debt criterion has only been secondary so far). Such shortsightedness then leads to the stated wrong incentives. The “masters of finance” often search for such ways in which they can “extinguish the thirst” so that it would not mirror in official Eurostat numbers.

Together with Michal we think that this is where it goes wrong and a new variable has to be introduced to the debates on budgetary policy – net worth of the state. It is an analogy of balance in case of private enterprises. It would then not be so easy to just improve deficits visually to the detriment of state property, the value whereof would decrease.  As an example, if we sold a building for half its price, the net worth would decrease despite the numbers that the statistics would show. The value of state property would thus be twice as low as compared to the increase in cash. The concept of net worth is naturally not so easy to calculate, whereas some types of properties are not easily valued. However, we find it crucial to commence this work and improve its methods gradually. Countries like Great Britain or Australia monitor the value of net worth and assign it an important role within the budgetary framework.

What areas are influenced by net worth?  On the side of assets, the state owns buildings, infrastructure, machines and equipment or financial property. So far nothing special, as this is what every enterprise has as well. However, within state we cannot forget about the net wealth of state enterprises, central bank, natural resources or ecological wealth. Last but not least, I would like to mention the so called taxation capacity. Private sector cannot collect taxes. All this is only done within assets. What accounts for the liabilities? Public debt. However, this is not all. One has to take into account also implicit debt (e.g. future pension expenditures that result from law or PPP projects) and conditioned debt (state guarantees). Basically, we get net worth of a country as follows - its assets minus its liabilities. Would it not be interesting to have a closer look at that?

Let’s go cooking. However, keep in mind that the ingredients have to be added in such way that we keep the concept of net worth clearly in our mind, which represents something like the “essential Chef’s book“. To begin with, add transparency. We can rely on the public control only if due and complex information on the state economy is available. We should require that the net worth of our country was published right from the beginning. Apart from that it would be suitable to publish the information on the economy of subjects of public administration and state enterprises at least once in two years and information on budgets three years ahead.

It would be helpful for transparency if the Parliament did not endorse measures without calculation of costs with regard to individual changes. In case of greater changes (e.g. pension reform) we could also require that control calculations are carried out by an independent institution. More analyses on sustainability of public finance and intergenerational reports should be released to the public. If it was like that, citizens would have a better image of which financial burdens would be transposed upon next generations. In case of public institutions Codes for online publishing of data could also be created and the same accounts for a request to make the lists of state subsidy and transfer recipients available. 

Today we laid the groundworks of the framework for a responsible budgetary policy in form of the net worth concept. This was followed by requests for greater transparency in public finance. To finish the “meal” we need various fiscal rules and an independent assessment institution. Those will be the issues we will deal with during the upcoming lecture.