There are ideas that make perfect logical, even economic, sense. Which then don’t work out in reality. The reasons for the ultimate failure is that reality is inhabited by us, us human beings. Take this idea:
Jeremy Hunt, the Chancellor, claimed that Rachel Reeves, his opposition counterpart, was preparing to “fiddle the books” in a move “out of the Gordon Brown playbook”, harking back to claims that the former prime minister hid private finance initiative schemes “off balance sheet” in order to maximise borrowing. Labour insisted the claims were untrue.
The intervention came as the independent Institute of Fiscal Studies (IFS) also sounded a warning over Labour’s plans to introduce a fiscal rule that would take account of “public sector assets as well as public sector debt.”
Entirely sensible. Yes, of course the public sector should run a proper balance sheet. We do think that should be a proper balance sheet as well - we need to have all those future liabilities from promised pensions on it as well that is.
If government borrows to create an asset then yes, that is different from government borrowing to finance current spending. Our accounting for government should reflect that.
Now, why won’t the idea work? Because of who will value the valuations and how they will do it. For what will happen - no, will - is that the standard GDP assumptions will be carried over. Within GDP calculations we measure value added at market prices. There are not market prices for a lot of what government does. Therefore government is valued at the cost of provision of government.
This has the odd effect that if we increase the number of bureaucrats, increases the wages of bureaucrats, then we’ve increased GDP. Equally, if we fired the bureaucrats who regulate the red flags carried in front of those new-fangled cars then we’d have reduced GDP. Even as we increased value added.
But government is valued in GDP at the cost of the provision of government. So, how will government created assets be valued? At their cost of provision, obviously. At which point having an actual balance sheet doesn’t improve matters. Because we’ll not be valuing the assets created at their actual value.
No, we are not just being cynics. This is how the accounting will be done. Therefore the idea fails.
Think on it. This idea of a public balance sheet, showing assets as well as borrowings. Imagine someone decided to borrow £50 billion - an absurd idea, we know - to build a railway line that cuts 10 minutes off the not-central Birmingham to an outer suburb of London travel time. Truly a ridiculous thought, agreed, but an obesely hyperbolised example just to show the abject foolishness possible. That railway line would have an actual value - either objective or realisable - of zero. But it would be carried on the government’s balance sheet at the £50 billion cost of production. Because that’s how government is calculated in GDP.
The aim of having a government balance sheet would be that sure, borrowing that creates assets worth more than the borrowing is a grand idea - that’s adding value, it’s wealth creation. But given who will value the valuations it won’t work that way. Any government spending upon anything will be concluded to have added value. Something which isn’t the case and therefore this plan fails.