Measuring Governments' Net Worth

Abstract

Increasingly, governments are making legislative commitments to be fiscally responsible and, as part of those commitments, are undertaking to maintain their net worth and report against that undertaking. The principles commonly cited in support of these commitments are transparency and inter-generational equity. Until recently most governments used cash accounting for their budgeting and financial reporting systems. Debt and of changes in debt were the main indicators of governments’ fiscal responsibility — that is, cash surpluses or deficits. However, cash accounting ignores such significant costs as asset depreciation and accruing employee entitlements (superannuation and long service leave) unless an equivalent amount of moneys is set aside in a separate fund. Cash accounting can also give a distorted view of whether a government is acting in a fiscally responsible manner because asset sale proceeds have been classified as either revenue or as reductions in expenditure. Such shortcomings in the quality of financial information provided to governments can lead to poor decisions being made in relation to an investment or disinvestment in public sector assets and in relation to the cost-effectiveness of alternative providers of public services. Further, the use of cash accounting as the basis of government financial reporting has been a significant impediment to holding governments accountable, on a year-to-year basis, for the quality of their fiscal management.