Governments hide what they owe and ignore what they own. Current practice “misses large swaths of government activity” and encourages “illusory fiscal practices,” the International Monetary Fund notes in its latest Fiscal Monitor report, which was released this week.
The solution? Governments should adopt the accounting standards developed by the private sector nearly 1,000 years ago.
Rather than use accrual accounting and double-entry bookkeeping, most governments focus on cash deficits and gross debt. One consequence is that many governments borrow extensively “off balance sheet.” The most common hidden obligation is the employee pension: promises of future income in exchange for labor provided today. According to the IMF, pensions alone are worth more than the face value of government bonds in Finland, Korea, Norway, Portugal, and the United Kingdom.
Even though those promises are economically equivalent to debt, they are not counted as debt in standard government accounts, if they are counted at all. Unscrupulous politicians can exploit the opaque accounting to hide the cost of their policies. Promising public servants more money when they retire is easier than raising taxes or cutting spending today.
Ironically, the IMF itself seems to have been misled about the dire state of American public pension plans, thanks to the low quality of U.S. government accounting standards. The Fiscal Monitor database shows that U.S. state and local government employee pension plans are a little more than 70% funded. The actual funding ratio is less than 50%.