For centuries, the Exchequer was a cash box rather than a system of budgeting and resource planning.  The job of the accounting system was to measure what went in and out, to ensure propriety but not value for money.  Productive investment and profligate spending, capital and current receipts, were all one.  

The last ten years have seen the introduction of resource accounting, which charges for the use of capital assets, and better recognition of accruals.  These are steps forward, but the analogy of HM Treasury plc should not be pushed too far.  Fundamental differences between governments and commercial organisations  translate into fundamental differences in their accounting needs.

Government is necessarily a going concern by virtue of the nature of government activity and its financial strength derives from its abilities to raise future taxes.  Governments default, not because they can’t pay, but because they won’t.  They make a choice that the external political consequences of repudiating commitments are less damaging than the domestic political consequences of raising the money.  Creditors cannot in practice take possession of public sector assets and there is usually no legal basis for them to do so.  The public sector balance sheet is therefore not analogous to a private sector balance sheet.

The differences are equally great for liabilities.  The obligation to determine liabilities is a key duty of directors.  But government is the body which determines what are and are not liabilities.  Government does so both for itself and for every other economic agent.  Pension liabilities, for example,  are defined by regulations which have not yet been made in the context of legislation which is the subject of frequent amendment.   The obligations of government are the product of future political expectations and compromises, not current legal duties.

Generational equity, the balance between our own needs and those of our children, and the implications of current pension expectations for future tax levels are vital elements in planning economic policy. But calculations that show the unfunded liabilities of governments in trillions of dollars are as futile as calculations that show the expected value of future tax receipts in trillions of dollars.  

The question of whether one entity is controlled by another is critical to private sector accounting.  In the last decade, both private businesses and governments have used the rules that govern these relationships to present misleading accounts.  New international financial reporting standards have rightly sought to check such abuses.

But here also government differs fundamentally from a company.  Government ultimately controls all economic entities, whether they are departments of state or private corporations.  When Northern Rock ran into difficulties the key decisions on its future were made not by its directors but by state agencies.  When the problems failed to resolve themselves, a bill to make government the legal owner of the business passed Parliament within twenty-four hours.

The legal basis of these public powers over private sector entities varies and may not formally exist:  that does not matter much because in a crisis government can take the legal authority it needs, as it did at Northern Rock.  The list of activities which government in this sense controls includes major financial institutions, utilities, and many other businesses of national and strategic importance.   A consolidated public account could incorporate the assets and liabilities of all such businesses which the government might be said to control but such a statement would serve no useful purpose.  What are the proper responsibilities of government when institutions such as Northern Rock and Bear Stearns, or Railtrack, British Energy and perhaps General Motors struggle to meet their liabilities?   What will such contingencies cost the taxpayer? These are important policy questions, but no accounting rules can answer them.

Governments, like private sector companies, are anxious to promote flattering reports of their affairs.  The job of resisting their attempts lies with statistical agencies like Eurostat and the Office of National Statistics.  An accounting group, the Financial Reporting Advisory Board, applies private sector accounting principles to public sector activities.  None of these organisations has remit or competence to determine the information needed to formulate policy and the degree to which policy goals have been achieved.  In a subsequent column I will describe how that gap should be filled.  A true and fair view is even more important to the operation of democracy than the functioning of markets.