1 thought on “US and UK governments are on course for fiscal calamity”

  1. Posted 16/03/2014 at 11:04 | Permalink

    Just some thoughts from an accountant who deals with the business world but has little experience of how governments disclose their fiscal imbalances. It is not suggesting any changes to the article.
    There is a distinction to be made between a commitment and a liability:
    If a service such as health care has been delivered there is a liability at the date of the service, no matter if the supplier is to be paid the next year.
    When evaluating liabilities, clearly the cost of repairs made today to potholes in the road is a liability. The question arises how to consider the cost of fixing potholes visible today but not yet fixed, and what about the cost of fixing potholes likely to appear in the future?
    The cost of fixing the population’s health issues likely to appear in the future is a commitment. It will become a liability in due course, just as future tax revenue will become an asset to be consumed in meeting the liability.
    In state expenditure there is an important assumption that is consistently applied: that future costs will be covered by future (taxation) revenue, albeit the revenue sources do not particularly match the costs. This assumption is not made in corporate accounting and the recent “windfall” made by the government in taking over Royal Mail pension illustrates the difference in the two views. The divergence between government and business accounting rules can be exploited and the PFI legacy of the last decade is an example.
    Taxation is a proportional levy without any proportional benefit and this fact renders inoperable a large proportion of sound accounting rules applied in business.
    Surely if forecasts show a series of future deficits the cumulative value should be treated as a liability. After all, if these deficits were to continue for a sustained period there would be default. But then if there is default the liability will not be settled, therefore it is not a liability.
    Ultimately governments do deal with accumulated deficits though not usually through a default. Potholes do not get fixed, services become creaky, inflation erodes their debts, assets such as land, buildings and public companies get sold, taxation increases.
    Then new governments get voted in!

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