Public Balance Sheets of G7 Countries

Many countries have accumulated historically high levels of public debt. These will need to be either paid off or serviced indefinitely. If creditors believe a country cannot manage this, then defaults and/or inflation will result. Needless to say, both would be economically very disruptive.

Sovereign debt alone provides a limited view of a government’s overall financial position. Governments issue other types of liabilities, for instance pension responsibilities, and hold assets, both financial and non-financial.

Note that a country’s public net worth is the negative of its expected discounted value of future tax surpluses. So for example, with a government that only issues debt, the value of this debt depends on the belief by holders that the government will raise enough real surplus revenues to pay off this debt. If investor beliefs change - for instance if they believe governments will not be able to raise enough revenue - then the value of the debt will decrease.

For a complete picture we need to take all assets and liabilities into account, and include all levels of government, e.g. state, local, and federal. There is however no comprehensive up-to-date source for this information, despite the importance of this information.

I therefore provide an overview of current best estimates here, focusing on the G7 countries. I pieced these together from various sources, and all details are available upon request.

Types of Assets and Liabilities

I split assets and liabilities into several categories. For assets, I differentiate between 1) financial assets, 2) non-financial assets (excluding land and natural resources), 3) land, and 4) natural resources. For liabilities, I consider 1) debt securities, 2) other liabilities (for instance pension responsibilities), and 3) unfunded liabilities.

Unfunded Liabilities

Unfunded liabilities represent promised payments (for instance for Social Security) minus expected tax receipts. Importantly, both of these can be changed: public pension systems have often been reformed and taxes can and have be raised. Such reforms are conceptually quite different from defaulting on debt.

Any calculation of unfunded liabilities shows us the accumulation of explicit debt assuming no reforms. Calculations often break down accumulations by time horizon. For instance, we can separate out the present value of debt accumulated in 1) the next 50 years, and 2) thereafter. Often the contribution in the distant future is where most of the liabilities are, but this calculation maintains the the highly unlikely assumption that no reforms will have occurred up to that point in time. I therefore limit myself to a 50 year horizon.

Estimates

Tables 1–3 show liabilities, assets, and net worths, all as a percentage of GDP. I also show net worths with unfunded liabilities excluded.

We see that accounting for unfunded liabilities makes a huge difference. We also see that looking just at debt gives a very incomplete picture of a country’s overall financial position. Japan, for instance, has a very high level of debt, however the government also owns a substantial amount of assets, both financial and non-financial. Natural resources are significant for the US and Canada, but not so much for the others.

The countries with the largest fiscal problems appear to be France, followed by Italy. However, if we ignore unfunded liabilities the country with the greatest fiscal problems is the United Kingdom. Interestingly, the US comes out looking comparatively good, despite the rapid accumulation of debt in recent decades.