June 21, 2006

The public sector keeps some de-facto public debt off its balance sheet.

Sir When a country provides its citizens with public services directly and does not have the resources for the required investments, then it contracts public debt, registers it as such, and collects tariffs and taxes from the citizens to service it. But, when instead a government decides, for whatever reason, to have the private sector perform that public service on its behalf, as for instance supplying electricity, then no public debt is recorded, notwithstanding that their citizens still have to pay for it and which all results in governments being able to keep society’s long term obligation with its private public service provider off the books. Yes, someone could argue that it is not really a public debt as no one is really forced to use electricity but, come on!, that argument assume that all the society could stop using electricity. As is, every time an Argentinean turns on a light at home, he is unknowingly helping to service a public debt that though never formally accounted as such, is a very real de-facto public debt and, in his particular case, mostly a foreign one.

One of the things we should expect from any good accounting is that it allows us to make valid comparisons, in the case of the private sector between companies and, in the case of the public sector, between countries, but, in this case, how do you compare France and the UK?.

Another problem with not recording the true societal debts and therefore the true societal costs is that the government starts to loose track of its real weighted average cost of funds, something we are taught to quite handy when having to select what projects to carry out.

Today instead of investing so much effort looking for the exact worldwide convergence of the accounting standards for the private sector, we citizens might do much better looking for some better approximates for our public sectors.