My colleagues at the Fiscal Council, Sebastian Barnes and Diarmaid Smyth, have produced a new report detailing a comprehensive approach to the State’s balance sheet. The report is available here.
I just want to underline here the value of the type of comprehensive approach developed by Sebastian and Diarmaid for policy analysis. Policy analysis can often be distorted by taking an overly narrow view of the government accounts, and in particular focusing only on the General Government accounts. Some examples:
In banking-related discussions, focus is often on the need for new State-provided capital and the consequent implications for Gross Government Debt. But even if the new round of stress tests do not reveal the need for new capital, any newly revealed losses are real losses in terms of the net worth of the State. On the other hand, additional capital required to meet more ambitious capital adequacy ratios need not lead to a reduction in net worth.
In the discussion of “stimulus programmes”, attention is often on forms of financing that run down State financial assets or use “off-balance sheet” forms of financing. The latter are typically off-balance sheet only to the extent that the liabilities – actual and contingent – are outside of the General Government accounts. They are very much on a more comprehensively measured balance sheet for the State.
Finally, in the discussion of the benefits from the promissory notes transactions, most attention is given to the impact on the General Government deficit, including the roughly €1 billion reduction in the deficit for 2014 and 2015. This particular reduction is largely an accounting fiction that follows from the limitations of General Government accounting. It is the result of the high interest rate that was paid on PNs. Sebastian and Diarmaid’s analysis shows the irrelevance of this interest rate from a comprehensive balance-sheet perspective (see also this recent post by Seamus Coffey). However, they show that the transactions are likely to generate a significant net present value gain when account is taken of the effects on all the relevant entities on the comprehensive State balance sheet, although the size of that gain is uncertain and depends on such factors as the choice of discount rate and the future evolution of the risk premium on Irish debt.