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Coronavirus underlines importance of government balance sheet management

31 March 2020: as a nation, we are likely to feel the consequences of the Government’s emergency COVID-19 interventions in years to come, so we owe it to future generations to maintain a grip on these liabilities.

The Budget earlier in March contributed an additional £12bn to the annual deficit, before the two coronavirus-led interventions added another £32bn. ICAEW’s March chart of the week highlighted how this took the forecast deficit for 2020-21 to £84bn.

Since then, further emergency measures and an assessment of the effect of a contracting economy on tax revenues, have resulted in the IFS predicting the deficit could reach £177bn.
 
But, and this is a big but, these eye-watering numbers only represent the budgeted gap between revenues and spending and do not include potential costs that are currently more difficult to predict. For example, the Government has just pledged £330bn in the form of loans and guarantees to help businesses and individuals through these difficult times, while HM Treasury is also guaranteeing emergency loans and corporate bond purchases made by the Bank of England. 
 
According to the latest Whole of Government Accounts (31 March 2018), the Government already has contingent liabilities amounting to £193bn. These are not recorded as liabilities on the balance sheet as there is only a possibility that the Government will be liable for them. However, what was only a possibility a few weeks ago may not be now – these are extraordinary times after all. 
 
A more holistic view of assets and liabilities will allow the Government to sensibly plan ahead, which it will need to do with some urgency once the dust has settled. Only by having a full picture of all assets and liabilities, which includes off balance sheet liabilities as described above, will it be possible to carry out risk planning, stress testing and scenario analysis. 
 
As a nation, we are likely to feel the consequences of the Government’s intervention in years to come, decades even. We owe it to the future generations to ensure we maintain a grip on these liabilities, including those with a lower probability of crystallising. After all, what seemed improbable a few weeks ago, doesn’t feel so improbable now.