What is in the public balance sheet?

Most of the discussion about the public finances focuses on the fiscal deficit – the shortfall between receipts and spending – and public debt – the accumulated amount of borrowing that has been used to finance deficits and other cash requirements over the years.

However, there is much more to the public finances than deficit and debt. The government owns property and other assets that aren’t reflected in those measures and has significant liabilities in addition to debt.

Chart 1 summarises the wider public balance sheet as recorded in the most recently published Whole of Government Accounts 2021/22. These set out the consolidated financial position for the UK public sector in accordance with IFRS standards.

As Chart 1 illustrates, there were assets of £2.4tn in the public balance sheet on 31 March 2022, but these were more than offset by liabilities of £6.3tn to result in an overall net liability position of £3.9tn.

This is equivalent to approximately £35,000 of assets and £94,000 of liabilities per person living in the UK, or a £57,000 net liability for each and every person living in the UK.

Chart 2 breaks down the £2,414bn asset side of the balance sheet into four main components:

• tangible and intangible fixed assets with a book value of £1,384bn,
• investments of £472bn,
• current assets of £230bn, and
• current financial assets of £328bn.

Financial assets, investments and current assets are mostly recorded at their fair value or current market value as appropriate, apart from student, bank and business loans which are recorded at amortised cost.

Fixed assets are mostly recorded at depreciated historical cost or at depreciated replacement value.

Chart 3 analyses total liabilities of £6,289bn on 31 March 2022 as:

• £2,909bn of financial liabilities,
• £2,639bn in public sector employee pension obligations,
• £529bn in provisions and charges, and
• £212bn in payables.

Financial liabilities include:

• British Government securities (gilts and treasury bills) owed to external investors,
• Bank of England deposits owed to banks, loans and other financial liabilities,
• National Savings & Investment premium bonds, certificates and deposits owed to the public, and
• banknotes in circulation.

Net financial liabilities of £2,582bn on 31 March 2022, £2,910bn less £328bn of financial assets, was higher than public sector net debt of £2,381bn on the same date, primarily because of financial liabilities that aren’t included in the National Accounts definition of debt.

The main public sector employee pension schemes are unfunded, meaning there is no money set aside to pay NHS workers, teachers, civil servants, armed forces or other public servants in retirement. Local government and other public bodies with funded pension schemes have liabilities of £449bn offset by investments of £349bn.

'Provisions for liabilities and charges', include nuclear decommissioning costs payable over the next century or so, and clinical negligence claims that can be paid over decades in some circumstances, as well as legal and other exposures.

'Payables' primarily relate to purchases of goods and services by public bodies, but also include tax refunds and private finance initiative (PFI) and other lease obligations.

What is not in the public balance sheet?

The Whole of Government Accounts report that there are £177bn in financial commitments under PFI contracts, leases and other non-cancellable contracts that are not recorded as liabilities in the then balance sheet, but will be turned into liabilities as services are provided or assets, goods or services are delivered.

There are also £107bn in contingent liabilities and £179bn in ‘remote’ contingent liabilities. The former includes £75bn relating to clinical negligence claims and £17bn in potential nuclear decommissioning costs that are considered possible but not probable, while the latter includes indemnities, guarantees and other financial exposures that are not expected to become payable but are required to be reported to parliament so that it has a full picture.

Also not included in the balance sheet are resources that do not meet the accounting definition of an asset, such as the right to collect taxes in the future. Anticipated future financial outflows that do not meet the definition of a liability, such as commitments to pay the state pension and other welfare benefits, are also not counted.

How do public assets and liabilities affect people and businesses?

Public assets play a significant role in our lives and in the economy. Infrastructure assets, such as roads and railways are critical to the operation of the economy, while social housing provides millions with somewhere to live. The defence of the nation depends on military bases and equipment. We benefit from parks, leisure centres, community halls, libraries, museums and heritage properties, while other assets are needed to provide public services, from hospitals and GP practices, waste recycling equipment, police stations, and many others.

Assets can also be used to generate income, such as the Crown Estate that pays for the upkeep of royal palaces, as well as dividends to the government. There are also international reserve assets that support the currency, and investments to cover liabilities such as the Pension Protection Fund. These reduce the amount that people and businesses strengthen the balance sheet and reduce the need for taxes in the future.

Liabilities represent future outflows of cash that have to be paid or refinanced before anything else, restricting the ability of the government to use money for other purposes. For example, with no money set aside to pay for most public sector pensions, cash needs to be found each month to pay retired public sector workers. Similarly, payables and provisions need to be settled before thinking about discretionary spending.

Financial liabilities are the largest component of the liability side of the balance sheet, and debt interest needs to be paid. It is also a vulnerability in that a significant proportion of debt needs to be refinanced every year, increasing the government’s dependence on debt markets.

Despite that, liabilities do have a role in how the public finances are managed. Borrowing can be used to invest now with payback in the future – either in economic growth or more efficient public services. And we were able to borrow significant sums to bail out the economy in the financial crisis and the pandemic.

What is the outlook for the public balance sheet?

The government does not prepare forecasts for future balance sheets, but financial liabilities expected to continue to rise as the government continues to borrow (see debt).

Fixed assets are expected to grow gradually as new assets are constructed or purchased, and infrastructure assets are revalued to current values, offset by depreciation each year to reflect their use.

Investments are expected to grow over time, although this will be partially offset by the sale of NatWest shares as the government disinvests. Receivables should also go up over time, with unpaid and accrued taxes expected to grow in line with the economy and inflation.

Cash and other financial assets are expected to be broadly stable in line with policy objectives.

The calculated value of pension obligations is expected to shrink significantly from the amounts reported in the balance sheet as of 31 March 2022. This is because these liabilities are calculated by discounting future pension payments and as interest rates have risen significantly over the last couple of years, the calculated liability should reduce accordingly.

The provision for nuclear decommissioning should also reduce with higher discount rates, as it is used to pay for nuclear facilities to decommissioned. However, cost estimates have a history of increasing as decommissioning work progresses and more problems are found.

Clinical negligence liabilities are also expected to fall with the higher discount rate, but are then expected to increase each year as new long-term claims are added to the total. This reflects a deliberate policy choice to avoid one-off settlements for long-term care and financial compensation in favour of ongoing payments. This approach avoids litigation by claimants if the money they receive runs out and avoids paying out one-off sums that turn out not to be needed in full.