Assessing a Government’s Non-debt Liabilities

In managing its finances, a government appropriately pays attention to the level of its indebtedness. This paper argues that, for many governments, the amount of the explicit debt on the balance sheets seriously understates the magnitude of their future fiscal obligations. Specifically, many governments, particularly in the industrial world, have legislated or, more implicitly, made policy commitments to their citizens in a way that public sector accountants would not strictly classify as formal debt obligations on their balance sheets. Yet in a political economy sense, these commitments are difficult to ignore or renege upon. A government’s “constructive fiscal obligations” also reflect the evolving history of its role vis-à-vis its citizenry as a provider of basic services and public goods (e.g., education, defense, public administration, sometimes health care), as a protector of the most vulnerable (e.g., welfare-type expenditures) and as the ultimate insurer in the event of adverse shocks. In effect, one must conceptualize a spectrum of fiscal obligations and risk exposures that extend beyond explicit debt alone. Financial markets are now putting pressure on governments to acknowledge the scale of these exposures and to confront whether they threaten a government’s fiscal sustainability.