by Jinashri Wijesundara
Every decision a government makes regarding finances has a ripple effect. Borrowing money, selling assets, investing in infrastructure – all these actions impact the country’s economic well-being in two ways, mirroring the double-entry accounting system businesses use. Dr. De Zilwa, a prominent economist, proposes a framework for analysing these impacts through the lens of a national balance sheet. Governments can build strong and prosperous nations by strategically managing debt and prioritising long-term growth.
Beyond traditional revenue and expenditure growth metrics
Traditionally, economic growth has been measured by a nation’s revenue (eg. income from taxes, exports etc) and expenditure (eg. spending on social programs, infrastructure etc). While this provides a basic understanding, it needs to account for the long-term trajectory of a country’s financial health.
The broader perspective of a National Balance Sheet and the double-entry impact
Dr. De Zilwa introduces the concept of a national balance sheet, similar to a company’s financial statement. This comprehensive document records a nation’s assets (everything it owns) and liabilities (what it owes).
Every economic activity within a nation has a dual impact, similar to a business transaction. Think of it as a two-sided coin. Building a road (an asset) requires borrowing money (a liability). Selling state-owned land (reducing an asset) generates immediate cash (a current asset) but eliminates a potential source of future income.
Every government action creates an entry on both sides of the national balance sheet. For example, when buying fuel, the government balance sheet decreases cash (current assets) but adds fuel reserves as an asset.
Government Investments vs. Private Investments
One key distinction between the balance sheets of government and public balance sheets lies in their investment horizons. Private businesses often prioritise quick returns on investments to satisfy shareholders. They might achieve this by setting higher prices for their products or services.
In contrast, governments can take a longer-term view. Their investments tend to be larger in scale, to create long-term benefits for the entire nation. Think of building a highway. While it might not generate profits immediately, the highway reduces transportation costs and time to market for businesses. With manhours, fuel costs, and time to ports saved due to the efficient infrastructure, the private sector ultimately increases its profit margins and market share. This translates to higher tax revenue for the government, strengthening its balance sheet in the long run.
When one sector feels the pinch, they all do Dr. De Zilwa digs deeper into the concept of the national balance sheet by highlighting its interconnected nature. Imagine it as a giant jigsaw puzzle, where each piece represents the financial statement of a single organisation in the country. Every private company, public entity, and state-owned enterprise contributes a piece to the puzzle. As these pieces interlock, distinct sections begin to take shape. Similar businesses, like all the hotels in the tourism sector, form one section, revealing the overall financial health of that particular industry. By analysing and understanding the manufacturing, agricultural, services and other sectoral balance sheets, the policymakers can identify areas of strength to leverage and weaknesses that require attention and make informed decisions for the future growth of those sectors within the national economy. These decisions may be presented as fiscal policies, such as tax breaks, subsidies, or investments in infrastructure.
Fiscal policy for long-term prosperity
Clever fiscal policies will ensure that governments recover their investments as planned but in a manner that does not hurt the public. By enabling the private sector to strengthen its balance sheets, these policies empower businesses to operate more efficiently and profitably. This translates to effortlessly paying tax revenue without squeezing their potential for revenue generation. In essence, a thriving private-sector fueled by strategic fiscal policies becomes the engine that drives tax revenue collection, ultimately allowing the government to recoup its investments and strengthen the national balance sheet. This creates a virtuous cycle of growth and prosperity for both the public and private sector
So the government and various sectors that add up to the national balance sheet are not isolated islands; they are intricately linked. There are also interdependencies among the sectors. When one suffers, the impact resonates throughout the national balance sheet. Let’s take tourism as an example. If a global economic downturn leads to a decline in tourist arrivals, hotels are the first to feel the pinch. Hotel occupancy rates will plummet, decreasing revenue, and weakening the asset base of hotels. But the impact doesn’t stop there. Hotels need to feed their guests, so they pay cash (a current asset) for supplies like eggs (increasing their inventory, another current asset). However, with fewer tourists, demand for these supplies also drops, impacting the dairy farms and other suppliers who provide to the hotels. This demonstrates how a decline in one sector can trigger a chain reaction, affecting the assets and financial health of interconnected businesses across the national balance sheet.
Building Wealth Through Revenue-Generating Assets
For sustainable growth, Dr De Zilwa emphasises that the governments need to focus on “revenue-generating assets”, a concept not different from what the private sector practices. These assets actively bring in income over time. Examples include productive industries that generate exports, investments in research and development that lead to innovation, or natural resources that can be sustainably harvested.
The key lies not just in acquiring these assets, but in managing them strategically. Dr. De Zilwa discourages using the proceeds from selling such assets for short-term consumption. This is like a family selling their income-generating rental property to buy groceries. Instead, these funds should be strategically reinvested in expanding the national balance sheet, acquiring new revenue-generating assets, or improving existing ones. This can be done by investing in infrastructure, industries, or research that will create additional income streams and expand the nation’s market share in the global economy.
Stress testing for unexpected events
The national balance sheet should not be a static document. Just as a business prepares for market fluctuations, Dr. De Zilwa emphasises the importance of “stress testing” the national balance sheet. This involves analysing how the country’s assets and liabilities would react to external factors like:
Currency Movements: Fluctuations in exchange rates can impact the value of a nation’s assets and liabilities denominated in foreign currencies.
Commodity Prices: Rising prices of essential commodities like oil and food can cripple a net importer’s finances.
Interest Rates: Changes in interest rates can affect the cost of servicing national debt.
By understanding how these factors impact the national balance sheet, governments can proactively develop strategies to mitigate risks and ensure long-term financial stability.
In conclusion, Dr De Zilwa says it is important to realise that while every government action creates an entry on both sides of the national balance sheet, it also affects the private sector balance sheets. For instance, consider government subsidies on fuel costs: the government’s balance sheet suffers a net negative effect, spending more than it earns, while businesses enjoy a net positive impact, benefiting from lower fuel costs and increased profit margins. However, governments may strategically choose to accept this short-term hit on their balance sheets to empower the private sector to strengthen their balance sheets, gain international market share, and facilitate future tax payments. This underscores the interconnectedness of economic decisions. All parties bear responsibility to meet these expectations—governments to enact fiscal policies strengthening private sector balance sheets, and the private sector to leverage these incentives to seize market share, generate revenue, and fuel the growth further by reinvesting profits back into the country’s economy.
By adopting Dr De Zilwa’s framework, governments can move beyond short-term thinking and focus on building a strong national balance sheet with a long-term growth emphasis through strategic management of revenue-generating assets. This approach fosters healthy and prosperous nations, ready to weather economic storms and thrive in the global marketplace.