Fixing public finances without a chainsaw

The threats posed by today's geopolitical and demographic shifts call for a fundamental transformation in public-finances management. Instead of focusing exclusively on debt reduction and tax hikes, European and US policymakers should leverage the value of public-sector assets to generate new revenue streams

- 

STOCKHOLM-Just as businesses and households assess their balance sheets before making investment decisions, so should governments. When budgets become imbalanced, the most effective way to boost revenue is by improving the management of assets and liabilities. By contrast, US President Donald Trump's reckless spending cuts - spearheaded by chainsaw-waving billionaire Elon Musk and his Department of Government Efficiency represent the worst possible approach to addressing fiscal challenges.

To be sure, the threats posed by today's geopolitical and demographic shifts call for a fundamental transformation of public-finances management. This challenge is particularly urgent in Europe, where the United States' recent pivot toward Russia has made defence spending a top priority.

But so far, European governments have focused exclusively on increasing debt and raising taxes, overlooking the full scope of their assets and liabilities. This narrow approach has deprived policymakers of crucial insights and accountability, and has led to inefficient resource allocation and potential inequities within and across generations.

It doesn't have to be this way. If governments introduced accrual accounting-driven targets and adopted public-sector net worth as a key metric of fiscal health, they could generate new revenue streams and strengthen their fiscal positions without cutting essential public services or resorting to tax hikes. Accrual accounting records revenues when they are earned and expenses when they are incurred, rather than when cash changes hands. Net worth is the value of all assets minus the value of all liabilities. Public debt is just one of a state's liabilities.