The Basics of a Government Balance Sheet

TL;DR: government balance sheets are similar to those of businesses but have key differences, most notably in the equity account. The debt account is the most publicized, and most important, balance sheet account for governments. We also take a glimpse into the balance sheets of four advanced economies - the U.S., Canada, the UK, and Japan - to uncover similarities and differences in their balance sheets.

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The press loves talking about how indebted your government is. It feels like, no matter where you live, you are inundated with facts and figures that attempt to convince you that your government is either broke or close to broke. The conclusion is that future generations will have to pay for today’s lack of discipline.

Part of this is true; many governments in the post-Covid world are indebted because of the borrowing required to deliver expensive social programs during the pandemic. Part of this is political; the non-ruling party, and the media that is aligned with them, have a vested interest in drumming up the extent to which ‘they got us in this mess’.

But, a key element which we think is missing from the discussion is an understanding of a government's finances. We explore this through the 'balance sheet', a critical tool in understanding the financial position of an entity. The questions that are important to answer are: how does the government balance sheet differ from a business balance sheet? What elements does it contain? Which elements are most important?

In this post, we attempt to answer these questions.

What is a Balance Sheet?

Imagine you wanted to calculate your ‘net worth’, a statistic that is often calculated and presented by the likes of Forbes or Fortune for the world’s richest people.

The words ‘net worth’ may get you thinking about your annual salary, investments you hold, property that you may have, and any cash that you have sitting at a bank; in short, the words ‘net worth’ bring to mind ‘finance stuff’. A balance sheet is a grouping or presentation of this ‘finance stuff’ that helps quickly provide a snapshot of your financial position, and determine your net worth.

Assets

Some of the things you are thinking about would fall into an ‘assets’ bucket. Assets are what you own, and include cash you have at the bank, investments you hold, valuables such as your great grandfather’s coin collection, and tangible possessions like a house or a car.

Liabilities

Other things would fall into a ‘liabilities’ bucket. Liabilities represent what you owe to others, and include items such as a mortgage, loans or lines of credit, and credit card debt.

Equity

A third bucket, ‘equity’, tells you your net worth and is calculated by subtracting your liabilities from your assets.

In other words, your net worth is the amount of cash that would be leftover if you were to sell all of your assets and use the proceeds to settle all of your liabilities.

Net Worth / Equity = Assets - Liabilities

Notice that how much money you make at work is not included in this picture. This is because your annual salary, by itself, does not influence your net worth. Instead, the cash that you receive from your employer is a source of ‘revenue’, and can be used to pay down your ‘expenses’ (e.g., rent, utilities, concert tickets, meals at a restaurant, etc.) or to buy assets (e.g., cash at the bank, investments, a home, a car, etc.). The level of your salary is not, by itself, a contributor to your net worth.

The balance sheet is used by individuals, businesses, and governments to determine their financial position at any point in time. In general, though it is not always the case, more equity is equal to a better financial position. After all, who doesn’t want a higher net worth?

How Does a Government’s Balance Sheet Differ From That of a Business?

We now transition to the topic at hand: the balance sheet of a government. Before thinking about how a government’s balance sheet differs from that of a business, we first need to ask an even more fundamental question: ‘what is the difference between a government and a business?’ The major differences are:

Business	Government
Aim for profitability	Aim for financial sustainability
Exist for benefit of shareholders	Exist for the benefit of its citizens
​Deliver goods and services to customers	Deliver goods and services to its citizens
Own assets from which they expect future economic benefit	​Own assets from which they expect future economic benefit
Owe liabilities to others	Owe liabilities to others
Equity is owned by shareholders	Equity (called ‘net position’ or ‘net worth’ for governments) is the collective interest of the public

These differences appear minor on paper but translate to completely different approaches to how businesses and governments manage their finances, and thus what their balance sheets look like.

We will simplify the discussion by focusing on the equity account. This is because, while the categories of assets and liabilities differ between businesses and governments, the most notable differences, and the ones that tell us the most about how the two entities approach finances, are in the equity account.

Businesses can grow their equity in two ways:

1. by making more money than they spend over time, and;

2. by selling more shares to investors.

The concept of selling shares does not exist for governments so they can only grow their equity by being fiscally responsible; by making more money than they spend over time, and using the excess to accumulate assets or to pay down liabilities.

At any point in time, a government's equity account, also called the 'net position', shows the residual difference between assets and liabilities. It can be either positive or negative.

• A positive net position indicates that a government's assets exceed its liabilities. Similar to the 'net worth' discussion above, this means that if the government were to wind down tomorrow by selling its assets and using the excess to pay down its liabilities, it would have money left over which could (theoretically) be given to its citizens.

• A negative net position indicates that a government's liabilities exceed its assets. This means that if the government were to wind down tomorrow, it would have still owe extra money to its creditors. This is not favourable because it means that, not only would the government not have money to give to its citizens, it would have to borrow more funds to make existing creditors whole.

Let’s look at what is typically on a government’s balance sheet.

What Is Typically On a Government’s Balance Sheet?

Below are elements that are found on a typical government balance sheet. For each balance sheet category, we have provided the definition from the U.S.'s Bureau of the Fiscal Service.

Assets

Assets are resources of the government that remain available to meet future needs.

• Cash and Investments: Representing the government's liquid resources.

• Infrastructure and Property: Physical assets owned by the government.

• Receivables: Money owed to the government, such as taxes that businesses or individuals have not yet paid.

These elements are similar to those held by businesses. The notable exception is that businesses also accumulate ‘intangible assets’ (patents, copyrights, trademarks, etc.) that have monetary value given to them by law. Governments do not have intangible assets on their balance sheet.

Liabilities

Liabilities are obligations of the government resulting from prior actions that will require financial resources.

• Debt: Representing money borrowed by the government.

• Pensions and Benefits: Reflecting obligations to government employees.

• Accounts Payable: Money owed by the government to its suppliers.

A government's debt is the most publicized and discussed balance sheet account. Most readers likely know that, for instance, the U.S. is heavily indebted, and that the U.S. Congress raises the ‘debt ceiling’ - the maximum amount of debt that the government can hold on its balance sheet - each time the U.S. approaches its 'borrowing limit'.

The reason that the debt account is so important is because, like a business or an individual, a government’s ability to pay the interest on, or ‘service’, its debt is a key indicator of the government’s creditworthiness and long-term sustainability. A government that is not creditworthy will have difficulty raising more debt, which will make it difficult for the government to fund its operations. This is because a government can not sell equity to the public, so it has to rely on either spending less than it earns, or raising more debt, to pay existing investors. A government that has historically struggled to meet its debt obligations will face challenges raising more debt.

During economic downturns, wars, and emergency situations such as the Covid-19 pandemic, governments are required to spend more to stimulate the economy, defend their population, or maintain public health, respectively. This higher level of spending typically, but not always, means that governments will take on more debt to pay for these services.

Key Metric: the Debt-to-GDP Ratio

Economists use several ways to compare the relative debt load of a government to that of its peers. One of the most common is the debt-to-GDP ratio, which compares a country's total debt to its gross domestic product (or GDP, the total economic output of a country measured over a period of time). The debt-to-GDP ratio is expressed as a percentage and provides insight into the relationship between a nation's debt and the size of its economy.

Key Metric: Per Capita Government Debt

Another metric used by economists to compare relative debt load is the per capita government debt which shows how much of the government's debt is attributable to each citizen under the government's jurisdiction.

Equity or Net Position

The net position is the residual difference between assets and liabilities, and is the cumulative results of operations since inception.

Case Studies

We next take a look at the balance sheets of four countries: the U.S., Canada, Japan, and the United Kingdom (UK).

A summary using the key metrics discussed above can be found below.

Metric	U.S.	Canada	Japan	UK
Per Capita Government Debt (in USD)	$73,000	$30,200	$60,000	$57,000
Debt-to-GDP ratio	129%	42%	226%	​105%

Conclusions:

• All of the countries profiled have a negative net position, meaning that their expenses have exceeded their revenues 'since inception'. The shortfall is financed through debt issuance.

• Relative to GDP, Canada has the lowest debt burden, Japan the highest.

• Debt accounts for ~80% of total liabilities for all countries with the exception of the U.S., which, in addition to a large debt load (62% of liabilities), also has large payables owing to public employees and veterans (33% of liablities)

Case Study: The U.S.

Population: 333.9 million

Per Capita Government Debt: $73,000 USD

Debt-to-GDP ratio: 129%

Interesting facts:

• The U.S. government has the world's highest debt load in absolute dollars.

• This means that the country also spends a lot of money on interest. The cost of servicing its debt was $726 billion (annualized) in July 2023. This is more than the total economic output (GDP) of all but the top 20 economies. More than Poland, Argentina, Sweden, Norway, Belgium, Israel, UAE, etc.

• Liabilities also include $12.8 trillion of retirement benefits and health and life insurance, owed to current and former civilian and military employees. This means that the U.S. also has the largest public pension plan of all of the countries profiled in this post.

Case Study: Canada

Population: 39.5 million

Per Capita Government Debt: $41,000 CAD ($30,200 USD)

Debt-to-GDP ratio: 42%

Case Study: Japan

Population: 124.6 million

Per Capita Government Debt: ¥8.9 million ($60,000 USD)

Debt-to-GDP ratio: 226%

Interesting facts:

• Japan has the highest debt-to-GDP ratio in the world of 226%, almost double that of the U.S.

• This is caused, in part, by a long history of spending on defense and on social welfare for a rapidly aging population. In fact, Japan’s population is the oldest in the world, with an average age of 48.6 years.

Case Study: the United Kingdom

Population: 59.6 million

Per Capita Government Debt: £45,000 ($57,000 USD)

Debt-to-GDP ratio: 105%