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Government assets matter too, not just debt*

In analysing the sustainability of government finances, the focus tends to be on gross government debt as a percentage of GDP. However, as gross debt does not take into account the asset side of government balance sheets, this measure only tells part of the story. Assets may generate income or be sold in order to redeem part of gross debt, and are therefore very relevant in assessing the financial health of government as well. A government with a high level of liabilities but also with significant amounts of assets on its balance sheet may be better off than a government with a lower level of liabilities and hardly any assets. Therefore, net government debt, which incorporates information on assets, constitutes a useful additional measure to gross government debt (the measure is explained below). It provides insight into the capabilities of governments to service debt in the longer run and thus presents a more comprehensive and nuanced picture of government financial health.

How do OECD countries compare in terms of gross and net government debt?


Figure 1 shows gross and net financial debt as a percentage of GDP in 2013 for selected OECD countries

The impact of the inclusion of financial assets in the debt measure differs considerably across countries. The impact is particularly large for Norway, Japan (which may be partly due to the fact  that debt data are not consolidated across different government units, i.e. gross debt figures include liabilities between these units which cancel out in net debt data), Finland, Luxembourg, Sweden, Slovenia and Greece. These countries have a relatively large amount of financial assets on their balance sheets, and so they rank lower on the basis of net government debt than on the basis of gross debt. For some of them, the debt measure even changes sign, implying that the amount of financial assets is higher than that of financial liabilities. On the other hand, the difference is relatively modest for the United States, Hungary, Italy, Poland, Belgium and the Slovak Republic. These countries only have a small amount of financial assets on their balance sheets and their net and gross debt ratios are therefore similar.

What happened during the crisis?

During the recent financial crisis most countries experienced an increase in their debt levels. This was a direct consequence of the economic downturn, which resulted in lower tax revenues and increasing expenditures. Furthermore, some governments increased their spending to actively support the economy and acquired assets in financial institutions to prevent a collapse of the financial sector. As these policies affected liabilities and assets in different ways, the impact on gross and net government debt levels also differed among countries. And of course, changes in GDP levels also affected debt ratios in different ways.


Figure 2 presents the changes in gross and net debt ratios between 2007 and 2013 for selected OECD countries

Most countries experienced increases in both gross and net debt ratios during the crisis, but the extent of such increases differs substantially between countries. Ireland reported the largest increase in gross debt ratio, from 26.9% in 2007 to 125.4% in 2013. This increase was the result of a sharp rise in liabilities combined with a decrease in GDP. As assets only increased to a small degree, the net debt ratio showed a sharp increase as well (from -1.4% to 72.8%).

Greece, Portugal, and Spain also registered large increases in their gross debt ratios in the period 2007 to 2013. As was the case with Ireland, this was due to a combination of increased liabilities and a decrease in GDP levels. In that respect, it can be noted that the United States reported a larger relative increase in liabilities than Portugal and Greece (86.0% versus 77.5% and 28.5%), but due to an increase in its GDP level over the same time period, the gross debt ratio increased to a lesser extent (by 46.4 percentage-point versus 64.4 percentage point and 75.1 percentage point in Portugal and Greece, respectively). It is interesting to note that while Spain recorded a lower increase in its gross debt ratio than Portugal and Greece, in terms of net debt ratios, the increase was higher in Spain. And the increase in the net debt ratio in the United States was almost as high as in these three countries, although the increase in the US gross debt ratio was much lower. Both effects are due to the fact that Spain and the United States experienced smaller increases in the value of their assets than Portugal and Greece. Therefore, the change in the net debt ratio for the former countries is relatively close to the change in their gross debt ratio, contrary to the latter countries.

The Czech Republic and Poland are the only two countries in which the net debt ratio increased more than the gross debt ratio. Both countries recorded increases in liabilities of more than 80%, whereas the value of assets only increased by 0.8% for the Czech Republic and by 8.7% for Poland. Combined with increases in their GDP levels of respectively 1.0% and 5.7% per year, this led to increases in their net debt ratios that exceeded those in their gross debt ratios.

The measure explained

In this Statistical Insight, we compare gross debt to net financial debt, calculated as gross debt minus the value of all financial assets. Whereas in gross debt only liabilities defined as debt instruments are taken into account, i.e. liabilities that constitute a financial claim on the debtor and that involve payments of interest and/or principal (therefore excluding liabilities in the form of shares, equity, financial derivatives and monetary gold), all financial assets, including e.g. equity, are taken into account in calculating net debt. The rationale is that all financial assets are deemed to be available for debt redemption. In some cases, non-financial assets are taken into account in calculating net debt, but as some of these assets may be highly illiquid (like land or infrastructure) and relevant data are only available for a few countries, they are not included here. With regard to valuation, the nominal value is used for liabilities, as that is the amount that the government owes the creditors, and market value is used for assets, as that best reflects the amount that can be obtained to service the debt.


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