Your A B C and 1 2 3 of Political Economy By Sarjo Bayang Part 17 Balance Sheet of The Nation
Author: Sarjo Bayang, UK
For individuals, organisations and nations, borrowing is one of sources that fuels the economic engine. Government borrowing usually gets done behind closed doors where the deal is sealed without some of us being consulted or simply informed.
What we may not also know is that any person, organisation, institution or nation that has assets at hand also keeps a load on the head. Just like lending institutions including banks, a Balance Sheet reveals net worth in clear picture.
When you see a person, institution or government with possessions, they may also be owing others. Direct borrowing is when money or material is received and to be paid for at agreed terms. Until the final payment is made, the borrower has a bundle of liability to carry.
Governments, individuals and organisations assume liability for unpaid wages, goods, or services rendered to them. Examples include staggering high cost utilities bills that some government institutions owe to suppliers for very long periods. Some of it gets written off over time while household customers are being chased for lower bills.
A Situation of Cannot but Borrow
Elementary Arithmetic teaches how big numbers get subtracted from small ones. The method is by having to borrow ten (10). Adding 10 increases the small number large enough to permit deduction of the single digit figure ranging from 1 to 9. Children being introduced to this number interplay may find it interesting.
As you and your problems grow, it comes clear that real life imposes situations that compel borrowing by individuals, organisations, institutions, and even states.
Until we hear news about banks being bankrupt, some of us assume that financial institutions serving as lenders hold unlimited stock of raw cash. Nations also borrow when circumstances arise. That borrowing affects everyone in society.
When personal problem size gets to be larger than content of your pocket, many will apply the simple arithmetic method; “cannot but borrow”. Just like that child faced with needing to take away big number from smaller, real life imposes similar challenges faced by many.
Economic power expressed in figures, count in money and material numbers. Due to the reality of uneven distribution some people have more while lot of us having less. Does it mean that the few rich enjoy better friendship with money and material than rest of us?
National Balance Sheet
Logic and accounting concept of Balance Sheet is simply to establish from what is owned how much is owed. In practice, when you take away what is owed from that owed, any difference becomes the balance.
If what is owed turns out to be more than owned, that situation reveals bottom level or net worth in the negative. To own more than what is owed means high level value status also seen as positive balance in net worth.
This accounting method of establishing Net Worth is applicable to businesses, organisations, individuals, and government all around the world. There is always a situation claiming ownership of money or other resources. By what the naked eyes can see, it is not possible to know if high volume possession of money and material also means high level Net Worth in the Balance Sheet.
Why it is called Balance Sheet may relate to history of accounting where the Net Worth is presented on sheets of paper showing positive or negative status. You can draw your own Balance Sheet to determine personal net worth.
Like organisations, businesses, and individuals, government as an established entity also owns and owes. To some of us, government is so rich that over long period many hands are kept on payroll including least productive. Public sector employment has biggest volume of liability in idle unproductive hands that hardly comes up on the National Balance Sheet.
Government offices also keep their lights, computers, refrigerators and other appliances on as though there is no bill to pay. We also see how government buys and maintains fleet of cars. A car for the boss on home to office commuting. Another car for taking children to and from school. Perhaps a third car for lifting the Mrs and other family members on private errands. Running cost plus other payments when added brings up real high figures for keeping a government in operation.
Producing a Balance Sheet is not for mere accounting decoration with neatly presented figures. In best use the Balance is meant to serve as instrument of reference. The Balance Sheet on one accounting period serves as point of reference for adjustments required in coming times.
One good use of Balance Sheet is to help cut down cost and raise the Net Worth profile to better position. Critical to making that informed decision is the occasion of identifying assets and liabilities. Key task of improvement is by cutting down cost while making gains through increasing net worth.
Providing clear public information on Balance Sheet of the nation will contribute to shared responsibility for everyone making informed decision about government Assets and Liabilities.
Net Worth of the Nation
Identifying Assets and Liabilities is key line of enquiry when plotting a Balance Sheet. It is not clear to many of us what counts as assets or liabilities of our government and whole nation. Many of us have never seen a government Balance Sheet.
We take for granted that all will be working. It is normally once a year when Minister of Finance talks about the financial situation by occasion of Annual Budget Session. Government comes up with forecasts of the economy and financial weather. When it rains though, not everyone has their fields wet enough to expect good harvest.
The nation’s Balance Sheet is not often interpreted in a language those of us understand good enough. It is loaded with technical jargon beyond simple understanding.
Next time our capable Finance Minister talks about state of the economy, we all want to hear it loud and clear. We want it translated in economic value terms. Economic growth of 2.5% does not convey any clear meaning or vital message for those of us not knowing the standard measurement. Tell us in simple language how that translates into amount of food basins per population over period in question. We also want to know how healthy the cash flow situation improves from previous hard years. Tell us the national debt in proportion to assets we see in the open.
Social Assets and Economic Liabilities
Not everyone in society contribute to the national wealth by equal value adding proportion. Some people are more resourceful and work harder than others.
The population put trust in one basket of values handed to selected few for safe and proper custody. When resources are prudently allocated; properly managed, we expect an increase in assets and reduction of liabilities.
Those who contribute to creating more wealth and bring about the good life we all dream about are bankable resourceful assets to everyone. Others who feed on resources without compensating the cost of their upkeep, we count them as liabilities to society.
At some extremes, less resourceful persons in society create situations of counterproductivity. They fail to deliver and cover their lack of productivity by creating unhealthy atmosphere especially at work. In the process, some productive persons with value adding potential get demotivated.
Your Personal Debt of State Borrowing
We may not be told that money borrowed by government is putting everyone in debt including the unborn. After the National Balance Sheet is plotted, money borrowed by government is accounted as liability to everyone.
On other hand, when government manages to increase the asset position from what is borrowed, everyone has some value added in turn. Though that is expected to bring about an increase in total good life effect, it does not always come by most readily.
To know your personal status in national debt position, first find out how much the government is owing. That amount when divided in proportion to the population reveals how much debt you and everyone is owing.
Knowing that everyone bears the burden of national debt makes public consultation crucial to decision making about what the nation owns and owes.
State resources are not always properly accounted for. That makes it difficult to produce a clean Balance Sheet established on realistic inflow and outflow of state possessions. Getting the population informed will contribute to ensuring transparency that many governments lack.
By producing relevant facts and figures interpreted for everyone’s best understanding the National Balance becomes effective government accountability measure. It is also reliable source of public information that good governance is meant to be.
Human Capital Value Accounting in National Balance Sheet
Accounting profession utilises suitable instruments and concepts to place value on assets. We hear about depreciation and scrap value; meaning a state of diminished useful condition.
Human capital is considered as valuable input of combined resources that keep an establishment in functional outfit. It makes sense to include this vital asset when drawing Balance Sheet; especially for the nation.
Taking stock of resourceful human capital will reveal the extent to which a nation relies on productive labour required for national development.
Politics is about numbers in vote count. The economy requires those numbers in resourceful human capital value contribution. Enhancing human capital resourcefulness optimises value adding contribution to the economy. That by itself renders a healthy National Balance Sheet required for everyone’s good life.