UK public finances are among the weakest in the world, the International Monetary Fund warned on Wednesday.
Using a balance-sheet approach, the UK government has less than £3trn in assets and £5trn of liabilities, indicating a negative net worth of over £2trn.
This means that the government has fewer assets compared with other countries but still has big public debts and future pension liabilities to deal with in the next decades.
The data shows that the country is dangerously exposed to a recession and risks a snapback in interest rates.
Since the financial crisis ten years ago, the IMF found that the negative net worth of the UK government had doubled representing a £1tn decline in the government's wealth.
In the financial crisis, both the assets and liabilities of the British government “expanded massively”, the IMF said, following the nationalisation of Northern Rock, RBS and Lloyds.
“Most of the expansion in the balance sheet was the result of large-scale financial sector rescue operations that resulted in reclassification of the rescued private banks into the public sector. [This] increased (non-central bank) public financial corporation liabilities from zero in 2007 to 189% of GDP in 2008, with similar [falls] in financial assets.”
The IMF also suggested that privatisations of infrastructure investment can be used to create a short-term “fiscal illusion” in the public finances. “Privatisations increase revenue and lower deficits but also reduce the government's asset holdings,” it said.
“Similarly, cutting back maintenance expenditure reduces the deficit and lowers debt but also reduces the value of infrastructure assets, which could cost more in the long run.”
“Better balance sheet management enables countries to increase revenues, reduce risks and improve fiscal policymaking,” the IMF said. “Countries with stronger balance sheets pay lower interest on their debt. Evidence also shows that countries with strong balance sheets experience shallower and shorter recessions.”