Explicit vs implicit government liabilities (2012)

Implicit debt is the promise of future payments by the government. Future pension and health spending typically represent the lion’s share of such debt. Taking into account implicit debt (after appropriate discounting and before taking into account social-security receipts) can offer an interesting perspective in terms of long-term government solvency. If implicit debt is added to the present stock of debt, the US rather than Japan is the country with the largest debt burden. Not surprisingly, the emerging economies carry smaller implicit debt due to (generally) better demographics and/ or (generally) less generous social- and health-care regimes. The latter matters greatly, as the comparison of the US, an advanced economy with relatively favourable demographics, and Japan and Germany suggests. Some caveats are in order. First, the figures for explicit debt refer to gross government debt. Net government debt and net public sector debt, let alone a net worth paint a more favourable picture for virtually all countries. The Russian government, for instance, is a net creditor thanks to savings in its oil stabilisation and national welfare fund. If the broader public sector and/ or the holdings of equity holdings and non-financial assets are taken into account, the picture often changes even more dramatically. India, whose explicitly debt burden is quite high, holds 20% of GDP worth of equity in stock-market-listed partially government-owned companies. Third, in addition to implicit liabilities, there are so-called contingent liabilities (e.g. bank bail-outs, wars). Last but not least, the NPV value of age-related spending increases is quite sensitive to the underlying assumptions in terms of demographic trends, economic growth and discount rates. In spite of these caveats, it is worth recalling that a narrow focus on gross (or even net) debt to ascertain long-term debt sustainability is insufficient.

Source: IMF