The best approach to analyzing a government's financial position is to calculate ratios using total net position (net assets) for the primary government
Government’s financial position is about to express monetary relations in the leverage process that shows how funds of primary and local governments are formed and used to satisfy social needs of citizens, regulation of the economy, funding of national defense and law enforcement. Financial position is a complex concept to analyze. “Financial position is a government’s financial status at a given point in time” (Mead, 2001). We are to find out whether the best approach to analyzing a government’s financial position is to calculate ratios using total net position (net assets) for the primary government or not.
The thing is that there a lot of ratios describing government’s financial position and it is not only about total net position for the primary government. In fact, liquidity, leverage, and continuing services are the main elements to measure financial position. We will try to disclose the main essence of this statement. Importance of liquidity ratios in analyzing financial position is determined by the fact that these concepts reflect the payment capacity to repay current and quick liabilities and are broken down to Current Ratio (that is calculated as: Current Assets/Current Liabilities) and Quick Ratio (that is calculated as: Quick Assets/Current Liabilities). Leverage (Debt to Net Assets, Debt to Assets), in its turn, measures the degree of reliance on debt in order to increase the return on equity. Leverage ratios characterize government’s financial position in the point of fiscal sustainability. The higher leverage ratio, the higher risks related to the need to service a debt. Another ratio to measure primary government’s financial position is Continuing Services Ratio which “focuses on the government’s ability to maintain the provision of basic government services” (Chaney & Mead, 2002).
“The best way to analyze government’s financial position is to calculate ratios using total net position for the primary government” – not at all. We can say with confidence, that net investment in capital assets, restricted (capital projects, debt service, community development projects), and unrestricted which form total net position for the primary government, for the whole, do not fully reflect the sense of “financial position” concept. Total net position can not signalize a need to change the parameters of budget in the long run what, in its turn, can have a big influence on whole economy. Liquidity, leverage, and continuing services, on the other hand, are to solve the major task of long-term sustainability of public finances – identification of those risks that have the potential to cause a need to change the existing fiscal policy as well as to assess the scale of the necessary changes. Total net position does not reflect such a closely connected to government’s financial position concept as solvency. Liquidity, leverage, and continuing services, again, are to reflect the ability to pay its debts without resorting to new borrowing indefinitely.
Thus, we can summarize the main idea. The best approach to analyzing government’s …