Relationship between spending and the balance sheet
During a year, the Crown collects revenue and incurs expenses. The difference between these figures is the “operating balance”. The operating balance is like a company's profit/loss and can be positive or negative.
- Figure 1 - Relationship between an income statement and a balance sheet
At a point in time, the Crown controls assets, and is responsible for liabilities. The difference between these figures is the Crown's equity or “net worth”.
When a government purchases an asset it can fund this by reducing another asset such as cash, or by borrowing and incurring a liability. While this will not change net worth at a point in time, it changes the composition and risk profile of the balance sheet. For example, while “cash” and a frigate are both assets, it is not possible in the short term to use a frigate to fund a negative operating balance.
