The Government Sector€¦ · The Government Sector 1. GFS Accounting Introducing the government...

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The Government Sector

Government Sector activities:

• Collect revenue (primarily taxes)

INTRODUCTIONINTRODUCTION

• Collect revenue (primarily taxes)

• Produce goods and services (nonmarket)

• Redistribute income via transfers

Fi i (t /f th t )Financing (to/from other sectors)

What is the government’s macroeconomic impact?Is government activity sustainable over time?

What is the government’s macroeconomic impact?Is government activity sustainable over time?

2

Four main blocks of information (statements) are used to

summarize the Government Sector:


Opening Balance Sheet


Statementof Government Operations

Statementof Government Operations

Statement of Other Economic Flows

Statement of Other Economic Flows

Closing Balance Sheet

Closing Balance Sheet

Stocks StocksFlows

At the beginning of the yearAt the beginning of the year

p

During the year

p

During the year During the yearDuring the year

At the end of the yearAt the end of the year

Basic relationship between the four financial statements:




SGOSGO SOEFSOEF ClosingBalance Sheet

ClosingBalance Sheet

＋＋＋＋＝＝

3

VE

S• Identify which institutions are covered

• Show main items in the fiscal accountsJE

CT

I• Define key balances

• Determine how government activity is

financed

OB

J • Analyze the fiscal position (flows)

• Analyze stocks

NE

Fiscal Balances &Fiscal Balances &

UT

LIN Fiscal AccountsFiscal Accounts

Fiscal Balances & Indicators

Fiscal Balances & Indicators

OU

Stock Indicators

Stock Indicators

4

hThe Government Sector1. GFS Accounting

Introducing the government accounts, some

key points:

SECTION 1.1The basics of government accountsSECTION 1.1The basics of government accounts

y p

Common Common reporting: reporting:

R, E, financingR, E, financing

Common Common reporting: reporting:

R, E, financingR, E, financing

Changes in Changes in assets and assets and liabilitiesliabilities

Changes in Changes in assets and assets and liabilitiesliabilities

Different Different presentations presentations

Different Different presentations presentations

GFSM StandardGFSM StandardGFSM StandardGFSM Standard

5

Some advantages of the GFSM 2001:

Policy analysisanalysis within country

GFSGFS

Comprehensive Policy analysisanalysis within country

Between and within countries

With other macro statistics,

Comprehensive

Comparable

,international accountingstandards

Integrated framework, tested

Compatible

Robust

GFSGFS

In particular, GFSM facilitates analysis by

focusing on two main issues:

Assets and Liabilities

Assets and Liabilities

Government Net Government Net Government Net Government Net

Impact of government operations

Impact of government operations

WorthWorthWorthWorth

6

Some key accounting principles in GFS:

SECTION 1.1The basics of government accountsSECTION 1.1The basics of government accounts

CoverageCoverageCoverageCoverage Accrual basisAccrual basisAccrual basisAccrual basis

ConsolidationConsolidationConsolidationConsolidation ValuationValuationValuationValuation

We will follow the 2nd Edition of the Government

Finance Statistics Manual (2001).

GFSGFS

GFS summarize information on:

• Activities

• Financial condition

• Both at a point in time (stocks) and over a period (flows)

…and are integrated with other macroeconomic sectors (SNA,

BOP, MS)

7

What constitutes the Public Sector?What constitutes the Public Sector?

General

CoverageCoverage

Public Government Corporations

StateState

Central

Government

Central

Government FinancialFinancialNon-

financial

Non-

financial

M t i l di thM t i l di thState

governments

State

governments

Local

governments

Local

governments

Monetary, including the

Central BankCentral Bank

Monetary, including the

Central BankCentral Bank

Nonmonetary financial

public corporations

Nonmonetary financial

public corporations

Example:CoverageExample:Coverage

Ministry of Foreign Affairs

Ministry of Foreign Affairs

Central Government

Central Government

State Oil CompanyState Oil Company

Nonfinancial Public

Corporation

Nonfinancial Public

Corporation

State-owned Agricultural

Bank

State-owned Agricultural

Bank

Financial Monetary Public

C ti

Financial Monetary Public

C tiCorporation Corporation

Financial Nonmonetary

Public Corporation

Financial Nonmonetary

Public Corporation

8

When are flows recorded?When are flows recorded?

when

AccrualAccrual

when…

• ownership of goods changes

• services are provided

• obligation to pay taxes is created

• claim to a social benefit payment is establishedp y

• or, other unconditional claims are established

Not necessarily when payments are made (cash basis)Not necessarily when payments are made (cash basis)

Example: AccrualExample: Accrual

In mid-December 2013, an interest payment of $100 million comes due.

Because of lack of funds, the government of Fiscalia decides

In mid-December 2013, an interest payment of $100 million comes due.

Because of lack of funds, the government of Fiscalia decides gto postpone payment until mid-January 2014.

gto postpone payment until mid-January 2014.

CashCash AccrualAccrual

Interest 0 100

20132013

Change in liabilities 0 100

of which: arrears 0 100

QuestionQuestion: in which case will the 2013 fiscal balance be greater?QuestionQuestion: in which case will the 2013 fiscal balance be greater?

9

Example: AccrualExample: Accrual

After an increase in revenues in early 2014, the government makes the interest payment out of its bank deposits.

What now?What now? (Assume no other interest payments due in 2014)

After an increase in revenues in early 2014, the government makes the interest payment out of its bank deposits.

What now?What now? (Assume no other interest payments due in 2014)What now?What now? (Assume no other interest payments due in 2014) What now?What now? (Assume no other interest payments due in 2014)

CashCash AccrualAccrual

Interest 100 0

100

20142014

Change in arrears 0 -100

-100 -100

NoteNote: in accrual basis, net worth does not change (Why?Why?)NoteNote: in accrual basis, net worth does not change (Why?Why?)

Change in financial assets(bank deposits)

How do we aggregate over different levels?How do we aggregate over different levels?

ConsolidationConsolidation

Eliminate all transactions and debtor-creditor relationshipsEliminate all transactions and debtor-creditor relationships

(Same principle applied in other sectors)(Same principle applied in other sectors)

Eliminate all transactions and debtor-creditor relationships

between units being consolidated

Eliminate all transactions and debtor-creditor relationships

between units being consolidated

Complete consolidation of the public sector allows:Complete consolidation of the public sector allows:Complete consolidation of the public sector allows:

• Assessment of overall impact on the economy

• More accurate evaluation of fiscal sustainabilitysustainability

Complete consolidation of the public sector allows:

• Assessment of overall impact on the economy

• More accurate evaluation of fiscal sustainabilitysustainability

10

Example:Consolidation - FlowsExample:Consolidation - Flows

Consolidating the General Government (SGO):Consolidating the General Government (SGO):

Central Government State Governments General GovernmentCentral Government

Revenue 500

Tax Revenue 480

Grants 20

Expenses 420

Compensation of employees 300

State Governments

80

40

40

55

30

General Government

540

520

20

435

330Compensation of employees 300

Use of goods and services 50

Grants 40

Other 30

Net operating balance 80

30

10

0

15

25

330

60

0

45

105

Example:Consolidation - StocksExample:Consolidation - Stocks

Consolidating the Public Sector (Balance Sheet):Consolidating the Public Sector (Balance Sheet):

General Government

Assets 20,000

Nonfinancial 18,000

Financial 2,000

of which: deposits in CB 100

Liabilities 5,500

To non-residents 3,000

To private sector 2,000

To state-owned banks 500

Public Corporations

Assets 5,000

Nonfinancial 3,000

Financial 2,000

of which: Loans to government 500

Liabilities 1,100

To non-residents 100

To private sector 900

To the government 100

Public sector

Assets

Nonfinancial

Financial

Liabilities

To non-residents

To private sector

21,000= 2,000 + 2,000 -100 – 500 = 3,400

24,400

3,1002,900

6,000

Net worth 14,500 Net worth 3,900 Net worth

Public sector net worth is equal to the simple sum here as well.Public sector net worth is equal to the simple sum here as well.

= 24,400 – 6,000 = 18,400

11

At market prices that are current…At market prices that are current…

ValuationValuation

• on the balance sheet date (stocks)

• on the date in which transactions are recordedrecorded (flows)

• some estimation or partitioning may be needed

• changes in market value between two periods are

recorded in the Statement of Other Economic Flows Statement of Other Economic Flows

(more on this later…)

• Fiscalia’s currency depreciates by 25%

ExampleValuationExampleValuation

During 2013 (from December 31, 2012 to December 31, 2013): During 2013 (from December 31, 2012 to December 31, 2013):

• Bond holdings by public utilities lose 5% in value

• The value of public land appreciates by 10%

Selected AssetsSelected Assets 12/31/12OEF

201312/31/2013

Financial monetary public

(Assume no changes in volume)(Assume no changes in volume)

Financial monetary public corporations (Central Bank): IR

500

Nonfinancial public corporations: Securities other than shares

20

Central government: Nonproduced assets (land)

1,200

12

• Summarizes government activity during the year.

• Records transactions, of two major types:

SECTION 1.2The Statement of Government OperationsSECTION 1.2The Statement of Government Operations

Revenue

Expense

Revenue

Expense

Transactions affecting net worth

Nonfinancial assetsNonfinancial assets

Transactions in: Financial assets

Liabilities (financing)

Financial assets


Recall: Recall: SGO has an impact on the government’s balance sheet. Recall: Recall: SGO has an impact on the government’s balance sheet.

1 RevenueRevenue11 Taxes

• On income, profits, capital gains• Payroll and workforce

2 Expense2 Expense

21 Compensation of employees• Wages and salaries• Social contributions

Transactions affecting Net Worth

Transactions affecting Net Worth

• Property• Goods & services• International trade & transactions

12 Social contributions• Social security• Other

13 GrantsF f i ’t

• Social contributions22 Use of goods and services23 Consumption of fixed capital24 Interest

• To nonresidents• To non-public sector residents• To other public sector

25 Subsidies• From foreign gov’ts• From international organizations• From other government

14 Other revenue• Property• Interest• Other

25 Subsidies26 Grants27 Social benefits28 Other

13



The balance of transactions affecting net worth is

called the “Net Operating Balance”

1 Revenue1 Revenue 2 Expense2 Expense

Net Net

operatingoperating

Net Net

operatingoperating

Question: Question: Can we therefore say that the change in net worth during the year is exactly equal to the net operating balance? Question: Question: Can we therefore say that the change in net worth during the year is exactly equal to the net operating balance?

operating operating

balancebalance

operating operating

balancebalance

Corresponds to accrual vs cash

“Use” vs “Purchase” of goods and services“Use” vs “Purchase” of goods and services

Fiscalia’sFiscalia’s Ministry of Education Ministry of Education purchases 2,000 boxes of purchases 2,000 boxes of pencilspencils (at $8.50 each) in late 2013 for several schools that (at $8.50 each) in late 2013 for several schools that Fiscalia’sFiscalia’s Ministry of Education Ministry of Education purchases 2,000 boxes of purchases 2,000 boxes of pencilspencils (at $8.50 each) in late 2013 for several schools that (at $8.50 each) in late 2013 for several schools that pp ( $ )( $ )are being built. are being built.

Construction of the schools is then completed in March 2014 and the pencils are delivered to the schools.

pp ( $ )( $ )are being built. are being built.

Construction of the schools is then completed in March 2014 and the pencils are delivered to the schools.

20132013 20142014

Purchase of G&S (cash)

Use of G&S (accrual)

Change in gov’t deposits

Change in inventories

14

Essentially equivalent to depreciation (normal wear and tear)

Consumption of fixed capitalConsumption of fixed capital

Fiscalia’sFiscalia’s public infrastructure public infrastructure (roads, dams, port facilities, Fiscalia’sFiscalia’s public infrastructure public infrastructure (roads, dams, port facilities, pp ( pbridges) is estimated to depreciate by about 1.5% in 2013.

pp ( pbridges) is estimated to depreciate by about 1.5% in 2013.

Balance sheet end-2012


SGO 2012

Expense: Expense:

SGO 2012

Expense: Expense:



Asset:Asset:Infrastructure

Asset:Asset:Infrastructure

10,00010,000

Consumption of fixed capitalConsumption

of fixed capitalAsset: Asset:

InfrastructureAsset: Asset:

Infrastructure

SECTION 1.2The Statement of Government OperationsSECTION 1.2The Statement of Government Operations

Now we’ll focus on the second block of the SGO:

Revenue

Expense

Revenue

Expense



Transactions in: Financial assets


Financial assets


Note: Note: These transactions do not do not affect net worth. Note: Note: These transactions do not do not affect net worth.

15

31 Nonfinancial AssetsNonfinancial Assets311 Fixed assets

• Buildings and structures• Machinery and equipment

32 Financial assets32 Financial assets

321 Domestic• Currency and deposits• Securities other than shares

Transactions in assets and liabilities

Transactions in assets and liabilities

• Other fixed assets

312 Inventories• Strategic stocks• Other inventories

313 Valuables314 Nonproduced assets

• Landb l

• Loans• Shares and other equity• Insurance technical reserves• Financial derivatives• Other accounts receivable

322 Foreign• (Same as * above)

323 Monetary gold and SDRs

*

• Subsoil assets• Other naturally occurring assets• Intangible nonproduced assets

33 Liabilities33 Liabilities331 Domestic

• (Same as * above)

332 Foreign• (Same as * above)

Net lending/borrowingNet lending/borrowing

Once the acquisition of nonfinancial assets is

considered, we arrive at another key balance:

Net acquisition of

nonfinancial assets

Net acquisition of

nonfinancial assets

Net

operating

balance

Net

operating

balance

Net Net

lending/borrowinglending/borrowing

Net Net


Note: Note: If <0, then government must receivereceive (net) financing for its activities; increase liabilities and/or reduce financial assets.

ApproximatelyApproximately equal to the Overall Balance (next slides).

Note: Note: If <0, then government must receivereceive (net) financing for its activities; increase liabilities and/or reduce financial assets.

ApproximatelyApproximately equal to the Overall Balance (next slides).

lending/borrowinglending/borrowinglending/borrowinglending/borrowing

16

Net lending/borrowingNet lending/borrowing

Another point of view:

Net incurrence ofNet incurrence ofNet acquisition ofNet acquisition of Net incurrence of

liabilities

Net incurrence of

liabilities

Net acquisition of

financial assets

Net acquisition of

financial assets

Net Net


Net Net


Note: Note: With some adjustments (not always applicable), we arrive at the Overall Balance (next slide)Note: Note: With some adjustments (not always applicable), we arrive at the Overall Balance (next slide)

Overall balanceOverall balance

Adjustment to account for operations in assets &

liabilities for policy purposespolicy purposes.

Privatization

proceeds and fixed

asset disposals

Privatization

proceeds and fixed

asset disposals

Net

lending/borrowing

Net

lending/borrowing

Overall balanceOverall balanceOverall balanceOverall balance

Policy

loans

Policy

loans

Note: Note: In this presentation, policy loans are reclassified as spendingspending. The above adjustments will tend to lower the overall balance relative to net lending/borrowing.

Note: Note: In this presentation, policy loans are reclassified as spendingspending. The above adjustments will tend to lower the overall balance relative to net lending/borrowing.

Overall balanceOverall balanceOverall balanceOverall balance

17

Recap:Statement of Government OperationsRecap:Statement of Government Operations

ExpenseExpenseRevenueRevenue Net operating Net operating

balancebalance

Net operating Net operating

balancebalance

Net

acquisition

of

nonfinancial

Net

acquisition

of

nonfinancial

Net lending/ Net lending/

borrowingborrowing

Net lending/ Net lending/

borrowingborrowing

assetsassets

Adjustments for “policy”

financial transactions

Adjustments for “policy”

financial transactionsOverall balanceOverall balanceOverall balanceOverall balance

Whenever net lending/borrowing is negative, the

government requires financing from other sectors:

SECTION 1.3Financing the BudgetSECTION 1.3Financing the Budget

DomesticDomestic

Financial

sector

Financial

sector

Nonfinancial

i t t

Nonfinancial

i t t

Central bank*Central bank*

State-owned

banks*

State-owned

banks*

Private banksPrivate banks

* * These are no longer relevant when considering the Consolidated Public Sector. Why?Why?* * These are no longer relevant when considering the Consolidated Public Sector. Why?Why?

ForeignForeign

private sectorprivate sector

18

The following equation always holds (General Government):

SECTION 1.3Financing the BudgetSECTION 1.3Financing the Budget

- NLB- NLB

Nonfinancial

private sector

Nonfinancial

private sector

Central

bank

Central

bank

State-

owned

banks

State-

owned

banks

Private

banks

Private

banks

Note: Note: When NLB<0, the sum of all (net) financing should be >0, but not necessarily each of the components individually. Note: Note: When NLB<0, the sum of all (net) financing should be >0, but not necessarily each of the components individually.

NonresidentsNonresidents

The central bank:

Pressures on other sectorsPressures on other sectors

Strains onStrains onC l b kC l b kC l b kC l b k

Expansion of

Assets

Expansion of

Assets Strains on

central bank

balance

sheet

Strains on

central bank

balance

sheet

Central bank Central bank

financing of financing of

the the

governmentgovernment

Central bank Central bank

financing of financing of

the the

governmentgovernment

(Lg)(Lg)

Reduction of

Funds

(Dep )

Reduction of

Funds

(Dep )

The CB will offset by reducing other assets and/or increasing other sources of funds (base money)

Result: Result: possible crowding out and/or inflation.

The CB will offset by reducing other assets and/or increasing other sources of funds (base money)

Result: Result: possible crowding out and/or inflation.

(Depg)(Depg)

19

State-owned and private banks:


Strains onStrains on

Expansion of

Assets

Expansion of

Assets Strains on

bank

balance

sheets

Strains on

bank

balance

sheets

Government Government

financing by financing by

banksbanks


financing by financing by

banksbanks

(Lg)(Lg)

Reduction of

Funds

(Dep )

Reduction of

Funds

(Dep )

Question: Question: how will banks respond? What are the likely macroeconomic effects?Question: Question: how will banks respond? What are the likely macroeconomic effects?

(Depg)(Depg)

Nonfinancial private sector (businesses and

households):


Reduce other Reduce other

assets:assets:

Reduce other Reduce other

assets:assets:

• Bank depositsBank deposits

• Corporate shares

• Foreign assets

• Bank depositsBank deposits

• Corporate shares

• Foreign assetsGovernment Government

financingfinancing


financingfinancing

Expansion of

assets

(lending to the

government)

Expansion of

assets

(lending to the

government)

Increase Increase

borrowing:borrowing:

B k lB k l

Increase Increase

borrowing:borrowing:

B k lB k l

NoteNote: some reactions (in redin red) will indirectly strain bank balance sheets (similarly to previous slide)NoteNote: some reactions (in redin red) will indirectly strain bank balance sheets (similarly to previous slide)

• Bank loansBank loans

• Foreign borrowing

• Bank loansBank loans

• Foreign borrowing

20

Finally, foreign borrowing:



financingfinancing


financingfinancing

Expansion of

liabilities

with

nonresidents

Expansion of

liabilities

with

nonresidents

Increase in

foreign debt

Increase in

foreign debt

NoteNote: from the point of view of the balance of payments, this amounts to a capital inflowinflow.NoteNote: from the point of view of the balance of payments, this amounts to a capital inflowinflow.

All modes of government financing are associated with

an increase in liabilities or decline in assets, with

respect to:

Recap 1Recap 1

respect to:

• the central bank

• “other depository corporations” (commercial banks)

• the nonfinancial private sectorp

• nonresidents

NoteNote: Therefore, all are associated with declines in the government’s financialfinancial net worthnet worth.NoteNote: Therefore, all are associated with declines in the government’s financialfinancial net worthnet worth.

21

QuestionQuestion: What about arrears and privatization? Aren’t

these possible avenues for financing the budget as

well?

Recap 1 (cont)Recap 1 (cont)

well?

AnswerAnswer: Yes, and both should be incorporated in the

accounting:

• Arrears: increase in liabilities with respect to another sectorsector

• Privatization: drawdown of assets

NoteNote: Arrears are associated with a decline in net worthnet worth, while privatizations may or may not be (depends on sale price)NoteNote: Arrears are associated with a decline in net worthnet worth, while privatizations may or may not be (depends on sale price)

The pressures exerted by government financing result

in some combination of the following

macroeconomic pressures:

Recap 2Recap 2

macroeconomic pressures:

• Inflation

• Crowding out

• Rising debt (domestic and/or foreign)

• Possible unsustainability

NoteNote: severity will depend on how large and how sustained these financing requirements are.NoteNote: severity will depend on how large and how sustained these financing requirements are.

22

Recall our basic identity between the four main GFS

statements:

SECTION 1.4Stocks and flowsSECTION 1.4Stocks and flows



SGOSGO SOEFSOEF ClosingBalance Sheet

ClosingBalance Sheet

＋＋＋＋＝＝

Now let’s take a closer look at the Balance Sheet.Now let’s take a closer look at the Balance Sheet.

61 Nonfinancial AssetsNonfinancial Assets611 Fixed assets

• Buildings and structures• Machinery and equipment

Oth fi d t

62 Financial assets62 Financial assets

621 Domestic• Currency and deposits• Securities other than shares• Loans• Shares and other equity• Insurance technical reserves

Fi i l d i i

The balance sheetThe balance sheet

• Other fixed assets

612 Inventories• Strategic stocks• Other inventories

613 Valuables614 Nonproduced assets

• Land• Subsoil assets

• Financial derivatives• Other accounts receivable

622 Foreign• (Same as above)

623 Monetary gold and SDRs

63 Liabilities63 Liabilities631 Domestic• Subsoil assets

• Other naturally occurring assets• Intangible nonproduced assets

631 Domestic• (Same as above)

632 Foreign• (Same as above)

Net Worth Net Worth = Nonfinancial assets + Financial assets - Liabilities

NoteNote: structure identical to that of “Transactions in assets and liabilities”.NoteNote: structure identical to that of “Transactions in assets and liabilities”.

23

The balance sheet produces several stocks that are

highly relevant for analyzing fiscal policy over time:

Key stocksKey stocks

• Total liabilities (gross debt stock)

• Net worth

• Net financial worth = net financial wealth position

NoteNote: While all are highly informative, net worth is the most comprehensive. NoteNote: While all are highly informative, net worth is the most comprehensive.

As the previous identity shows, changes in the debt

stock and in net worth are caused by:

Two key stocksTwo key stocks

stock and in net worth are caused by:

• Fiscal policy (SGO)

• Changes in volume or value (SOEF), mostly non-

policy related.p y

Now let’s take a closer look at the Statement of Other Economic Flows.Now let’s take a closer look at the Statement of Other Economic Flows.

24

For each line, the SOEF records two types of changes:

Other economicflowsOther economicflows

Opening Balance SheetOpening Balance Sheet


• Fixed & inventories

• Valuables & others

Financial AssetsFinancial Assets

•• Domestic & Foreign


• Fixed & inventories

• Valuables & others

Financial AssetsFinancial Assets


Holding Holding

Gains (or Gains (or

losses)losses)

Holding Holding

Gains (or Gains (or

losses)losses)

Other Other

changes in changes in

volumevolume

Other Other

changes in changes in

volumevolume

NoteNote: Unlike the SGO, most of these changes are deemed to be beyond the government’s control.NoteNote: Unlike the SGO, most of these changes are deemed to be beyond the government’s control.

Domestic & Foreign

LiabilitiesLiabilities


Domestic & Foreign

LiabilitiesLiabilities


What are these changes?

Other economicflowsOther economicflows

Holding Holding Holding Holding R lti fR lti f

Exchange rates, Exchange rates, gg

gains (or gains (or

losses)losses)

gg

gains (or gains (or

losses)losses)

Resulting from

price changes

Resulting from

price changesmarket prices of

stocks, bonds, land,

and fixed assets

market prices of

stocks, bonds, land,

and fixed assets

Other Other

ll

Other Other

ll

Resulting from:• recognition/derecognition

Resulting from:• recognition/derecognition

Discoveries,

catastrophes,

Discoveries,

catastrophes,

NoteNote: under normal circumstances, holding gains are much more common than other volume changes. NoteNote: under normal circumstances, holding gains are much more common than other volume changes.

volume volume

changeschanges

volume volume

changeschanges• quantity or quality

• reclassification

• quantity or quality

• reclassification

catastrophes,

growth/depletion,

seizure

catastrophes,

growth/depletion,

seizure

25

QuestionQuestion: What then causes changes in net worth and

debt?

Debt and networthDebt and networth

• A positive or negative net operating balance…

and/or

• Holding gains and/or other changes in volumeHolding gains and/or other changes in volume

NoteNote: this covers everything; there can be no other cause no other cause of a change in government net worth or debt! NoteNote: this covers everything; there can be no other cause no other cause of a change in government net worth or debt!

In terms of two simple formulas:In terms of two simple formulas:

Debt and networthDebt and networth

• Under normal circumstances (OEF small), changes in net

worth are driven by fiscal policy (NOB).

Th f iti ( ti ) NOB ill i (d )• Therefore, a positive (negative) NOB will increase (decrease)

net worth.

NoteNote: while a reduction in net worth is inevitable, a negative NOB does not necessarily increase government debt (L).

Think of an example where this is the case.Think of an example where this is the case.

NoteNote: while a reduction in net worth is inevitable, a negative NOB does not necessarily increase government debt (L).


26

Two similar formulas for net Two similar formulas for net financialfinancial worth (worth (NFWNFW):):

Net financialworthNet financialworth

• Now we re-introduce net acquisition of nonfinancial assets

(NANA).

A t d fi it (NLB < 0) ill l d t fi i l• A government deficit (NLB < 0) will always reduce net financial

worth.

NoteNote: also, while a reduction in net financial worth is inevitable, deficits do not necessarily reduce net worth or L.


NoteNote: also, while a reduction in net financial worth is inevitable, deficits do not necessarily reduce net worth or L.


hThe Government Sector2. Fiscal Balances and Indicators

27

In order to analyze the government sector and fiscal

policy in particular, several balances are useful:

SECTION 2.1Fiscal balancesSECTION 2.1Fiscal balances

Net operating balance (NOB) = Revenue - ExpenseNet operating balance (NOB) = Revenue - Expense

O ll b l (OB) NLB dj t d f “ li ”O ll b l (OB) NLB dj t d f “ li ”

Net lending/borrowing (NLB) = NOB – net acquisition of nonfinancial assets = net acquisition of financial assets – net incurrence of liabilities

Net lending/borrowing (NLB) = NOB – net acquisition of nonfinancial assets = net acquisition of financial assets – net incurrence of liabilities

These are three balances that we discussed previously.These are three balances that we discussed previously.

Overall balance (OB) = NLB adjusted for “policy” financial transactionsOverall balance (OB) = NLB adjusted for “policy” financial transactions

Other useful balances.

Fiscal balancesFiscal balances

Gross operating balance (GOB) = Revenue – Expense, excluding consumption of fixed capital Gross operating balance (GOB) = Revenue – Expense, excluding consumption of fixed capital

Cash surplus/deficit = Net cash inflow from operating activities - Net cash outflow from investments in nonfinancial assets

Cash surplus/deficit = Net cash inflow from operating activities - Net cash outflow from investments in nonfinancial assets

Overall primary balance = OB + net interest expensesOverall primary balance = OB + net interest expenses

NoteNote: since net interest expenses tend to be positive (why?why?), primary balances are generally > OB and NOB, respectivelyNoteNote: since net interest expenses tend to be positive (why?why?), primary balances are generally > OB and NOB, respectively

Primary operating balance = NOB + net interest expensesPrimary operating balance = NOB + net interest expenses

28

Conceptually, the different fiscal balances tell

us different things:


OB: (Net) Contribution of the government sector to aggregate demandOB: (Net) Contribution of the government sector to aggregate demand

Primary balance*: most closely related t t liPrimary balance*: most closely related t t lito present policyto present policy

NoteNote: Can adjust different balances (NOB, OB, for example) by excluding net interest expenseNoteNote: Can adjust different balances (NOB, OB, for example) by excluding net interest expense

Conceptually, the different fiscal balances tell

us different things:


NOB: Government savings (link to the National Accounts)NOB: Government savings (link to the National Accounts)

NLB: Government savings investmentNLB: Government savings investmentNLB: Government savings-investment balance (link to the CAB)NLB: Government savings-investment balance (link to the CAB)

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ExampleExample

Receipts:Receipts:Tax revenue = 500Receipts:Receipts:Tax revenue = 500

Fiscalia General Government 2013:

Expenditures:Expenditures:Compensation of employees = 400Expenditures:Expenditures:Compensation of employees = 400

Grants = 30Interest income = 10Privatization proceeds = 80Fines & others = 5

Grants = 30Interest income = 10Privatization proceeds = 80Fines & others = 5

Purchase of g&s = 30Interest payments = 15Subsidies = 10Social benefits = 25

Purchase of g&s = 30Interest payments = 15Subsidies = 10Social benefits = 25

Financial and other operations:Financial and other operations:Additional interest due (but payment postponed to 2014) = 10Financial and other operations:Financial and other operations:Additional interest due (but payment postponed to 2014) = 10

We will now calculate the main balances for We will now calculate the main balances for FiscaliaFiscalia..We will now calculate the main balances for We will now calculate the main balances for FiscaliaFiscalia..

Purchased g&s not used in 2013 = 5Net Investment in fixed capital = 150Subsidized loans extended to coffee farmers = 20Depreciation of capital stock = 10

Purchased g&s not used in 2013 = 5Net Investment in fixed capital = 150Subsidized loans extended to coffee farmers = 20Depreciation of capital stock = 10

Example (cont)Example (cont)

Revenue (Revenue (RR):):Tax revenue = 500Grants = 30Interest income = 10

Revenue (Revenue (RR):):Tax revenue = 500Grants = 30Interest income = 10

Total revenue =Total revenue =Total revenue =Total revenue =

Interest income 10Privatization proceeds = 80Fines & others = 5

Interest income 10Privatization proceeds = 80Fines & others = 5

Expense (Expense (EE):):Compensation of employees = 400UseUse of g&s = 30 – 5 = 25II 15 10 25

Expense (Expense (EE):):Compensation of employees = 400UseUse of g&s = 30 – 5 = 25II 15 10 25

Total expense =Total expense =Total expense =Total expense =

Therefore, Therefore, Net operating balance = R – E = 545 – 495 = 50 Therefore, Therefore, Net operating balance = R – E = 545 – 495 = 50

InterestInterest = 15 + 10 = 25 Subsidies = 10Social benefits = 25Consumption of fixed capital = 10Consumption of fixed capital = 10

InterestInterest = 15 + 10 = 25 Subsidies = 10Social benefits = 25Consumption of fixed capital = 10Consumption of fixed capital = 10

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Net acquisition of nonfinancial assets:Net acquisition of nonfinancial assets:Privatization proceeds =Investment in fixed capital =Change in inventories =

Net acquisition of nonfinancial assets:Net acquisition of nonfinancial assets:Privatization proceeds =Investment in fixed capital =Change in inventories =

Total net acquisition of Total net acquisition of nonfinancial assets =nonfinancial assets =Total net acquisition of Total net acquisition of nonfinancial assets =nonfinancial assets =

NOBNOB – net acquisition of nonfinancial assets. Net lending/borrowing =

ThusThus, the general government must borrowborrow 25 in net terms net terms to finance operations.

NOBNOB – net acquisition of nonfinancial assets. Net lending/borrowing =

ThusThus, the general government must borrowborrow 25 in net terms net terms to finance operations.

Change in inventories Change in inventories

What about gross borrowing, i.e. accumulation of liabilities?

Since the increase in financial assets = 20 (why?why?), then liabilities must increase by (assuming zero OEF).

This should be equal to the increase in government net debt.This should be equal to the increase in government net debt.

Since the increase in financial assets = 20 (why?why?), then liabilities must increase by (assuming zero OEF).

This should be equal to the increase in government net debt.This should be equal to the increase in government net debt.


Net lending/borrowing Net lending/borrowing – privatization proceeds – policy loans = = Overall balanceOverall balanceNet lending/borrowing Net lending/borrowing – privatization proceeds – policy loans = = Overall balanceOverall balance

ThusThus, the general government is generating an overall deficit of 125; or an excess of fiscal policy activities over revenue equal to this amount.ThusThus, the general government is generating an overall deficit of 125; or an excess of fiscal policy activities over revenue equal to this amount.

Primary operating balance = Primary operating balance = NOBNOB + + net interest =Primary operating balance = Primary operating balance = NOBNOB + + net interest =

Primary balances are therefore straightforward to calculate:

Overall primary balance = Overall balance + Overall primary balance = Overall balance + net interest =Overall primary balance = Overall balance + Overall primary balance = Overall balance + net interest =

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Finally, Gross operating balance (Finally, Gross operating balance (GOBGOB) )

== NOBNOB ++ Consumption of fixed capital =

Finally, Gross operating balance (Finally, Gross operating balance (GOBGOB) )

== NOBNOB ++ Consumption of fixed capital == = NOBNOB + + Consumption of fixed capital = = = NOBNOB + + Consumption of fixed capital =

Other economic flowsOther economic flows: assume no extraordinary events causing changes in the volume of assets, but the local currency depreciates by 13%.

Al th t th t k f i t ti l iAlso assume that the stock of international reserves remains constant at 100 USD throughout 2013, and that the exchange rate at the beginning of the year was = 1.

QuestionQuestion: : what is the change in net worth during 2013?QuestionQuestion: : what is the change in net worth during 2013?


Recalling our previous equation:Recalling our previous equation:

The change in net worth should be equal to the net operating balance plus other economic flows

Recalling our previous equation:Recalling our previous equation:

The change in net worth should be equal to the net operating balance plus other economic flowsoperating balance plus other economic flows: operating balance plus other economic flows:

Thus:Thus:

NW = NOB + OEF =

Thus:Thus:

NW = NOB + OEF =

NoteNote: : net worth is increasing by 63, although debt is increasing by 45 (see three slides back).

What accounts for this difference? What accounts for this difference?

NoteNote: : net worth is increasing by 63, although debt is increasing by 45 (see three slides back).

What accounts for this difference? What accounts for this difference?

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Summary of major changes in Fiscalia 2013:

Opening Opening

RecapRecap

SGOSGO OEFOEF Closing Closing

Balance Sheet

A = 1,000L= 500NW = 500NW = 500

Balance Sheet

A = 1,000L= 500NW = 500NW = 500

R = 545E = 495

NOBNOB = 50= 50

R = 545E = 495

NOBNOB = 50= 50 A = 13A = 13A = 13A = 13

Balance Sheet

NW = 563NW = 563A = 1,108A = 1,108

Balance Sheet

NW = 563NW = 563A = 1,108A = 1,108

NANA = 75NLB = NLB = --2525FA = 20L = 45L = 45

NANA = 75NLB = NLB = --2525FA = 20L = 45L = 45

,,L = 545L = 545

,,L = 545L = 545

Regardless of changes in policy, fiscal balances will

change over the course of an economic cycle:

SECTION 2.2Indicators of the fiscal positionSECTION 2.2Indicators of the fiscal position

Generally speakingGenerally speaking:

Revenues (taxes) Revenues (taxes) are tied to the level of economic activity, rising during upswings, falling during downturns.Revenues (taxes) Revenues (taxes) are tied to the level of economic activity, rising during upswings, falling during downturns.

ThusThus, fiscal balances will naturally improve during upswings, deteriorate during downturns. ThusThus, fiscal balances will naturally improve during upswings, deteriorate during downturns.

Expenses, Expenses, on the other hand, are relatively stable throughout the cycle (some exceptions).Expenses, Expenses, on the other hand, are relatively stable throughout the cycle (some exceptions).

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Fiscal balance and economic cycles (no policy change).

Indicators of the fiscal positionIndicators of the fiscal position

Potentialor Long-term Real

Output, fiscal Output, fiscal balancebalance

term Real GDP

Actual Real GDP

In this example, the “structural fiscal balance”= 0In this example, the “structural fiscal balance”= 0

TimeTime00

Fiscal Fiscal balancebalance

structural fiscal balance 0structural fiscal balance 0

Therefore, in order to assess fiscal policy, one must

adjust balances adjust balances to account for the cyclical effect.

Indicators of the fiscal positionIndicators of the fiscal position

(If we observe unadjusted balances, we might incorrectly

attribute changes in the balance to changes in policy.)

QuestionQuestion: : which balance are we talking about? QuestionQuestion: : which balance are we talking about?

AnswerAnswer: : can be NOB or net lending/borrowing if (f i li i ) h h j fi d

AnswerAnswer: : can be NOB or net lending/borrowing if (f i li i ) h h j fi dif we assume (for simplicity) that there are no major fixed asset sales, privatizations, or policy lending, then NLB = Overall Balance.if we assume (for simplicity) that there are no major fixed asset sales, privatizations, or policy lending, then NLB = Overall Balance.

In this section, In this section, we will work through an example using the primary NOB.In this section, In this section, we will work through an example using the primary NOB.

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South Africa, 2007South Africa, 2007--10, basic information.10, basic information.

How to adjust the fiscal balance: an exampleHow to adjust the fiscal balance: an example

2006 2007 2008 2009 2010

(billion 2005 Rand)

Potential output 1,619 1,679 1,740 1,802 1,865

Real output 1,659 1,751 1,814 1,784 1,833

GDP Deflator (2005=100) 106 115 125 134 145

Nominal terms

Revenue 464 537 600 576 640

Primary expense* 402 479 573 650 731

Primary net operating balance 62 58 27 -74 -91

Nominal GDP 1,767 2,016 2,274 2,396 2,663

Primary NOB (% of GDP) 3.5 2.9 1.2 -3.1 -3.4

(billion current Rand)

Real terms

Revenue 436 467 479 429 441

Primary expense* 377 416 457 484 503

* Excludes interest payments

(billion 2005 Rand, unless otherwise specified)

Question: Question: in what years did South Africa have a positive (negative) output gap?Question: Question: in what years did South Africa have a positive (negative) output gap?

Step 1: Step 1: define the output gap as a ratio:

Where y = real GDP, yp = potential GDP


pt

t

y

yGap

2006 2007 2008 2009 2010

Potential output 1,619 1,679 1,740 1,802 1,865

Real output 1,659 1,751 1,814 1,784 1,833

(billion 2005 Rand)

Step 2: Step 2: Determine a historical “elasticity” of revenue

Gap (ratio) 1.02 1.04 1.04 0.99 0.98

For simplicity: For simplicity: we can assume that the elasticity of revenue with respect to output is approximately equal to 1.For simplicity: For simplicity: we can assume that the elasticity of revenue with respect to output is approximately equal to 1.

with respect to output (various estimation techniques)

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Step 3: Step 3: adjust revenue (R) by the inverse of the gap

and the elasticity:


t

pt

y

yR

GapRAdjR

1

2006 2007 2008 2009 2010

Revenue 436 467 479 429 441

Gap (ratio) 1.02 1.04 1.04 0.99 0.98


typ

Step 4: Step 4: compute the adjusted primary balance as

Adjusted revenue 426 448 460 433 449

adjusted revenue minus primary expense:

Adjusted revenue 426 448 460 433 449

Primary expense 377 416 457 484 503

Adjusted primary NOB 49 32 3 -51 -54


Adjusted primary NOB (% of Yp) 3.0 1.9 0.2 -2.8 -2.9

Fiscal balances, stance, and impulseFiscal balances, stance, and impulse:


4

South Africa 2006-10

2

0

2

4

2006 2007 2008 2009 2010

% o

f G

DP

)

Primary NOB

Adjusted primary NOB

Fiscal stance

Fiscal impulse

-6

-4

-2(%

Base year: 2005Base year: 2005Primary NOB = 2.7%Primary NOB = 2.7%

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hThe Government Sector3. Stock Indicators

The GFS system allows for easy and coherent joint

analysis of stocks and flows.

Stock IndicatorsStock Indicators

• Recall our identity:

• OEF can be sporadic and are largely beyond the

control of the government two major

k i il ff d b h NOB ( )stocks are primarily affected by the NOB (fiscal policy)

These stocks areThese stocks are: gross debt (L) and net worth (NW)These stocks areThese stocks are: gross debt (L) and net worth (NW)

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A preliminary concept of sustainabilityA preliminary concept of sustainability:

In the simplest terms, one should be concerned

Introducing sustainabilityIntroducing

sustainability

p

about situations in which:

• Debt grows continuously (may lead to abrupt financing

difficulties, crisis)

• Net worth is continuously depleted (similar to above,

plus possible long-term impoverishing impact)

NoteNote: : both indicators are useful, reveal different parts of the puzzle. NoteNote: : both indicators are useful, reveal different parts of the puzzle.

FiscaliaFiscalia 2013. 2013. As a percentage of GDPAs a percentage of GDP:

• NOB = OEF = 0

Example 1Example 1

• Therefore, NW remains constant at 30.

• However, debt (L) increases from 35 to 45.

QuestionQuestion: what does this imply, and should we be concerned?

AnswerAnswer: : it implies that the government has acquired nonfinancial assets (investment) equal to 10% of GDP. Should not be a concern if social return is sufficient.

AnswerAnswer: : it implies that the government has acquired nonfinancial assets (investment) equal to 10% of GDP. Should not be a concern if social return is sufficient.

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• NOB = -5, OEF = 2 (recall that NW at beginning of 2013 is 30)

Example 2Example 2

• Debt (L) declines from 35 to 31.

Answer 1Answer 1: : NW = 30 – 5 + 2 = 27 (fell by 3). Also, if L falls by 4, then assets must have fallen by 7Answer 1Answer 1: : NW = 30 – 5 + 2 = 27 (fell by 3). Also, if L falls by 4, then assets must have fallen by 7

QuestionQuestion: what will be end-2013 NW? Should we be concerned?

then assets must have fallen by 7. then assets must have fallen by 7.

Answer 2Answer 2: : Concerns: (aa) large operating deficit offset by OEF(how reliable?); and (bb) large asset sales/privatization to finance debt reduction.

Answer 2Answer 2: : Concerns: (aa) large operating deficit offset by OEF(how reliable?); and (bb) large asset sales/privatization to finance debt reduction.


• NOB = -2, OEF = -15

Example 3Example 3

• No change in government assets.

Answer 1Answer 1: : NW = 30 – 2 – 15 = 13 (fell by 17). Since no change in assets,

debt increases by same amount: L = 35 + 17 = 52

Answer 1Answer 1: : NW = 30 – 2 – 15 = 13 (fell by 17). Since no change in assets,

debt increases by same amount: L = 35 + 17 = 52

QuestionQuestion: what will be end-2013 NW and L? Think of an example

where this type of scenario might occur. Should we be concerned?

debt increases by same amount: L = 35 + 17 = 52. debt increases by same amount: L = 35 + 17 = 52.

Answer 2Answer 2: : Could occur as a result of a contingent liability becoming

effective (crisis/banking system bailout).

Answer 2Answer 2: : Could occur as a result of a contingent liability becoming

effective (crisis/banking system bailout).

Answer 3Answer 3: : Rapid adverse movements in both NW and L. May need fiscal

adjustment ( NOB) to re-build NW or pay down L.

Answer 3Answer 3: : Rapid adverse movements in both NW and L. May need fiscal

adjustment ( NOB) to re-build NW or pay down L.

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Lessons drawn from these examples:Lessons drawn from these examples:

•• At times, debt and net worth tell similar stories (Example 3Example 3),

h th i littl h i th t id

LessonsLessons

when there is little happening on the asset side…

…but debt generally only tells a partial story:

• Incurring debt to finance acquisition of nonfinancial assets (NW = 0) raises questions of efficiency of investment (Example 1Example 1)

• Debt may be falling, but beware of relying on sporadic “holding ” d/ l d d b ( ll )gains” and/or asset sales to reduce debt (Example 2Example 2).

• Thus, a more complete picture emerges when looking both at NW and L.

Going forwardGoing forward, one should have an idea of the structural NOB, and of contingent liabilities (Example 3Example 3). Going forwardGoing forward, one should have an idea of the structural NOB, and of contingent liabilities (Example 3Example 3).

The Government Sector€¦ · The Government Sector 1. GFS Accounting Introducing the government...

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