Government Sector Policy
description
Transcript of Government Sector Policy
This training material is the property of the International Monetary Fund and is intended for use in IMF Institute for CapacityDevelopment courses. Any reuse requires the permission of the IMF. The views expressed in this material are those of thecourse staff and do not necessarily represent those of the IMF or IMF policy. 1
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:
INTRODUCTIONINTRODUCTION
Opening Balance Sheet
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:
INTRODUCTIONINTRODUCTION
Opening Balance Sheet
Opening Balance Sheet
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
• 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
Liabilities (financing)
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
Transactions affecting net worth
Transactions affecting net worth
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
Balance sheet end-2012
SGO 2012
Expense: Expense:
SGO 2012
Expense: Expense:
Balance sheet end-2013
Balance sheet end-2013
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 affecting net worth
Nonfinancial assetsNonfinancial assets
Transactions in: Financial assets
Liabilities (financing)
Financial assets
Liabilities (financing)
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
lending/borrowinglending/borrowing
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
lending/borrowinglending/borrowing
Net Net
lending/borrowinglending/borrowing
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
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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:
Pressures on other sectorsPressures on other sectors
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
Government Government
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):
Pressures on other sectorsPressures on other sectors
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
Government Government
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:
Pressures on other sectorsPressures on other sectors
Government Government
financingfinancing
Government Government
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
Opening Balance Sheet
Opening Balance Sheet
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
Nonfinancial assetsNonfinancial assets
• Fixed & inventories
• Valuables & others
Financial AssetsFinancial Assets
•• Domestic & Foreign
Nonfinancial assetsNonfinancial assets
• Fixed & inventories
• Valuables & others
Financial AssetsFinancial Assets
•• Domestic & Foreign
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
Domestic & Foreign
LiabilitiesLiabilities
•• Domestic & Foreign
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).
Think of an example where this is the case.Think of an example where this is the case.
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.
Think of an example where this is the case.Think of an example where this is the case.
NoteNote: also, while a reduction in net financial worth is inevitable, deficits do not necessarily reduce net worth or L.
Think of an example where this is the case.Think of an example where this is the case.
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
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Conceptually, the different fiscal balances tell
us different things:
SECTION 2.1Fiscal balancesSECTION 2.1Fiscal balances
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:
SECTION 2.1Fiscal balancesSECTION 2.1Fiscal balances
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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Example (cont)Example (cont)
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.
Example (cont)Example (cont)
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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Example (cont)Example (cont)
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?
Example (cont)Example (cont)
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
How to adjust the fiscal balance: an exampleHow to adjust the fiscal balance: an example
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:
How to adjust the fiscal balance: an exampleHow to adjust the fiscal balance: an example
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
(billion 2005 Rand, unless otherwise specified)
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
(billion 2005 Rand, unless otherwise specified)
Adjusted primary NOB (% of Yp) 3.0 1.9 0.2 -2.8 -2.9
Fiscal balances, stance, and impulseFiscal balances, stance, and impulse:
How to adjust the fiscal balance: an exampleHow to adjust the fiscal balance: an example
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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FiscaliaFiscalia 2013. 2013. As a percentage of GDPAs a percentage of GDP:
• 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.
FiscaliaFiscalia 2013. 2013. As a percentage of GDPAs a percentage of GDP:
• 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).