Overview

Public sector activities are important in any country, and their impact on the economy cannot be ignored. The effect of taxes, public sector investment, and government decisions and regulations on the everyday life of a country come immediately to mind, but in the last few decades, the public sector has taken over additional functions that were previously handled almost exclusively by the private sector. For example, the public sector has become heavily involved in investment, subsidies, stockpiling, marketing boards, and oil distribution; through state enterprises, it is actively competing with the private sector. In recent years, as a result of the renegotiation of external debts, the public sector in certain countries has taken over the foreign obligations of the private sector—a development that may have serious implications in the future, because the servicing of these debts will have to be carried out by the public sector. In certain countries, this additional fiscal burden has been compounded because an exchange rate guarantee has been given to the private sector. Thus, the public sector may face heavy additional expenditures and/or losses in the future that will have to be financed either by higher taxes or by bank credit expansion.⁵

As a result of these developments, public sector revenues and expenditures have risen rapidly in relation to GDP. In most cases, however, expenditures have grown faster than revenues, with a consequent increase in the fiscal deficit (and financing requirements). To illustrate this point, let us review some of the available data. The overall deficit of all central governments rose almost steadily, to as much as 18.5 percent in 1983 from about 4.5 percent of total expenditures in 1974, and declined thereafter to 12.3 percent in 1988.⁶ This expansion of the deficit affected almost all country groups, whether rich or poor, industrial or developing, oil producing or oil importing.

These figures underestimate the full impact of the fiscal deficit, because they refer only to central government operations. If the total public sector (including the quasi-fiscal deficit of the central banks) were considered, the deficit would be considerably higher.

In fact, in many countries the difficult financial situation has been the result of fiscal weakness. That is, important priority decisions have often not been made, and there is sometimes not enough consistency between expenditures and their financing. Government budgets too often tend to overestimate revenues and underestimate expenditures. Also, if revenues fall short of budgeted amounts, there is a certain rigidity on the expenditure side because budgetary appropriations may already have been committed.

The widening of the fiscal deficit often reflects not only public sector operations per se, but also the result of other decisions, which are eventually reflected in the fiscal transactions. Following are a few illustrative examples:

• A fiscal deficit may emerge because of subsidies on certain food products, which may result in lower revenues (tax rebates) or higher expenditures (minimum prices to producers or maximum consumer prices). The decision to grant the subsidy is usually based on social and/or political considerations.

• Domestic prices of petroleum products may be kept artificially low to provide cheap urban transportation, resulting in low revenues for state oil companies, who sometimes cannot cover their operating costs. Incidentally, this is a case in which the decision may result in a lower surplus rather than a larger deficit and, in contrast to the previous case, the implicit subsidy would not be clearly quantified or specifically identified in the fiscal statistics.

• Deficits of local governments, municipalities, and universities are usually in response to political pressures, and they are financed by treasury transfers; thus, local governments and universities may even show surpluses after transfers, or they may have little or no incentive to curtail their outlays.

• A budget deficit may reflect military expenditures owing to an emergency in the country or in the region.

• Investment may be made for political reasons, such as opening up undeveloped or isolated regions for economic and political reasons—for example, to alleviate unemployment in a certain area, to reassert the sovereignty of the country in a certain region, or in connection with political elections.

• Tax exemptions and rebates may be granted to encourage some specific activities.

Too frequently, there is a certain lack of coordination between these various actions and the overall fiscal situation. For example, the minister of industry may argue for granting tax rebates to certain industries without much concern for the impact of the lost revenues on the overall budget situation. Indeed, Fund staff members have been told more than once by the authorities that they cannot raise revenues, they cannot cut expenditures, and they cannot afford the deficit! In general, there is a tendency to believe that a government can and should spend money, and there is little concern about the financing of the government deficit. People may be concerned about the size of the deficit per se, but they do not seem to relate it to revenue and expenditure policies. They agree that revenues should be raised and expenditures cut, but the burden should be carried by some other sectors of the economy. But, after all, the government can always finance its deficit through the central bank—that is, through inflation.

The trend toward rising government deficits is basically a result of past policies combined with the present inability to change. In general, such deficits reflect the political inability—in a situation of sluggish growth and external shocks—to redistribute revenues and/or change the system of social and welfare benefits that were devised under more favorable economic conditions (high growth, full employment, and external stability). The inability to accept changes and adaptations in industrial patterns results in public transfers covering the operational losses of ailing and uncompetitive industries.

Social security systems are also all under stress, because contributions are falling while payments are rising, due to increased unemployment and longer life expectancies. This, too, adds to the burden on governments’ budgets.

In present economic conditions, the following economically damaging consequences of high budgetary spending are possible:

• If high deficits are associated with accommodating, easy credit policies, the consequence is inflation (under certain economic circumstances) and/or balance of payments deficits.

• Accommodating high public expenditure by higher taxes could produce higher real marginal taxes and disincentives to invest during periods of sluggish economic activity.

• If high budgetary deficits are associated with tight credit policies, this results in “crowding out” effects and a tendency toward higher exchange rate appreciation and interest rates, especially when demand for private credit is still strong.

If the country’s fiscal situation cannot be ignored because of its impact on the economy, then a closer look at fiscal policies is a key element of the adjustment process. This means that the desk economist must know what is going on in the fiscal area. More specifically, he needs detailed and comprehensive financial statistics as well as information on what is behind these statistics (such as legislation), so that he can pinpoint fiscal problems. The causes of fiscal imbalance are many, and sometimes they are not immediately evident. Indeed, tax rebates or the artificially low prices of petroleum products would not show up at all on fiscal accounts, because they take the form of uncollected revenues.

Table 1 illustrates the need for information that goes beyond the purely statistical. Suppose that in a country with high inflation income taxes were levied on the income generated in the previous year, and that the tax administration of that country was reasonably efficient; for example, tax receipts were equivalent to 5 percent of GDP of the year in which the income was generated. The ratio of tax receipts to GDP would be steadily declining over time. To reverse such a trend, action would be required to modify the tax legislation, rather than to improve the tax administration.

Table 1.

Tax Receipts as Percent of GDP

¹Equal to 5 percent of GDP of previous year.

Table 1.

Tax Receipts as Percent of GDP

	1989	1990	1991	1992	1993
Nominal GDP	3,000	3,600	5,400	9,180	18,360
Tax receipts1		150	180	270	459
Tax receipts as percent of GDP		4.2	3.3	2.9	2.5

¹Equal to 5 percent of GDP of previous year.

View Table

Table 1.

Tax Receipts as Percent of GDP

	1989	1990	1991	1992	1993
Nominal GDP	3,000	3,600	5,400	9,180	18,360
Tax receipts1		150	180	270	459
Tax receipts as percent of GDP		4.2	3.3	2.9	2.5

¹Equal to 5 percent of GDP of previous year.

In certain countries the desk economist needs data not only on the central government but also on the rest of the public sector, and, in particular, on the state enterprises. Only on the basis of reliable and comprehensive data can the Fund give the authorities advice that allows them to take the right decisions or be aware of the financial consequences of their political decisions.

However, one has to be realistic. For many reasons, data on the entire public sector are not always available, or may only be available with such a delay as to make them useless in shaping decisions. For example, decentralized agencies are usually very slow in preparing statistics. State enterprises may operate as independent companies, but too often they request government transfers to finance their deficits but are unwilling to explain how the deficits were generated, because they do not want too much interference in their everyday operations. Also, some enterprises may submit only profit and loss statements, whereas information on cash flows is also needed. Since economic policy decisions often have to be taken in a hurry, it is important to develop proxies that facilitate the assessment of the fiscal situation and its prospects despite gaps in the statistical information available.

Coverage of the Nonfinancial Public Sector

Coverage of the nonfinancial public sector varies from country to country according to the availability of data and the extent to which individual entities depend on governmental decisions.

Generally, the nonfinancial public sector includes the central government (comprising budgetary and extrabudgetary operations), the rest of general government, and the autonomous state enterprises. State-owned financial institutions should be classified with the financial system. However, there are several borderline cases that may receive different treatment, depending on the circumstances. For instance, an enterprise that is 50 percent (or less) government owned could be included with the nonfinancial public sector, depending on the degree of control that the central government has on the enterprise. Some enterprises that are more than 50 percent state owned could, in certain circumstances, be included with the private sector if they operate like private entities, make independent decisions, and receive no direct government assistance or preferential treatment. Similar borderline cases exist with some financial institutions, such as certain housing institutes, which may extend credit for construction or for the purchase of residences.

Another interesting case is provided by some cooperatives that benefit from special rediscount facilities, low interest rates, and government transfers, as public entities, even though the former are legally owned by the members of the cooperative. Since their pricing and expenditure policies are controlled by the state, these cooperatives could be included with the nonfinancial public sector, if data on their operations are available. In the case of a socialist country with a large industrialized sector that is more or less autonomous from direct government control, an exception could be made. In this case, for the sake of facilitating the analysis, the nonfinancial public sector could be separated into two subsectors, covering the government apparatus and the cooperatives or socialized enterprises, respectively.

Binational enterprises may be similar borderline cases. The capital of these enterprises can be wholly or partially subscribed by the central government, but the enterprises may operate as private entities. Their classification as part of the nonfinancial public sector, private sector, or a separate sector, will depend on the special circumstances of each country.

In general, entities should be included in the nonfinancial public sector on the basis of economic principles (pricing policies, decision-making machinery, or dependence on transfers) rather than on the basis of strictly legal principles.

A second constraint in defining the nonfinancial public sector is represented by the availability of data. In some countries, the coverage of the sector may be limited merely because information on state enterprises and autonomous government agencies is not available. In this case, nonconsolidated entities would be implicitly treated as a part of the private sector, and, for the sake of consistency, monetary and balance of payments statistics should be similarly adjusted.

Time Frame

Public sector operations are carried out in the context of a fiscal year, which does not necessarily coincide with the calendar year. Some adjustments to the fiscal figures may, therefore, be required to make them comparable with other variables such as national accounts, monetary accounts, and balance of payments, if the latter are presented on a calendar year basis. Moreover, in some instances, public sector operations may be attributable to more than one fiscal year, even though they take place during the same time span. For instance, in Honduras the fiscal year covers 15 months, starting January 1; therefore, operations during the first quarter of the year may be attributed to two different fiscal years. To be more specific, taxes collected during the first quarter of the year for tax liabilities of the previous calendar year would be attributed to the previous fiscal year rather than to the current fiscal year. For expenditures, the treasury may continue to make commitments against budgetary appropriations even after December 31. As a result, if a mission should request data for central government operations in fiscal year 1990, it would receive data covering the period January 1, 1990 through March 31, 1991. Hence, for reconciliation with national accounts, monetary accounts, and balance of payments statistics, these data would need to be adjusted by deducting operations that took place during the first quarter of 1991 (carry out) and by adding operations of the 1989 budget that took place during the first quarter of 1990 (carry in).

Reconciliation of Data

Fiscal data may differ from estimates derived from other sources because of either timing or coverage discrepancies. The following summarizes the main sources of discrepancy:

1. Differences from monetary accounts: credits. Differences on use of bank credit between fiscal sources and monetary accounts are usually few and easily identifiable. Timing differences are rather unusual; most of the differences, therefore, refer to coverage discrepancies, including:

   1. Bank credit for extrabudgetary operations;

   2. Capitalization of interest: in some instances, the central government does not pay interest accrued on its outstanding central bank debt, and the unpaid interest is usually capitalized in the central bank balance sheet in the form of bank credit to the government. This capitalization is usually not recorded in the central government statistics; and

   3. Central bank payment of amortizations and interest abroad on behalf of the treasury whenever the central government fails to service an external debt that carries a central bank guarantee. Such payments are reported as a credit to the central government in the central bank balance sheet but usually are not reported in the treasury records, because the pertinent budgetary appropriations are not utilized.

2. Differences from monetary accounts: deposits. Changes in budgetary deposits, as derived from the monetary accounts, may differ from data derived from the treasury balance sheet because of timing discrepancies. If monetary data are used as the basic source of information, the timing discrepancy should be recorded as part of central government financing “below the line.” Apart from deposits related to the budget, the central government may hold other deposits in the banking system including:

   1. Deposits of ministries, usually representing funds that have been transferred from the treasury general account to the disposal of individual ministries. These transfers would appear in the budget as expenditures;

   2. Earmarked funds. In some countries, certain revenues or taxes are earmarked for specific purposes outside the budget;

   3. Sinking funds for the servicing of government debt. If the central bank is acting as the agent of the central government to service that debt, the bank may have standing authority to transfer funds periodically from the treasury general account to sinking funds for the servicing of the debt; the transfer would be reported in the budget as servicing of debts, even though the actual payment may be made at a later stage from the sinking funds;

   4. Transitory accounts, deposits that may arise whenever the banking system is acting as the agent of the central government to collect taxes. Funds collected are usually deposited in a transitory account before being deposited to the treasury general account. In some countries, banks are authorized to use these transitory accounts as their working capital and, therefore, they may be interested in delaying the transfer of the funds into the treasury accounts;

   5. Extrabudgetary deposits, deposits that may arise because certain ministries and government agencies collect fees and other revenues outside the budget. The collecting ministries or agencies may dispose of these funds at their discretion. Extrabudgetary deposits may also include funds from foreign loans and grants, channeled outside the budget; and

   6. Sinking funds related to two-step loans. The final recipient of a two-step loan may be required to make periodic deposits into these sinking funds so that the treasury can meet its debt-service obligations. In some cases the treasury has re-lent loan proceeds domestically at shorter maturities than those envisaged in the foreign obligations. In these cases, a sinking fund deposit would not yet be required for payment abroad and would be at the disposal of the treasury, which could re-lend it domestically until the maturity of the foreign obligation.

3. Differences from balance of payments: gross disbursements of loans. Data derived from the lending agencies may differ from data recorded by the treasury both in timing and in coverage. Lending agencies may make payments abroad to foreign suppliers and contractors, but they may notify the local authorities only after a certain delay. Coverage differences may be attributable to extrabudgetary foreign loans, donations distributed under the direct control of a foreign embassy, different reporting of two-step loans, or valuation discrepancies that arise because lending agencies are reporting disbursements at exchange rates different from those used by the authorities. Finally, in some instances the central government may make some payments while expecting them to be reimbursed by a foreign lender. In such a case, the treasury could report the foreign loan as if it were already disbursed.

4. Differences from balance of payments: amortization and interest payments. Some of these discrepancies have already been mentioned in reviewing the differences between fiscal and monetary data, and include central bank direct payments abroad on behalf of the treasury, payments from sinking funds, and treatment of two-step loans, if the final recipients of these loans are directly servicing the debts. Also, the differences may reflect exchange rate differentials; an attempt should, therefore, be made to obtain data in both local and foreign currency.

5. Differences from data reported by the rest of the public sector:

   1. The social security system may report contributions from the central government (as state and as employer) on an accrual basis, whereas the budget may show only amounts that have been actually transferred;

   2. Debt-service payments abroad related to two-step loans may also give rise to discrepancies, because the treasury may make these payments directly, even though the final recipient of the loan is assumed to be responsible for its servicing. In the budget, these payments would be shown as transfers to the rest of the public sector, but the final recipient of the foreign loan is not likely to show the transfer or the debt-service payments;

   3. Transfers from the rest of the public sector into sinking funds for servicing two-step loans may result in differences, because the rest of the public sector would consider these deposits as transfers to the central government (or as external debt amortization), even though the central government is not aware of these deposits;

   4. Certain state enterprises (utilities and transportation) may show as revenues amounts that the central government or the rest of the public sector is expected to pay either for provision of goods and services or for transfers, even though the treasury or the rest of the public sector does not make these payments;

   5. The central government classification of transfers to the rest of the public sector between current and capital may differ from the classification used by the recipient entity; and

   6. State enterprises may show as transfers to the central government certain taxes and revenues that have been collected on behalf of the treasury but have not been transferred, either because the collecting entity is using these funds as working capital or because it has retained them to offset certain payments that the central government was expected to make—but did not—for goods and services.

Central Government Operations

The operations of the central government are important because they usually account for most of the revenues, expenditures, and deficit of the public sector. Also, central government operations may include transfers to finance the deficits of autonomous agencies, in which case it could be argued that central government operations, to a large extent, reflect the problems of the entire public sector.

The central government concept is also important from the point of view of policy decisions. The operations of the central government are under the direct control of the minister of finance; therefore, the implementation of policy decisions, for instance, in the case of expenditure cuts, should be fast and clear.

Central government operations may be classified into two broad categories, budgetary and extrabudgetary, depending on whether or not they are embodied in a budget. Although preparation of a program requires looking at central government operations as a whole, it is important to maintain the distinction between budgetary and extrabudgetary operations, at least in working tables. Discussions on the fiscal situation are usually carried out with the minister of finance and his staff who are familiar with, and think in terms of, budgetary operations. Discussion may be facilitated by showing the two categories separately in the working tables, as well as their total. Also, in countries with large extrabudgetary operations, such a distinction would emphasize that the budget reflects only a portion of total central government operations and usually greatly underestimates the deficit to be financed with domestic resources, because extrabudgetary operations are usually left outside the budget, owing to a lack of financing sources that are not inflationary.

Budgetary Operations

Most central government operations are embodied in a budget document, which is the result of political debate and compromise. Since assistance to other government entities is often in the form of treasury transfers, the budget also offers an opportunity to review the policies of the entire public sector. However, in some countries, rather than being a formal document requiring legislative action for its approval and/or revision, the budget is instead a mere guideline that can be revised by the chief executive. This is particularly true of defacto governments. Also, in some instances, the legislative process of approving the budget is so protracted that the formal budget document is valid only from a historical point of view. Budgetary operations are, thus, all those government operations that are included in establishing a “budget,” whether in the form of a formal document or a “working” expenditure plan.

The budget is a form of financial programming inasmuch as it presents how the government plans to spend government revenue according to a certain set of priorities. In simple terms, a budget presents on the one hand a certain level of receipts (from tax and nontax revenues, bank credit, use of foreign loans, and sale of bonds) that the authorities expect or hope to collect and, on the other hand, a certain level of expenditures or appropriations that the authorities expect or plan to make. Thus, it is not certain in advance whether the revenues will materialize, but a presumption exists that expenditures will be made.

An example of a budget is presented in Table 2. That budget indicates that the country treasury had an accumulated deficit arising from the operations of previous years of C 250 million, total revenues of C 2,309 million, and total expenditures of C 2,059 million. The accumulated deficit reflected, inter alia, changes in balance sheet items, accounting adjustments, and the difference between receipts and expenditures (on an accrual basis) of previous years. Revenues and expenditures are distributed between an operating or current budget and capital operations. The budget adds up to zero—that is it assumes that the year’s revenues will be sufficient to finance the year’s expenditures as well as the accumulated deficits of previous years. It should be stressed that accumulated deficits are a balance sheet entry and their elimination would not necessarily imply cash payments. If revenues had been higher, the budget would have shown a surplus for the year, which could have been used to finance operations of the following year. If revenues had been lower, the budget would have ended with a deficit to be financed in subsequent years.

Table 2.

El Salvador: Original Central Government Budget, 1983

(In millions of colones)

Source: El Salvador, Ministry of Finance, Informe Complementario Constitutional sobre la Hacienda Publica, Ejercicio Fiscal 1983 (San Salvador: 1983).

¹Including use of foreign loans (C 13 million) and sale of bonds (C 252 million),

²Including amortization of external debt (C 33 million) and internal debt (C 51 million).

Table 2.

El Salvador: Original Central Government Budget, 1983

(In millions of colones)

A.	Estimated cumulative financial deficit, as of December 31, 1982				−250
B.	Current revenues
	Tax revenues	1,299
	Nontax revenues	141
	Current transfers	14
	Other current revenues	3			1,457
C.	Other revenues for the financing of the operating budget				2651
D.	Capital receipts
	Sale of bonds	55
	Reimbursement of loans	2
	Domestic credit	336
	Use of foreign loans	194			587
E.	Total receipts (A through D)				2,059
F.	Operating expenditures
	Operating outlays	1,008
	Current transfers	190
	Interest on public debt	275			1,473
G.	Capital expenditures
	Direct investment	337
	Capital transfers	55
	Amortization of public debt	842
	Financial operations	110			586
H.	Total expenditures (F plus G)				2,059

Source: El Salvador, Ministry of Finance, Informe Complementario Constitutional sobre la Hacienda Publica, Ejercicio Fiscal 1983 (San Salvador: 1983).

¹Including use of foreign loans (C 13 million) and sale of bonds (C 252 million),

²Including amortization of external debt (C 33 million) and internal debt (C 51 million).

View Table

Table 2.

El Salvador: Original Central Government Budget, 1983

(In millions of colones)

A.	Estimated cumulative financial deficit, as of December 31, 1982				−250
B.	Current revenues
	Tax revenues	1,299
	Nontax revenues	141
	Current transfers	14
	Other current revenues	3			1,457
C.	Other revenues for the financing of the operating budget				2651
D.	Capital receipts
	Sale of bonds	55
	Reimbursement of loans	2
	Domestic credit	336
	Use of foreign loans	194			587
E.	Total receipts (A through D)				2,059
F.	Operating expenditures
	Operating outlays	1,008
	Current transfers	190
	Interest on public debt	275			1,473
G.	Capital expenditures
	Direct investment	337
	Capital transfers	55
	Amortization of public debt	842
	Financial operations	110			586
H.	Total expenditures (F plus G)				2,059

Source: El Salvador, Ministry of Finance, Informe Complementario Constitutional sobre la Hacienda Publica, Ejercicio Fiscal 1983 (San Salvador: 1983).

¹Including use of foreign loans (C 13 million) and sale of bonds (C 252 million),

²Including amortization of external debt (C 33 million) and internal debt (C 51 million).

To analyze the financial impact of such a budget, however, its components have to be rearranged in a presentation that shows the gap between central government operations and their financing. Hence, the budget items should be rearranged as in Table 3.

Table 3.

El Salvador: Central Government Budgetary Operations

(In millions of colones)

Table 3.

El Salvador: Central Government Budgetary Operations

(In millions of colones)

Revenues		1,459		(1,457 + 2)
Expenditures		1,975		(2,059 − 84)
Deficit		−516	=	Resource gap
External loans
	Use	207		(13 + 194)
	Amortization	−33		(part of 84)
Internal financing
	Sale of bonds	643		(252 + 55 + 336)
	Amortization	−51		(part of 84)
	Other	−250		(residual)

View Table

Table 3.

El Salvador: Central Government Budgetary Operations

(In millions of colones)

Revenues		1,459		(1,457 + 2)
Expenditures		1,975		(2,059 − 84)
Deficit		−516	=	Resource gap
External loans
	Use	207		(13 + 194)
	Amortization	−33		(part of 84)
Internal financing
	Sale of bonds	643		(252 + 55 + 336)
	Amortization	−51		(part of 84)
	Other	−250		(residual)

In practical terms, this budget indicates that genuine revenues are projected to amount to C 1,459 million; expenditures (excluding amortization) to C 1,975 million; and the deficit of C 516 million is expected to be financed by a net use of foreign loans (C 174 million) and a net sale of bonds (C 592 million); hence, treasury deposits could increase by C 250 million during the year.

Budgets may be modified during the course of the fiscal year. Increases in expenditures may be introduced together with revenue measures to provide the required financing, but, as with the original budget document, it is not certain that the additional revenues, which could be in the form of bank credit, will be generated according to the plan.

In general, revisions of expenditure appropriations fall into three broad categories:

1. Budgetary appropriations of an individual ministry are modified so that total appropriations of that ministry and of the entire budget remain unchanged. For instance, a shift occurs in the composition of expenditure appropriations within the budget for the ministry of education. Such a budget revision usually requires the agreement of the minister affected and of the minister of finance.

2. Budgetary appropriations are transferred from the budget of one ministry to that of another ministry. For example, to compensate for an increase in the expenditures of the ministry of health, the budgets of one or more of the other ministries are reduced by the same amount. Hence, the overall budgetary appropriations are not modified. Such modification of the budget usually requires the approval of the full cabinet.

3. Total budgetary appropriations are increased with or without additional matching revenue measures. Usually, this kind of budget revision requires congressional approval or the same procedures that are required for approval of the original budget.

Cash Versus Accrual Basis for Data Reporting

Public sector operations may be reported either on a cash or on an accrual basis.

1. Cash versus accrual: revenues. Central government revenues should always be shown on a cash basis, that is revenues that have actually been collected during the period under consideration. Revenues on an accrual basis may include claims against taxpayers who cannot or will not pay; their collection could, therefore, be doubtful.

2. Cash versus accrual: expenditures. Government outlays pass through different stages that may be broadly summarized as follows:

   1. Appropriation represents the amount that has been legally allocated to a certain ministry or program and against which expenditures can be made. All expenditures must have corresponding appropriations. In some countries, uncommitted appropriations expire at the end of the fiscal year, a fact that may create a distortion in the “commitment” figures (see ii below), because ministries tend to rush to make commitments at the end of the fiscal year for expenditures that may never be made. In other countries, some uncommitted appropriations at the end of the fiscal year may be transferred automatically to the new budget or commitments may continue to be made for a certain period against unused appropriations of the previous fiscal year;

   2. A commitment is a decision taken by the ministry to use the appropriations authorized under the budget. In some countries, a commitment also involves a legal obligation, in which case the government will have to make the expenditures; while in others, the commitment can be rescinded without penalty. Some appropriations may be committed at the beginning of the fiscal year or month (for instance salaries) as a matter of routine, even though the “order of payment” (see iii below) will not take place at that time. In some countries, the full defense budget is committed at the beginning of the year and put at the disposal of the ministry of defense, which may operate with little or no control during the year;

   3. Order of payment is the stage at which the ministry gives the order to the treasury to issue the checks to make payment. The government usually has a certain legal obligation at this stage, because the service for which the payment is requested has already been provided;

   4. Issuance of checks should be the final stage, because the treasurer, by issuing a check, is also reducing the government deposit by a similar amount. However, in some countries facing serious financial imbalances, the treasurer has on occasion withheld actual delivery of the check, thus creating an additional form of floating debt; and

   5. Payment of the check takes place when the check is presented for collection. This stage represents the actual reduction of the treasury deposits held in the banking system. However, from a practical point of view, the treasury already reduced its bank balance when it issued the check.

Each of the preceding stages involves an amount that would be smaller, or at most equal to, the amount involved in the previous stage. The following numerical example illustrates this point:

	Total	Pending
Appropriations	5,000	—
Commitments	4,500	500
Order of payments	4,200	300
Checks issued	3,850	350
Checks delivered	3,800	50
Checks paid	3,700	100

View Table

	Total	Pending
Appropriations	5,000	—
Commitments	4,500	500
Order of payments	4,200	300
Checks issued	3,850	350
Checks delivered	3,800	50
Checks paid	3,700	100

Accrual data cover expenditures either at the commitment or at the order of payment level, depending on the circumstances and the legal implications. Cash data should cover expenditures at the check issuance stage. In this manual, accrual data will be referred to as expenditures and cash data as payments.

The presentation of fiscal outlays on a cash or on an accrual basis depends on: the need to reconcile fiscal data with other financial and economic variables; the importance of the floating debt (the difference between payments and expenditures) as a source of financing; and the availability of data.

National accounts, balance of payments data, and—to some extent—monetary statistics are on an accrual basis; there is merit, therefore, in presenting fiscal operations on an accrual basis. For instance, unpaid interest and other external arrears are included in the balance of payments. Capitalized interest due to the central bank is routinely reported in the central bank balance sheet as a credit to the government and a central bank profit, even though no cash movement takes place. Public consumption and investment are reported in the national accounts on an accrual basis. Also, if the floating debt, whether domestic or external, is rising, this is an indication of a fiscal imbalance financed by a forced credit, but this important piece of information would be missing in a cash presentation.

At the same time, cash data are equally important because they indicate the direct impact on central bank credit and on financing requirements in general. As shown in Appendix III, in some instances, cash payments may be higher than expenditures, a piece of information that would be vital in preparing a monetary program.

Rest of General Government

The “rest of general government” includes local governments (states, provinces, and municipalities), the social security system, health and educational entities, local development corporations, and innumerable other entities covering a wide variety of activities. Although it includes a large number of institutions, the rest of general government usually has only limited direct revenues and depends mostly on central government transfers to finance its expenditures. There are obviously certain exceptions: for example, local governments may levy taxes, and social security system revenues may be substantial. In some countries, certain entities may receive a fixed portion of central government tax revenues or receipts of some state enterprises. In many countries, while the central government should contribute to the social security system both as a state and as an employer, it often delays these payments or may transfer to the system only the minimum resources needed to carry on normal operations.

The overall financial situation of the rest of general government varies considerably from country to country, depending on whether the institutions involved have direct access to foreign and domestic credits. If access is limited, expenditures by the rest of the general government can be assumed not to exceed its revenues, which, as mentioned before, depend by and large on central government transfers. The degree of dependence on central government transfers determines how tightly the central government can control the activities of the rest of general government by limiting transfers.

Information on the financial operations of the rest of the general government is usually limited and unreliable, normally available on an annual basis and with considerable delay. However, these shortcomings are not necessarily serious, particularly if the rest of general government depends on treasury transfers and has no direct access to sources of credit.

State Enterprises

The performance of the nonfinancial public sector is, in many countries, strongly influenced by the activities of state enterprises, as these organizations may generate a considerable share of both the revenues and outlays of the public sector. In many instances, the operations of state enterprises show considerable deficits, whether due to relatively high operating costs, low revenues (including those kept low by policy decisions), or relatively high investment.

The financial operations of state enterprises may reflect certain decisions taken on the basis of political and/or social considerations. Thus, an enterprise with a persistent current account deficit may continue to operate, although its operation is recognized as being economically unjustified. The decision to continue operating the enterprise may be based on the desire to maintain a certain level of employment, or prestige, or other political considerations. Revenues of certain enterprises may be kept below what is required to finance the operating costs, because of a government decision to keep tariffs and prices charged by those enterprises low in order to “protect” the consumer. As a result of these decisions, state enterprises may show overall deficits or very low surpluses, which may require transfers from the central government or use of bank credit.

In many countries, state enterprises represent a separate sector that may, to various degrees, be insulated from other developments in the economy. They may receive low-interest capital transfers from the central government, automatic financing of their deficits, exemptions from taxes on international trade and from income taxes, protection from foreign competition, and access to credit at preferential interest rates. A further complication arises because certain state enterprises do not collect overdue bills, and sometimes they have uncollected debts owed by government agencies. As a result, state enterprises may fail to pay taxes and dividends to the central government, or they may require transfers from the treasury. In these circumstances, however, it is difficult to analyze the financial situation of these enterprises, because their reported operations may not reflect in full their real status.

The pricing policy of state enterprises may be dictated by other than economic considerations. Thus, price adjustments may be delayed during periods of high inflation. On the expenditure side, wage increases may be granted, regardless of productivity, and investment may be carried out without concern for cost or need.

Given the importance of the transactions of state enterprises, reliable data (including information on pricing and other policies) are necessary to formulate adjustment policy decisions and to analyze economic and financial developments in a country. However, in many countries, up-to-date information on the activities of state enterprises is lacking, and financial data on their operations are usually limited and difficult to analyze. A state enterprise may provide a balance sheet, a profit and loss statement, and a cash flow, but these documents may be available only annually and with considerable delay. This information may be fairly comprehensive, insofar as it represents the operations of the enterprise, but it may be difficult to analyze and integrate with other financial statistics. Balance sheets and profit and loss statements may include adjustments, as well as items that may be difficult to classify or to interpret. Valuation adjustments of fixed assets and of inventories, large fluctuations in accounts payable and receivable (particularly if related to transactions with the rest of the nonfinancial public sector), and exchange rates used to convert foreign exchange-denominated transactions into local currency are typical examples of balance sheet and profit and loss statement items that may require investigation and explanation.

State enterprises may be classified into four broad categories:

1. Enterprises that are engaged in production (referred to here as producing enterprises). Typical examples of such enterprises are mining and manufacturing companies (state oil companies are reviewed separately below). These enterprises are also engaged in the marketing of their products domestically and/or abroad. If the companies depend heavily on exports, their revenues originate mostly from these sales and fluctuate with changes in international prices and exchange rate movements. Operating costs reflect both production and marketing costs. The former may be affected by fluctuations in international prices and exchange rate movements with regard to imported inputs.

2. Enterprises engaged in providing certain services (“service enterprises”) such as electricity, telephone, water, and transportation (railroads and airlines). Revenues of these enterprises are derived from the sale of their services and may be affected by political and social considerations. Thus, public utility tariffs and public transportation fares may be kept below the level needed to cover operational costs and investment expenditures in order to protect the consumer. Low tariffs, however, have a doubly negative impact: they reduce the revenue at the disposal of the enterprise and limit investment resources, while at the same time they fail to discourage (and may even encourage) consumption. To satisfy additional demand, the enterprise should invest more, but, for lack of financial resources, it cannot. Expenditures of these enterprises may be affected by both domestic and external factors, such as the cost of petroleum products.

3. Enterprises engaged in marketing commodities (including price-regulating agencies), and enterprises engaged in the purchase and sale of domestic agricultural products and stockpiling of commodities (“trading enterprises”). Revenues and expenditures of these enterprises are affected by policy decisions, since pressures usually exist to pay an incentive price to producers (thus increasing expenditures) and to subsidize prices to consumers (thus lowering revenues).

4. State oil companies engaged in the producing, importing, refining, and marketing of petroleum products. In an oil-producing and oil-exporting country, revenues will depend on international prices (for exported output) and on domestic decisions (for domestic sales). Operating costs will depend mostly on domestic decisions, as well as on costs of certain imported inputs, which are influenced by international prices and by exchange rate movements. In an oil-importing country, revenues will depend on domestic decisions (similar to the service enterprises mentioned above), but operating costs will be influenced mostly by external factors (international prices for oil and exchange rate movements).

This classification may help both in formulating policies and in preparing comprehensive and consistent statistical information. As indicated above, the operations of certain state enterprises are heavily affected by external factors that are either beyond the control of the authorities (international prices) or reflect certain of the authorities’ decisions (exchange rate). Other enterprises are almost entirely affected by domestic policy decisions in regard to both their revenue and their expenditures.

Statistics on the operations of state enterprises may also differ according to the kind of enterprise. In this context, exceptions may be made to the general rule that fiscal revenues should be reported on a cash basis, if consistency with other economic data is to be obtained. For example, producing enterprises are likely to sell their output on commercial terms, that is, with payment delayed by three or more months. Hence, there is an advantage to showing revenues of these enterprises on an accrual basis to allow for a reconciliation with, for instance, export statistics. Also, accounts payable and receivable represent an important source of financing for producing state enterprises.

A similar argument in favor of revenues on an accrual basis could be made for the service enterprises. However, uncollected receipts of these enterprises are likely to include overdue payments by the rest of the public sector and may give rise to serious discrepancies, if the debtor agencies have not included in their outlays their commitments to pay state enterprises. At times, public sector entities do not pay for goods and services provided by certain state enterprises on the grounds that either those enterprises owed them money for goods and services that the public sector entities had provided, or that the treasury had failed to make or to recognize certain transfers. In the latter case, certain entities may claim that the debt is that of the treasury and, therefore, they do not recognize their liability to the enterprises.

Revenues of trading state enterprises should be reported on a cash basis, as these enterprises generally operate on a cash basis.

The state oil companies are more difficult to review, since their external operations are usually on commercial terms (like those of the producing enterprises), whereas their domestic sales may be affected by delays in payments, as are the service enterprises.

Given these complications, the operations of each public enterprise should be investigated to ascertain whether receipts should be reported on a cash or an accrual basis.

Table 4 presents typical information provided by the state enterprise (balance sheet and profit and loss statement), as well as a reorganization of these data for purposes of analysis. In this example, receipts from sales are on an accrual basis and may include revenues not collected from the rest of the public sector. The offsetting entry to these uncollected receipts is accounts payable in the balance sheet.

Table 4.

Operations of a State Enterprise

¹Excluding depreciation.

²Derived from balance sheet (changes in gross value of fixed assets).

Table 4.

Operations of a State Enterprise

		End-December 1985	End-December 1986	Changes
I. Balance Sheet
Assets		645	750	105
Cash and bank deposits		50	60	10
Accounts receivable		120	140	20
Loans		45	40	−5
Fixed assets		420	490	70
	Gross value	570	680	110
	Depreciation	150	190	40
Other assets		10	20	10
Liabilities		645	750	105
Accounts payable		35	55	20
Short-term loans		70	90	20
Supplier credits		45	35	−10
Medium- and long-term loans		345	390	45
Net worth
	Capital and reserves	100	100	—
	Profit and losses	50	80	30
II. Profit and Loss Statement 1986
Receipts from sales				325
Other income
	Interest			15
	Other			20
Total receipts				360
Expenditures
	Wages and salaries			180
	Contributions to social security			20
	Interest on external debt			15
	Interest on domestic debt			10
	Purchase of goods and services			30
	Other expenditures			10
	Depreciation			40
Total expenditures				305
Net income before taxes				55
Income tax				25
Net income				30
	Distributed dividends			10
	Undistributed income			20
III. Operations 1986
Revenues				360
Expenditures				400
Current1				265
Taxes				25
Capital2				110
Deficit				−40
Changes in assets (increase −)
	Cash			−10
	Accounts receivable			−20
	Loans			5
	Other			−10
Changes in liabilities
	Accounts payable			20
	Short-term loans			20
	Supplier credits			−10
	Loans			45

¹Excluding depreciation.

²Derived from balance sheet (changes in gross value of fixed assets).

View Table

Table 4.

Operations of a State Enterprise

		End-December 1985	End-December 1986	Changes
I. Balance Sheet
Assets		645	750	105
Cash and bank deposits		50	60	10
Accounts receivable		120	140	20
Loans		45	40	−5
Fixed assets		420	490	70
	Gross value	570	680	110
	Depreciation	150	190	40
Other assets		10	20	10
Liabilities		645	750	105
Accounts payable		35	55	20
Short-term loans		70	90	20
Supplier credits		45	35	−10
Medium- and long-term loans		345	390	45
Net worth
	Capital and reserves	100	100	—
	Profit and losses	50	80	30
II. Profit and Loss Statement 1986
Receipts from sales				325
Other income
	Interest			15
	Other			20
Total receipts				360
Expenditures
	Wages and salaries			180
	Contributions to social security			20
	Interest on external debt			15
	Interest on domestic debt			10
	Purchase of goods and services			30
	Other expenditures			10
	Depreciation			40
Total expenditures				305
Net income before taxes				55
Income tax				25
Net income				30
	Distributed dividends			10
	Undistributed income			20
III. Operations 1986
Revenues				360
Expenditures				400
Current1				265
Taxes				25
Capital2				110
Deficit				−40
Changes in assets (increase −)
	Cash			−10
	Accounts receivable			−20
	Loans			5
	Other			−10
Changes in liabilities
	Accounts payable			20
	Short-term loans			20
	Supplier credits			−10
	Loans			45

¹Excluding depreciation.

²Derived from balance sheet (changes in gross value of fixed assets).

Appendix III presents the entries in a flow of funds table related to the privatization of state-owned enterprises.