In a series of regional seminars that will span Asia, Africa, Latin America, and Europe, experts from Fund member countries have begun discussions on the draft of a new Manual on Government Finance Statistics.
For many years the Fund has provided guidance in statistical areas related to its work. Standardized statistics on reserves and monetary aggregates have appeared in International Financial Statistics since 1948 and have served as a guide for national statistical and analytical practices. The Fund publishes a Balance of Payments Manual, which has been revised several times since its first edition in 1948, and a Balance of Payments Year Book containing this data. Now, for the first time, it is extending its work of development, standardization, and publication into the additional field of disaggregated government finance statistics. Behind this expansion lies the conviction that since fiscal policy must play an important role in economic management, government operations should be measured in a manner that is consistent with financial statistics and permits comparison with other countries. Experience has shown that the use of statistics on government finance that are not suitably constructed can lead directly to inappropriate fiscal policy decisions.
Discussion of Draft Manual
To meet the need for consistent and appropriately structured data on government operations, the Fund, with the cooperation of the World Bank, has embarked upon a program to develop, collect, and publish such statistics both for the use of the Fund and the Bank and for the use of national policymakers and experts. One of the first tasks under this program—which is being carried out jointly by the Fund’s Bureau of Statistics and Fiscal Affairs Department—has been to prepare the Draft Manual. Preparation of the draft was based on a long accumulation of experience; aggregate government finance data have appeared in International Financial Statistics for many years, and tables on government finance have been an integral part of Fund and Bank mission work for more than two decades. Over the past three years, moreover, special Fund missions have visited many countries to examine and discuss government finance data, and Fund staff have participated in discussions on the classification of government revenues and expenditures at meetings of the Organization for Economic Cooperation and Development.
While the Draft Manual is being discussed, efforts are underway to collect statistics in a questionnaire based on the Draft Manual and designed to tests its feasibility. For this purpose each government is being asked to designate a person as its correspondent with the Fund on government finance statistics. These correspondents, or their close associates, are completing the questionnaires and attending the regional seminars convened by the Fund in Singapore, Nairobi, Latin America, West Africa, and Europe. At the Singapore seminar in February 1975, some 50 delegates from 21 countries, the Fund, and the Bank met for a week to exchange views and share experiences on questions dealt with in the Draft Manual. A number of concepts were sharpened for application to particular issues, and several delegations indicated that in addition to reporting to the Fund, their countries were already taking steps to adopt the proposed data systems as an aid to national policymakers. Fund staff also met with each country delegation to discuss the questionnaire and other data problems.
The Draft Manual under discussion at these seminars is in its English version, a 350-page volume (somewhat longer in the French and Spanish translations). It spells out the types of government activities to be measured and the means of measuring them, presents an analytical framework for the organization of these statistics, and shows the categories into which government revenues, expenditures, financing, and debt may be classified. To convey some idea of the character and objectives of the Draft Manual and of its relationship to other areas of economic analysis, this article briefly outlines its major organizing principles and its analytical framework.
As with any effort to collect and organize statistics, the development of government finance statistics involves a succession of alternatives and choices. Should one include government-owned enterprises? Should the statistics register expenditure at the stage of placement of government orders, delivery of merchandise, or payment of funds?’Should one classify a tax by the purpose for which its revenues are allocated, by whether the tax is included in the sales price, by the sector that will finally bear the tax or by the kind of transaction on which the tax is levied? To maintain a consistent course among the many alternatives, one should ideally be guided by a few basic organizing principles—enough to offer adequate guidance for the multitude of choices but not so many as to offer conflicting advice.
One may identify three basic organizing principles implicit in the Draft Manual:
The institutional sector in the economy called government is to be defined not by legal or structural criteria but by the function it performs—primarily the provision of nonmarket services for collective consumption and the transfer of income for purposes of public policy, with funds coming mainly from compulsory levies on other sectors.
To provide data for the economic and financial analysis of government and of its effects upon the economy, one should measure—not estimate or impute—the flow of payments between this sector and the rest of the economy during a given period of time.
Because the ultimate effect of each transaction on the rest of the economy may be indeterminate or unclear, transactions should be classified not by their ultimate purpose or effect but by the immediate nature or characteristic of each transaction as it occurs.
These are not self-evident principles, and quite different organizing principles can form the basis for other data systems. For the purposes of financial and economic analysis, however, these appear to yield the most useful results. It may be useful here to look into the meaning and implications of each of these three principles.
Definition by function
The first principle holds that government performs a function different from that of other sectors of the economy, and it defines the coverage of government strictly on the basis of this function. The line is drawn around government not by legal or institutional criteria, nor by whether an activity is included in budget documents or receives extrabudgetary treatment, but by whether it represents the political authorities’ performance of their governmental function—that is, the supply of primarily nonmarket services and the transfer of income for public policy supported mainly by compulsory levies on other sectors. This means excluding from the data all of the financial institution functions that some governments may carry out through development banks, post office savings accounts, and the like. Also excluded are all industrial or enterprise activities of a government, other than those for use within government or for sale to the rest of the economy on only a minor scale. The conduct of major industrial or commercial activities through government-owned and government-controlled enterprises would therefore be reflected not in a large government sector but in many public enterprises outside that sector. Such nonfinancial public enterprises could be grouped with government to form what may be called the nonfinancial public sector. While definition of government by function does exclude financial institutions as well as most enterprises that may appear in budget documents, it brings social security schemes within government. Though separately organized in some countries, such schemes are nonetheless similar in nature to activities carried out within government.
Another characteristic which differentiates government from other sectors is its motivation; it does not seek to maximize profit or utility for its own consumption. Government is moved by broader goals of social, political, and economic policy involving the entire economy. Because the function and motivation of government are different, government operations cannot be adequately analyzed within the same framework as other sectors of the economy. While government may borrow to meet its financial needs (as do institutions in other sectors), it does not ordinarily lend money to make a profit, but to promote policy goals. In the government sector, therefore, there is not necessarily any symmetry between the nature of changes in its financial assets and liabilities.
Measurement of payment flows
The second principle is that compilers of government finance statistics are to measure—not to estimate or impute-the flow of payments between the government and the rest of the economy during given time periods. The reporting of payments is preferred, particularly for aggregate revenues and expenditures, because they approximate the flows of funds and resources between government and the rest of the economy, avoid problems of valuing resource flows, and correspond most closely with other financial statistics. While statistics on the actual delivery of commodities rather than payment for them have advantages for input-output analysis and measurement of production, these are far less important in analysis of the government sector than of other sectors of the economy. Most government accounts, as a result, fall closer to a payments basis than to registration of deliveries. In order to avoid the need for estimates, however, the Draft Manual recommends that data be used for any stage between delivery and payment that will represent the most accurate and reliable statistics available.
The gross flow in and out of government is desired. Thus, fees are not shown as negative expenditures offsetting the cost of a service, nor are the costs of collecting taxes shown as negative revenues offsetting part of the taxes collected.
There are minor exceptions, such as refunds, and corrective transactions, and there is one major exception-the operating revenues and expenditures of industrial activity carried out within government that are shown on a net basis. Because government finance statistics focus on the income, outlay, accumulation, and financing types of flows, but not on production flows that do not constitute income available to the government, they include only the operating surplus or deficit of industrial activities within government.
Government transactions are to be measured in real time—that is, when they occur—so that the data can be used in conjunction with other financial statistics for the economy. This means showing the flow of payments in and out of government at the time it actually takes place. This may differ from some government accounts which are based on the budgetary year in which the revenues or expenditures originate and not on chronological time.
Because government finance statistics seek to measure transactions between the government and the rest of the economy, they require the elimination of all transactions taking place within the government itself. Such internal transactions will frequently be included in government budgets and accounts as a means of portraying the full nature of some operations. In preparing government finance data, however, it is necessary to eliminate these transactions so as to provide a true measure of a government’s transactions only with the rest of the economy.
Classification by immediate characteristics
The third principle asserts an agnosticism or uncertainty as to the effect of government transactions on the rest of the economy. Because circumstances change and institutions vary, the effects of any government transaction on the economy cannot be determined by examining the government transaction alone. Additional study is needed on the interaction and repercussions of such transactions in the rest of the economy. The task of government finance statisticians is still to measure just what the government itself does, leaving for others the study or determination of the effects. In the classification of government activities, therefore, it is necessary to be guided by the nature or characteristics of transactions when they take place and not by their eventual effect or purpose.
This focus on the immediate characteristics of the transaction itself leads to six criteria which form the basis for the overall analytical framework laid out in the Draft Manual. Each transaction, the Draft Manual explains, can be classified by these criteria:
(1) Does it flow to or from government? The basic difference between transactions lies in whether they are receipts (carrying funds into the government) or payments (carrying funds out). While some data systems blur this distinction by assigning a negative sign to some items and classifying them with items moving in the opposite direction as negative receipts or expenditures, the Draft Manual calls for gross treatment of all except industrial transactions and certain corrective adjustments such as refunds.
(2) Does it involve repayment? Repayable transactions generate or extinguish a claim for repayment and are distinguished from nonrepayable transactions involving no claim for repayment. There are a number of reasons for drawing this distinction. Repayable transactions alter the financial asset or liability position of both the government and the other transactor while nonrepayable transactions do not. Asset and liability positions affect future government payments and receipts; they may influence the economic behavior of those involved by making them “feel” richer or poorer; and they may affect the behavior of other savings and investments by changing the demand or supply for financial claims and, hence, the interest rate. How these effects operate depends upon the subsector involved, the institutional structure of the monetary system and capital markets, and other conditions and policies. Whatever the effects, however, the existence or absence of a financial asset or liability is a distinction that is apparent when the transaction takes place. Many data systems follow this distinction, sometimes referring to the contrast between nonrepayable and repayable as nonfinancial and financial or as definitive and nondefinitive.
(3) If it is a nonrepayable transaction, is payment in return for something received.—that is, is it requited? Requited transactions involve payment for a quid pro quo, such as goods, services, use or ownership of property, or factor services received in return. However, an unrequited transaction, while it may be voluntary or compulsory, conditional or unconditional, brings no concurrent counterpart in exchange—that is, no benefit, product, or service to the payer in return for the payment. Since product is usually measured by the payment involved, designation of a transaction as an unrequited payment implies that no product has been supplied. The requited versus unrequited distinction is sometimes referred to as exhaustive versus nonexhaustive, since exhaustive payments indicate use of a product while nonexhaustive payments do not. Sometimes unrequited transactions are also referred to as unilateral, and requited transfers as bilateral.
(4) If the transaction is not repayable, is it for current purposes or for capital purposes—that is, involving goods usable for productive purposes for more than a year? The basis for this distinction lies in the fact that use of capital goods in production for a period of more than one year affects future income and present wealth, as the capitalized present value of the future income flow. It must be recognized, however, that expenditures besides those for physical assets may also affect income growth, and capital formation cannot always be assumed to result in the highest rate of growth. Outlays for health care and education, for example, may affect the availability and quality of the labor supply. To identify all transactions affecting future income growth and not only those involving capital goods, a more comprehensive distinction between developmental and nondevelopmental transactions is sometimes advocated. Fully satisfactory criteria applicable in a broad range of circumstances have not yet been evolved, however. The distinction between current and capital transactions is included in the Draft Manual, therefore, as a measure of the acquisition of capital assets and not as an indication of all resources devoted to growth.
(5) If it is a repayable transaction, does it involve claims on government or government claims on others? Such a distinction is necessary because of the fundamental asymmetry between the government’s financial assets and liabilities discussed above. Because the government has access to the central bank, it need not be concerned with maintaining primary and secondary reserves of relatively liquid financial assets to call on in case of sudden need. It need not give priority, as other institutions must, to a precautionary asset position matching the maturity structure of its liabilities. Unlike other sectors, the government does not “feel” richer and act differently when its financial assets increase. It does not manage its financial assets and liabilities position to maintain a desired liquidity at the smallest possible cost.
While government borrowing is directed toward meeting government financial needs, government lending is generally undertaken for policy-oriented purposes and not for purposes of liquidity management or earning a return. A distinction is necessary, therefore, between transactions involving a government’s financial assets and those involving its liabilities.
(6) If it is a repayable transaction, does it involve debt and equities or currency and deposits? In both groups of transactions involving claims—those dealing with a government’s financial assets and those with its liabilities—important differences separate currency and deposit transactions from those involving debt and equities. Government holdings of currency and deposits are held for liquidity purposes. They constitute working balances and are not taken on by government for public policy purposes. Unlike other government financial assets, therefore, they belong with government liabilities as a means of adjusting the government’s liquidity position.
Among government liabilities, currency and deposits have a special characteristic, because any demand, time, or savings deposits accepted by government are classified as liabilities of the financial institutions sector. Similarly, any currency issues of government are considered to represent government performance of the monetary authorities’ function and are shown as liabilities of the monetary authorities. The Draft Manual draws a distinction, therefore, between repayable transactions involving debt and equities and those involving currency and deposits.
Classification of transactions
If these six criteria are arranged in a matrix they produce 16 cells into which government transactions may be classified (see Chart 1). Of these, 15 cells represent recognizable categories in the analytical framework with which many technicians have implicity or explicity been working for years. The remaining cell—of current, unrequited, nonrepayable government receipts—may be divided to separate receipts of taxes from receipts of grants. Now all of the ingredients for the analytical framework are in place. They are recognizable, once the matrix format is unfolded, as the major categories of the statistical system: revenue, grants, expenditure, net lending, deficit/surplus, and financing (see Chart 2). By matching any transaction against the above criteria, it can be properly classified in the appropriate category.
Chart 1Classification of government transactions by criteria Chart 2Analytical framework for classification of government transactions
Among the nonrepayable receipts, it will be noted that grants—unrequited transfers from abroad or from other levels of government within the country—are distinguished from revenues. Although they are grouped with revenues in arriving at the deficit/surplus, the distinct character of grants warrants their separate identification as a distinct “building block” for purposes of analysis.
Among repayable transactions, a separate category called net lending is set up, involving the government’s financial assets other than currency and deposits. This separation reflects the basic asymmetry between lending and borrowing by governments. Net lending is separated from government financing, therefore, and in order to arrive at the deficit/surplus is grouped with outright, nonrepayable expenditures as a means of carrying out policy objectives.
As a result of this organization of receipts and payments, derivation of the surplus or deficit is equal to revenues, plus grants and minus expenditures and net lending. There are many derivations of deficit/surplus in use today, and all seem to be controversial. This deficit/surplus, however, is meant to be a comprehensive presentation of the government’s overall financial position and of its impact, in most circumstances, on monetary conditions and the balance of payments. It cannot be said to be a very precise measure of government impact on monetary conditions, since this will also depend on the means by which the deficit is financed—or by which the surplus is distributed—as well as on the monetary structure and the circumstances at that time. It must be noted, too, that there are many analytical questions that this concept of the deficit or surplus cannot answer, such as government saving, government borrowing from the banking system, and the net effects of government operations with the rest of the world. But no single deficit/surplus concept can be all things to all men. In fact the variety of analytical questions raised by government operations are best answered not by any single measure but by rearrangement of basic “building blocks” of payments and receipts to meet as many analytical needs as possible.
It has been noted that the third organizing principle—classifying transactions by their immediate nature rather than by their ultimate effect—produces the overall framework of major analytical categories. Within these major categories, however, further classification is necessary to produce the disaggregated statistics upon which an adequate portrayal of government can be based. This means that one must also classify revenues, expenditures, and financing into homogeneous categories based upon the nature of the transaction itself, rather than any ultimate effect. Which characteristics can be used? The choice of characteristics in taxes is the base on which the tax is levied—property, income, sales, international trade, and so on—with no judgment on the sector, price, or income flow upon which ultimate incidence will rest. In the economic classification of expenditures, the characteristics used are some of the same criteria discussed above for nonrepayable transactions—requited or unrequited, current or capital, and so on. In the classification of expenditures by function or purpose, the immediate function or purpose is the focus—for example, sanitation, rather than its ultimate beneficial effect on health or income. In the classification of financing, transactions are arranged by the debt instrument the government sells or by the sector or class of holder with whom the debt is lodged.
Relations with other data systems
Delineation of the three organizing principles underlying government finance statistics can also provide insight into the relationship between these statistics and other data systems. How do other data systems view these principles?
Government budgetary accounts have a coverage defined on legal or institutional grounds rather than on the basis of function. As a result, the elimination of enterprise or financial institutions functions may be necessary for the preparation of government finance statistics, as well as the addition of any government functions performed outside the budgetary accounts. In regard to the second principle, budgetary accounts frequently, include transactions between government agencies, and sometimes also transactions taking place in other time periods, so that this too may require adjustment for statistical purposes. In the classification of transactions, finally, budgetary accounts are usually guided in part by certain legal criteria, such as transacting entity or account, item purchased, or program involved, and these may or may not readily relate to classification by the nature of the transaction itself.
While government finance statistics are usually derived from government budgetary accounts, these statistics in turn provide many of the data from which the national income accounts are constructed. In general, a close correspondence is found between government finance statistics and national accounts. Both define government, like other institutional sectors of the economy, on the basis of the functions it performs, although government finance statistics exclude from government several financial institution functions performed by it which the national accounts retain in government. Because the national accounts focus on preparation of integrated statistics for all sectors of the economy, they organize data for government in the same way as for other sectors. Government data are organized differently in government finance statistics, however, to reflect the unique character of governmental operations. With regard to the second principle, because the national accounts are concerned with the measurement of production on a basis common to all sectors, they do not seek to measure only actual payments between government and the rest of the economy during a given time period but also deliveries, flows within government, and estimated past and future flows connected with production during a given period. Some difference may also arise with respect to the classification of transactions whose immediate nature or characteristics, utilized by government finance statistics, differ from their eventual use or presumed effect utilized by the national accounts.
A rather close correspondence with the three principles will also be found for the monetary accounts. There is similarity with government finance statistics in the definition of government, the measurement of payments during a given period of time, and classification by the nature of the transaction. Discrepancies may be encountered in valuation, however, since monetary account statistics are drawn up on the basis of changes in stocks between two dates while government finance statistics are generally based on the flow during the period.
With respect to balance of payments accounts, no difference is encountered in the definition of government by function. Some differences may arise concerning the measurement of payments in government finance statistics, however, as the balance of payments also registers claims and liabilities that may arise in the absence of a generating payments transaction.
It is these ideas that experts from the various countries have before them as they consider the Draft Manual at the regional seminars and examine their statistics on government operations for compilation of the Fund’s questionnaire. The conclusion of the deliberations, it is hoped, will result in an agreed and fully articulated guide for the compilation of comparable and consistent government finance statistics to meet the needs of each country’s analysts and decision makers, as well as the needs of the World Bank and the Fund.
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