Chapter

2. Pillar I: Fiscal Reporting

Author(s):
Sailendra Pattanayak
Published Date:
April 2018
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Fiscal reports should provide a comprehensive, relevant, timely, and reliable overview of the government’s financial position and performance.

17. Fiscal reporting refers to the preparation and publication of summary information about the past and present state of a country’s public finances. More specifically, fiscal reports can be defined as retrospective reports on fiscal developments, including in-year and year-end budget outturn/execution reports, fiscal statistics, and annual financial statements.

18. Three main categories of fiscal reports can be distinguished:

  • Budget execution reports, which follow the annual budget’s presentation and classification and compare outturns of revenue, expenditure, and other fiscal aggregates with the corresponding values in the approved budget.

  • Fiscal statistics, which are produced in accordance with national or international statistical standards20 and summarize the impact of the public finances on the wider economy.

  • Government financial statements or accounts, which are produced in accordance with national or international accounting standards and summarize the government’s financial position and performance.

19. Fiscal reporting is the foundation of good fiscal management. Quality fiscal reports are essential to ensure that the government’s fiscal decisions are based on the most complete, up-to-date, and accurate understanding of its financial position. Fiscal reports are also the main mechanism through which legislatures, auditors, and the public hold governments accountable for their financial performance. Finally, fiscal reports are a critical source of information for markets and other external stakeholders to understand the government’s financial position (including debt) and its implications for economic and fiscal policy.

20. Fiscal reporting (under Pillar I of the Code) covers four dimensions:

  • 1.1. The coverage of fiscal reports, in terms of institutions, stocks, and flows.

  • 1.2. The frequency and timeliness of fiscal reporting.

  • 1.3. The quality of fiscal reports, in terms of their international comparability and internal and historical consistency.

  • 1.4. The integrity of reported information, in terms of the degree of external validation and the comparability of budget and outturn data.

Dimension 1.1. Coverage of Fiscal Reports Fiscal reports should provide a comprehensive overview of the fiscal activities of the public sector and its subsectors, according to international standards.

21. Comprehensive fiscal reporting is necessary for governments, legislators, citizens, and markets to have a complete understanding of a country’s fiscal position and a full account of the use of public resources. Accordingly, the four principles under this dimension call for fiscal reports to:

  • cover all public entities (1.1.1). The scope of fiscal reporting should cover not only the central and subnational governments but also other entities that are part of the wider public sector;

  • capture all public assets and liabilities (1.1.2). A consolidated balance sheet covering all public financial and nonfinancial assets and liabilities helps provide a comprehensive picture of the overall financial position and net worth of the public sector and its subsectors;

  • cover all revenue, expenditure, financing, and other economic flows (1.1.3). Fiscal reports should cover not only cash transactions but also any accrued revenue, expense, and financing, as well as fiscally significant other economic flows, such as volume and value changes in assets and liabilities; and

  • provide a comprehensive statement of the revenue foregone from tax expenditures (1.1.4). Such a statement is important not only to understand the cost of tax expenditures themselves but also to estimate the full cost of policies, which are in part supported through tax expenditures.

Table 2.1 provides a list of relevant standards, norms, and guidance material related to dimension 1.1 of the Code.

Table 2.1.Relevant Standards, Norms, and Guidance Material
Standards/Guidance MaterialsBrief Description
IMF, Government Finance Statistics Manual (GFSM, 2014)GFSM 2014 includes definitions and discussion of:
  • the public sector and its subsectors (Chapter 2);

  • the sources and uses of cash (Chapter 4);

  • the concept and classification of revenues (Chapter 5);

  • the concept and classification of expenses (Chapter 6);

  • the concept and classification of assets, liabilities, and net worth, as well as various balance sheet memorandum items (Chapter 7);

  • transactions in non-financial assets and their classification (Chapter 8);

  • transactions in financial assets and liabilities and their classification (Chapter 9); and

  • other economic flows that are recorded in the GFSM framework (Chapter 10).

https://www.imf.org/external/pubs/ft/gfs/manual/gfs.htm
International Public Sector Accounting Standards (IPSAS)IPSAS 6 and IPSAS 1 deal with Consolidated and Separate Financial Statements and Presentation of Financial Statements respectively. IPSAS 24 provides guidelines on the Presentation of Budget Information in Financial Statements.

Standards dealing specifically with the recording and evaluation of stocks are: IPSAS 11 (construction contracts), 12 (inventories), 13 (leases), 16 (investment property), 17 (property, plant and equipment), 19 (provisions, contingent liabilities and contingent assets), IPSAS 21 and 26 (impairment of assets), 25 (employee benefits), 28, 29, and 30 (financial instruments), 31 (intangible assets), and 32 (service concession arrangements).

Standards dealing with cash flows are: IPSAS 2 (Cash Flow Statement) and Cash Basis IPSAS (Financial Reporting under the Cash Basis of Accounting).

http://www.ipsasb.org/
IMF Technical Notes and Manuals, and Other PapersTechnical Notes and Manuals: Khan and Mayes (2009); and Flynn, Moretti, and Cavanagh (2015). Other Papers: Dippelsman, Dziobek, and Gutiérrez (2012); and Bova and others (2013).
IMF Guide on Coverage and Sectorization of the Public SectorThis guidance note (based on the GFSM 2001) describes the scope of the general government and public sector and discusses in some detail their components. It also provides a decision tree for identifying government and other public sector units that is based on two fundamental questions: (i) who controls the unit? and (ii) is it a market or nonmarket producer?

http://www.imf.org/external/pubs/ft/gfs/manual/pdf/compan.pdf.
OECD Principles of Budgetary Governance, 2014Principle 6 requires that budgets provide a comprehensive, accurate, and reliable account of the public finances.

http://www.oecd.org/gov/budgeting/principles-budgetary-governance.htm
IMF, Public Sector Debt Statistics: Guide for Compilers and Users (PSDSG, 2011b)PSDSG provides a conceptual framework (consistent with GFSM 2014), guidance on the measurement, compilation, analytical use, and presentation of public sector debt statistics, and a description of the work of international agencies on this topic.

https://www.imf.org/en/Publications/Manuals-Guides/Issues/2016/12/31/Public-Sector-Debt-Statistics-Guide-for-Compilers-and-Users-Guide-for-Compilers-and-Users-24905
Tax Expenditures in OECD Countries, 2010This study of ten OECD countries clarifies the technical and policy issues behind the use of tax expenditures.

http://www.oecd-ilibrary.org/governance/tax-expenditures-in-oecd-countries_9789264076907-en

22. In practice, the coverage of fiscal reports varies widely from country to country depending on its national legal requirements, the standards that it uses, and the frequency, quality, and timeliness of its data (Figure 2.1). Coverage—of institutions, assets and liabilities, and flows—also tends to vary in different fiscal reports produced by a country.

Figure 2.1.Examples of the Difference in Coverage in Various Fiscal Reports

WGA = whole of government accounts; ESA= European System of Accounts; PSF = public sector finances.

Source: IMF (2016f).

Source: IMF (2016c).

Principle 1.1.1. Coverage of Institutions Fiscal reports cover all entities engaged in public activity according to international standards.

23. All public sector entities should be part of fiscal reports to provide a complete picture of the country’s fiscal operations and reduce the incentive for governments to use some entities for off-budget fiscal activity.21 Fiscal reports should include all government entities at the central and subnational levels as well as those under the control of government.22 This would include ministries, departments and agencies at the central and subnational levels, as well as any extrabudgetary entities or funds, nonprofit institutions, or corporations owned or controlled by the government.23 Ensuring that the institutional coverage of fiscal reports follows international standards allows capturing fiscal policy and operations conducted by extrabudgetary entities, local governments, or public corporations. This reduces the scope for governments to circumvent their fiscal rules or artificially improve their reported fiscal performance or position by shifting operations outside the narrowly covered reports (Irwin, 2012). It also facilitates cross-country comparisons.

24. The public sector may be divided into three main subsectors—namely, central government, subnational government, and public corporations (Box 2.1). The general government is composed of the first two of these sectors, while the public sector is composed of all three. The central government and subnational government sectors may be further decomposed into budgetary entities (i.e., those entities whose transactions are included in the annual budget) and entities that are not included in the budget (“extrabudgetary entities”), a large component of which, in many countries, is social security funds.

Box 2.1.The Public Sector and Its Subsectors

Statistical and accounting standards require that economic substance take precedence over legal form. The GFSM 2014 defines specific criteria to determine the true economic nature of each entity/unit, which follows an analysis that takes the form of a decision tree.1 Entities/units that are deemed to be under government control should be classified to a specific subsector of the public sector as illustrated in Figure 2.1.1.

Figure 2.1.1.The Public Sector and Its Main Components

1Includes social security funds.

2Alternatively, social security funds can be combined into a separate subsector, as shown in the box with dashed lines.

3Budgetary units, extrabudgetary units, and social security funds may also exist in state and local governments.

Budgetary central government includes central/national government entities whose activities are financed through a “legislative budget” (namely, the budget that is approved by the legislature and enacted by law). They typically include central government ministries, departments, specialized boards, commissions, or agencies. In practice, specialized boards, commissions, and agencies with significant own-source revenues are often outside the boundary of the budgetary central government, and only the transfer from the budget to those agencies, or budget income remitted by them, is included in the government’s budget and accounts.

Extrabudgetary central government comprises the noncommercial central/national government entities whose revenue, expenditure, and financing transactions are not recorded in the budget. Many of these entities have a legal and organizational status that is independent of government ministries and departments. Also included in this subsector are nonprofit institutions that are controlled by any central government entity/unit. An important example of extrabudgetary entities in many countries is social security funds,2 established to provide pension, health care, and other social insurance benefits that are financed by earmarked contributions or, in some countries, levies on the personal income tax.

Subnational governments consist of entities/units exercising some of the functions of government at a state, regional, or local level. As at the central level, state and local governments often include budgetary and extrabudgetary entities/units, and sometimes, social security funds.

General government sector is a consolidation of central and subnational governments.

Public corporations sector consists of all resident corporations controlled by government entities/units or by other public corporations. The two main types are nonfinancial and financial public corporations. Financial public corporations include the monetary authority (central bank) and nonmonetary financial corporations. As defined in GFSM 2014, entities that are legally constituted as corporations, but do not produce goods and services for the market at economically significant prices, should not be classified as public corporations.

Public sector comprises the general government sector and public corporations owned or controlled by central or subnational governments.

Sources: IMF (2014a); and Allen and Radev (2010).1 See Figure 2.4 of the GFSM 2014.2 Social security funds can be part of central government. Alternatively, they can be combined into a separate subsector, as shown in this box (Figure 2.1.1) with dashed lines.

25. The last decade has seen a steady expansion in the institutional coverage of fiscal reporting (Box 2.2). Several factors contributed to this expansion, notably advances in technology, which allow a faster compilation and easier accessibility of financial data; the adoption of international standards of fiscal reporting and accounting (GFSM 2014 and IPSAS); and pressures from international organizations, rating agencies, and citizens for greater fiscal transparency.

Box 2.2.Trends in the Institutional Coverage of Fiscal Reports

Significant progress has been made in the last decade in expanding the institutional coverage of fiscal reports. Figure 2.2.1 shows that (out of 189 IMF member countries) the number of countries providing general government data to the IMF has nearly doubled.

Figure 2.2.1.Progress in Coverage of Budgetary, Central, and General Government Reporting

(Number of Countries)
Source: IMF GFS Yearbook.

26. Fiscal reports should consolidate intrasectoral flows and stocks by eliminating all material transactions/flows and cross-holdings of assets and liabilities among institutional entities. The consolidation process avoids double counting of flows and stocks across subsectors of the public sector and ensures that fiscal reports present the net fiscal impact of the sector on the rest of the economy (Box 2.3). The fiscal reports should consolidate not only budgetary entities but also extrabudgetary activities/funds, including social security funds (Box 2.4).24

Box 2.3.Consolidation of Stocks and Flows within the Public Sector

Consolidation means presenting the assets, liabilities, revenue, and expenses of the government and its controlled entities as if they were a single entity. Internal transactions and balances should be eliminated. Consolidation is facilitated when the entities to be consolidated follow similar accounting policies, classifications, and reporting timeframes. In the absence of a harmonized accounting framework across all entities, templates should be defined that would require entities (e.g., subnational governments and/or public corporations) to provide reconciled data from their own respective financial statements in conformity with the government chart of accounts and identify the amounts to be eliminated.

Consolidation of the full public sector is ideal, but frequently the unavailability of data requires it to be conducted at lower levels, such as central government, general government, and the nonfinancial public sector. The type of transactions and stock positions to be eliminated depends on the level of consolidation. For example, at the level of central or general government, the most important categories would be grants/transfers, interest, and loans and debt securities. Intrasectoral consolidation should always be done before intersectoral consolidation. While consolidation is not a technically challenging process, practical difficulties often make it challenging to consolidate all the relevant transactions and stock positions, so materiality considerations should be applied (See Government Finance Statistics: Compilation Guide for Developing Countries, Chapter 9). Further guidance on consolidation can be found in the GFSM 2014, paragraphs 3.152–3.168).

Source: IMF staff.

Box 2.4.Extrabudgetary Funds

Extrabudgetary funds (EBFs) account on average for almost half of central government expenditure across a range of advanced, middle-income, and low-income countries. Social security and health funds account for about two-thirds of this amount, slightly less in developing countries.

EBFs may be established to carry out specific government functions, such as road construction, or the nonmarket production of health or education services. They may be managed by the ministry of finance or treasury, line ministries, or autonomous agencies.

There are many categories of EBFs, including special purpose funds (e.g., social security, environmental protection, and road maintenance funds); development funds, sovereign wealth funds, and stabilization funds; revolving funds that are replenished through charges made for goods and services or on-lending; and sinking funds1 accumulated by the government to repay debt.

There are also many sources of finance used by EBFs including earmarked revenues (e.g., social insurance or health contributions, or natural resource revenues, or motor vehicle license fees or gasoline taxes); transfers from the budget; user charges; sales of financial and nonfinancial assets, including privatization receipts; sales of goods and services; borrowing; and donor funds, including direct aid contributions, debt relief, and debt swap arrangements.

EBFs have been set up for a variety of reasons. These reasons may include avoiding the constraints of the budget process and protecting funds from political scrutiny. On the other hand, well-designed EBFs provide an efficient mechanism for linking earmarked taxes and levies to the services delivered (e.g., social benefits and road maintenance). If left outside the budget, the funds need to be subjected to a robust and transparent system of control, reporting, and external audit.

Source: Allen and Radev (2010).1 A sinking fund is a separate account that is made up of segregated contributions provided by the unit(s) that makes use of the fund (parent unit) for the gradual redemption of the parent unit’s debt.

Levels of Practice Under Principle 1.1.1

Basic Practice: Fiscal reports consolidate all central government entities according to international standards.

27. Basic practice requires that fiscal reports cover all the activities of the central government. This requires consolidation not only of central government ministries and other executive agencies that are on budget but also of social security funds organized and managed by the central government and other extrabudgetary activities/funds. Some countries have achieved this by eliminating extrabudgetary entities, minimizing them or integrating them into the budget (see Box 2.5 for examples of Turkey25 and Brazil), or at least reporting them in consolidation.

Box 2.5.Turkey and Brazil: Rationalization of Extrabudgetary Funds

The number of extrabudgetary funds (EBFs) in Turkey has fallen from around 80 in the late 1990s to 13 in the 2000s to 5 in 2013. EBF’s share of central government expenditure has similarly fallen from over 3 percent of GDP in the late 1990s to 1.4 percent of GDP in 2013. The remaining 5 EBFs comprise the Defense Industry Support Fund, the Social Security Fund, the Privatization Fund, the Promotion Fund, and the Support and Price Stability Fund. The last two funds are known as “budgetary funds” since they receive transfers from the budget while the others receive a defined share of tax or nontax revenues.

A similar trend was observed in Brazil, following the implementation of the Fiscal Responsibility Law, in 2000. This law required that all EBFs are brought under the federal government’s budget, accounts, and the single treasury account.

Sources: IMF (2017a and 2017d).

Good Practice: Fiscal reports consolidate all general government entities and report on each subsector according-to-international-standards.

28. Good practice requires that fiscal reports present consolidated data for general government (namely, both central and subnational governments).26 Subnational governments can raise, spend, and, in some cases, borrow significant resources. They provide basic goods and services, pay salaries, collect taxes, and build infrastructure. It is, therefore, important to capture their activities in the consolidated general government fiscal position to assess the overall impact of government on the economy and get a better sense of the overall fiscal situation of the country. The reporting of general government fiscal data is also important to compare countries with different degrees of fiscal decentralization, as shown in the European Union (EU) example in Box 2.6.

Box 2.6.European Union Member States: General Government Consolidation

European Union (EU) member countries are required to provide the main aggregates of general government on an annual basis to Eurostat twice a year, under both the Excessive Deficit Procedure (Maastricht Treaty) and the European System of Accounts 2010 Trans-mission Program. Under the latter, they are also required to report quarterly financial and nonfinancial accounts for the general government and its subsectors. The data are accessible in Eurostat’s public databases: Annual Government Finance Statistics, Government Deficit and Debt, and Quarterly Government Finance Statistics within government statistics. General government statistics are compiled/ consolidated by the EU member countries based on guidance and accounting rules provided by Eurostat. This helps to compare the fiscal situation of EU member countries that have different degrees of fiscal decentralization (see http://ec.europa.eu/euostat/web/government-finace-statistics).

Other regional bodies that have adopted the general government coverage as the basis for fiscal rules and fiscal surveillance include the West Africa Economic and Monetary Union (WAEMU), the Central Africa Economic and Monetary Community (CEMAC), and the East African Community (EAC).

Sources: Eurostat; and IMF staff.

Advanced Practice: Fiscal reports consolidate all public sector entities and report on each subsector according to international standards.

29. Advanced practice requires that fiscal statistics and/or financial statements present consolidated data for general government entities and public corporations they own and control.27 The challenge with such consolidation is that often, public corporations follow commercial accounting standards that make data difficult to combine without extensive adjustments. Compliance with International Financial Reporting Standards (IFRS)28 facilitates the consolidation of financial data on public corporations with data on the general government sector in countries that follow IPSAS, GFSM 2014, or related standards. The Whole of Government Accounts System developed in the United Kingdom provides a good example of full consolidation (Box 2.7).

Box 2.7.Full Public Sector Consolidation: The Whole of Government Accounts of the United Kingdom

The U.K. Whole of Government Accounts (WGA) is one of the most comprehensive set of audited consolidated accounts published globally, comprising all 5,500 public entities in the U.K. public sector. The U.K. Treasury defines the “Whole of Government” as “a group of entities that appears to exercise functions of a public nature, or to be entirely or substantially funded from public money.” WGA provides a comprehensive picture of the financial position of the U.K. public sector, including details of the revenue and expenditure, assets, and liabilities, using IFRS-based accounting policies.

The WGA includes a balance sheet that is more complete than in most other advanced economies. It includes both financial and non-financial assets and liabilities, including liabilities arising from the defined benefit pension schemes of public employees. The WGA’s coverage of flows is equally comprehensive, including a statement of revenue and expenditure, including realized gains/losses in assets and liabilities; a cash-flow statement that presents the cash flows from operating, financing, as well as from capital and financial investment; and a statement of comprehensive income and expenditure, with information on unrealized asset revaluation gains/losses and actuarial gains/losses associated with the pension liability.

Source: Flynn, Moretti, and Cavanagh (2016).

Principle 1.1.2. Coverage of Stocks Fiscal reports include a balance sheet of public assets, liabilities, and net worth.

30. Balance sheets, prepared in line with internationally recognized standards, provide a complete picture of the financial position and overall net worth of a government or public sector. A government balance sheet reports on its stocks of assets and liabilities and shows to what extent its liabilities are matched by corresponding assets (its net worth). A growing number of countries include some balance sheet data in their fiscal reports (Box 2.8). The change in net worth measures whether a government’s activities and decisions generate more debt—that is, obligations for current or future generations for which availability of matching resources is not certain at the time of reporting (Box 2.9 describes a nomenclature for public debt). It is one of the main measures of the sustainability of fiscal activities.

Box 2.8.Trends in Balance Sheet Reporting by Governments

The number of countries reporting data on financial assets and liabilities to the IMF has increased from 13 in 2003 to 37 in 2016 (Figure 2.8.1), including almost all countries in the EU. The number of countries with comprehensive balance sheets, including both financial and nonfinancial assets and liabilities and an overall picture of government net worth, increased from 7 to 29 between 2003 and 2016. Countries that perform best in the coverage of stocks include not only some advanced economies (particularly those in the EU) but also some emerging market and developing ones. Those that reported full balance sheets over most of the past decade include Australia, Hong Kong SAR, El Salvador, Japan, Norway, Russia, and the Slovak Republic.

Figure 2.8.1.Reporting of Assets and Liabilities

(Number of Economies)

Sources: Flynn, Moretti, and Cavanagh (2016); Wang, Irwin, and Murara (2015); Government Financial Statistics Yearbook (GFSY 2003, 2013, and 2016).

Box 2.9.A Nomenclature for Public Debt

Public debt can be thought of as a subset of liabilities in a balance sheet. Liabilities are obligations that provide economic benefits to the units holding the corresponding financial claims. The criterion to define a liability as debt is that future payments of interest and/ or principal are due by the debtor to the creditor. Six different instruments comprise gross debt: debt securities; loans; other accounts payable; special drawing rights (SDRs); currency and deposits; and liabilities arising from insurance, pension, and standardized guarantee schemes. These financial instruments can be grouped according to their marketability.

Securities are the most marketable debt instruments and the primary instruments used by countries with access to a developed financial market. Loans are, by definition, less marketable debt instruments. For countries with underdeveloped or constrained financial markets, loans tend to be a major share of the debt instrument portfolio. Debt securities and loans are frequently the only two debt instruments reported in public sector debt. SDRs and currency and deposits are often measured at face value (e.g., the Maastricht definition of debt used by the European Union Excessive Deficit Procedure). Other accounts payable (e.g., trade credit and unpaid bills) is a nonmarketable debt instrument that can be of significant magnitude especially in times of financial distress. This instrument is often excluded in the analysis of public-sector debt. Insurance, pensions, and standardized guarantee schemes are the other debt liabilities. Wider measures of actual and potential liabilities also take into account nondebt liabilities, such as financial derivatives, social security entitlements, and other contingent liabilities.

Source: Dippelsman and others (2012).

31. Establishing a full balance sheet requires the following steps:

  • Adopting accruals accounting or statistical standards, such as IPSAS or GFSM 2014, which define the rules and principles for recording and evaluating all types of assets and liabilities (Table 2.1).

  • Establishing a complete list of government/public sector assets and liabilities. To establish the opening balance sheet, governments should (i) prepare a physical inventory of tangible assets, and (ii) compile lists of other assets (both financial and nonfinancial) and liabilities, based on the available sources of information, such as invoices and contracts. Once the initial lists of assets and liabilities are established, governments should adopt procedures for capturing all movements on these assets and liabilities (e.g., additions, disposals, or transfers of tangible assets) and regularly update the inventories.

  • Valuing assets and liabilities. Valuations are required when the opening balance sheet is prepared, and subsequently throughout the life of the assets/liabilities, using international standards29 that define the valuation methods for the different categories of assets and liabilities.

Levels of Practice Under Principle 1.1.2

Basic Practice: Fiscal reports cover government cash and deposits and all debt.

32. Basic practice requires the reporting on the government’s cash holdings, its deposits, and debt to provide information on a country’s immediate financial liquidity position. Information on the amount of cash holdings and deposits in the government’s bank accounts and the government’s borrowing is the bare minimum that a government should know to manage its liquidity position. This information should be available relatively easily to ministries of finance or central banks and should be published:

  • Bank statements are usually received either daily or weekly from the central bank and/or commercial banks and should be reconciled with the accounts maintained by the treasury department/ministry of finance. On this basis, treasury departments should be able to evaluate the government’s cash holdings and deposits. Such an evaluation will be easier for countries that operate with a Treasury Single Account (TSA)30 or with a limited number of commercial bank accounts.

  • Debt instruments that countries should report at a basic level of practice include (i) government-issued debt instruments (marketable or nonmarketable), such as treasury bills, notes, and bonds, and (ii) loans (including those arising from commercial contracts, like finance leases). These two instruments are de-scribed in Box 2.9.

33. Gathering data on all forms of government debt often requires considerable coordination across various agencies. Most governments maintain records of “primary” debt, such as loans received and bonds held and issued, and attempt to report on their debt as exhaustively as possible. However, where the capacity is limited, the total of domestic debt and debt denominated in foreign currency, as well as details of individual loan agreements, should at least be provided in the fiscal reports. Often, the data for loans and debt securities come from debt management offices, which normally focus on marketable instruments. Data for other liabilities may be supplied by an accounting unit at the ministry of finance or a statistical agency. The ministry of finance may compile data on debt owed to domestic residents, while the central bank may compile data on debt owed to foreign residents when preparing a country’s external debt statistics. Interagency coordination therefore plays an important role in the compilation of reliable and timely data.

Good Practice: Fiscal reports cover all financial assets and liabilities.

34. Good practice requires a financial balance sheet covering all financial assets and liabilities and hence net financial worth,31 an important measure of the government’s medium-term solvency (see Box 2.10 for the example of Austria). Preparing a financial balance sheet requires the identification and valuation of the following assets and liabilities:

  • Financial assets. In addition to cash and deposits, governments should report on their outstanding loans (and possibly advances) as a lender, tax and trade receivables, as well as equity investments. The balance sheet should also report the value of other types of assets, such as SDRs and monetary gold, which are normally held by the central bank.

  • Liabilities. These would include debt instruments and other contractual liabilities, such as trade payables, lease contracts, financial liabilities related to public-private partnerships, and the equity holdings of public corporations.

35. Valuation methods for financial assets and liabilities may change over time. Financial assets and liabilities are usually valued at nominal value. However, more complex valuations may be required for some assets and liabilities, such as equity investments, derivatives, and pensions. For example, governments may choose to recognize their equity investments at book value until the preparation of audited financial statements by the respective public corporation allows them to be recognized at their market value.

Box 2.10.Austria: The Statement of Financial Position of the Federal Government

Since December 2013, following the introduction of accrual accounting, the Federal Government of Austria has been publishing a statement of financial position (the balance sheet) containing details of all material categories of assets and liabilities, except for the civil servants’ pension entitlements. The accounting of the Federal Government follows IPSAS to a large extent; deviations from the standards are explained in the accounting policies section of the financial statements.

The asset side of the statement of financial position shows how financial resources have been used by showing the assets in which investments have been made. The asset side is comprised of noncurrent assets and current assets. The noncurrent assets include intangible assets (e.g., software and licenses); property, plant, and equipment (e.g., land, buildings, and cultural assets); securities; and equity investments and receivables. The current assets comprise short-term financial assets, short-term receivables, inventories, and cash and cash equivalents (e.g., bank balances).

The liabilities side discloses the sources of the financial resources that made these investments possible. It comprises noncurrent liabilities and current liabilities, such as financial liabilities, payables, and provisions (e.g., provisions for severance payments or litigation expenses), together with net assets as a balancing item. Although the civil servants’ pension entitlements are excluded from the statement, a 30-year forecast of future pension expenses and associated revenue is disclosed in notes to the financial statements to provide an approximation of the future burden of those pension schemes on the federal budget.

Source: Adapted from Austrian Federal Ministry of Finance (2013).

Advanced Practice: Fiscal reports cover all financial and nonfinancial assets and liabilities and net worth.

36. Advanced practice requires that all assets and liabilities be included in the balance sheet, thus allowing governments to calculate their overall net worth, an important indicator of long-term fiscal sustainability. Preparation of a full balance sheet requires the recognition of the following:

  • Nonfinancial assets, including all physical assets, intangible assets, and inventories. Physical assets can include natural resources, infrastructure assets (road networks, sewerage systems, land, and buildings), weapons systems, and heritage assets. These are likely to represent a large part of a government’s balance sheet. Intangible assets include the value of contracts, of leases and licenses, as well as of goodwill and other marketable assets. Inventories include goods held for sale, for use in production, or for some other later use.

  • Contractual liabilities arising from insurance, pension, and standardized guarantee schemes, including pension entitlements of public-sector employees (where these pensions are paid under nonautonomous pension schemes), claims of pension funds on public-sector entities that retain the responsibility for funding any deficit (or claiming any excess funding) of the pension scheme, and the liabilities of standardized guarantee schemes (see Pillar III, Principle 3.2.3).32

37. The valuation of governments’ nonfinancial assets can be challenging. The valuation methods for tangible assets will typically be an initial recognition at cost, and a subsequent recognition at amortized (or historical) cost, market value, or replacement cost. For assets that are valued at amortized (or historical) cost, a useful life needs to be determined appropriately in the accounting policies, based on information provided by the entities that supply or maintain these assets. Where initial recognition at cost or market value is not possible, because supporting information is not available (e.g., roads or other infrastructure assets constructed a long time ago), or there is no observable market price (e.g., heritage assets), accounting policies may authorize that simpler methods, such as statistical estimations, be used.33

Principle 1.1.3. Coverage of Flows Fiscal reports cover all public revenues, expenditures, and financing.

38. To provide a complete picture of financial operations for a given year, fiscal reports should include information on all cash and accrued transactions and other economic flows. While fiscal reporting in many countries remains largely cash-based, some countries have made progress in moving government reporting onto a partial or full accrual basis (see Box 2.11). Depending on the financial reporting standards used, reports on government financial operations can take several forms, including:

  • budget execution reports that show how the government’s actual revenues, expenditures, and financing operations compare with budgeted amounts;

  • cash flow statements that show the cash revenues, expenditures, financing, and net liquidity position at a given point in time;

  • operating statements that provide a comprehensive picture of the accrued revenues and expenditures for a given period; and

  • statements of other economic flows that affect net worth, such as revaluations, and the acquisition and disposal of assets.

Box 2.11.Accounting Basis of Fiscal Reports (Number of Countries)

The number of countries reporting data to the IMF on a full-accrual basis increased from 9 in 2004 to 14 in 2016 (Figure 2.11.1).

Figure 2.11.1.Accounting Basis of Data Reported to the IMF, by Region (2016)

Note: Partial accrual includes countries that report transactions and other economic flows on an accrual basis but do not prepare a full balance sheet. Full accrual includes countries that record transactions and other economic flows on an accrual basis and publish a full balance sheet.

The regional split is done according to the area department of the IMF.

Source: Government Financial Statistics Yearbook (GFSY, 2003, 2013, 2016).

39. For comprehensive reporting on flows, it is important to record economic flows when the underlying economic event occurs. This requires the recognition of economic events in flow reports at the time at which they occur, as well as when the related cash receipts and payments take place (Flynn, Moretti, and Cavanagh, 2016).34 These economic events may directly generate a corresponding or simultaneous cash flow, but in many cases—such as depreciation, revaluation, and impairment—they do not.35 This is an important difference between cash and accrual bases. Accrual accounting offers a number of benefits over traditional cash accounting from the point of view of government transparency, accountability, and financial management.

  • First, by capturing both cash transactions and noncash flows in financial statements, accrual-based fiscal reports provide a more comprehensive view of the government’s financial performance and the cost of government activities.

  • Second, accrual accounting can help focus greater attention on the part of policymakers and the public on the acquisition, disposal, and management of government assets, as well as control and monitoring of all liabilities, including arrears, contingent liabilities, and expenditure commitments.

  • Third, by consolidating not only central government ministries and agencies but also all institutional units under government control, accrual-based financial reports prepared in line with internationally recognized standards provide a more complete picture of the financial position of the public sector as a whole.

  • Fourth, by reporting stocks and flows within an integrated accounting framework based on internationally recognized standards such as GFSM 2014 and IPSAS, accrual accounting can improve the reliability and integrity of government financial data.

Levels of Practice Under Principle 1.1.3

Basic Practice: Fiscal reports cover cash revenues, expenditures, and financing.

40. At the basic level of practice, governments should produce reliable and complete information on their cash transactions and cash holdings. These data should include a cash flow statement that presents all cash inflows, outflows, and changes in cash balance. Cash flows should be grouped under three broad categories: (i) cash flows from operating activities, (ii) cash flows from investing activities, and (iii) cash flows from financing activities. Cash flows from investing activities mainly comprise cash payments (receipts) to acquire (dispose) tangible, intangible, and financial assets. Cash flows from financing activities comprise the proceeds from issuing various forms of government debt (e.g., bonds and treasury bills), and repayments of previous loans. Cash receipts and payments that do not fall into these categories should be reported as operating activities.

Good Practice: Fiscal reports cover cash flows, accrued revenues, expenditures, and financing.

41. To conform with good practice, governments should prepare an accrual-based operating statement in addition to their cash flow statement to provide a more complete picture of their revenues and expenditures. In addition to the data reported under a cash basis of accounting, the operating statement should report the following information (see Box 2.12 for the Philippines example):

  • Accrued revenue. Tax and nontax revenue should be recorded and reported when the events generating a legal right to receive such revenue have occurred.36 As governments record their tax revenue before the actual receipt of tax payments, provision for tax amounts unlikely to be collected should also be made to prevent an overestimation of the government’s income.

  • Accrued expenditures. Accrued expenditures should be recorded whenever an obligation is created—for example, when goods or services are delivered or a subsidy or transfer is granted to a third party. Re-cording expenditures on an accrual basis will require the government to develop clear accounting policies and procedures for recording accrued expenses/liabilities. Where accounting systems cannot immediately support the recognition of such liabilities, it may be necessary to use indirect measures or approximations such as an estimate of accrued expenses at the end of the year.

Box 2.12.Philippines: Coverage of Flows

The audited annual financial reports of national government agencies, local government units, and government-owned and controlled companies include an income statement and a cash flow statement. These statements cover cash flows, accrued revenues and expenses, and some realized and unrealized valuations and volume changes (other economic flows) based on accrual accounting with some modifications.

Income is recorded upon delivery of goods and services, except for tax revenue, duties, fees, fines and penalties, and user charges, which are recognized upon collection in line with the government’s accounting policy. Expenses are recognized when obligations are incurred, and these are reported in the financial statements in the period to which they relate. Some other economic flows related to the value of nonfinancial assets are not recorded in the accounts, but these gaps will be closed by the government’s efforts to further move toward implementing IPSAS.

Source: IMF (2015e).

Advanced Practice: Fiscal reports cover cash flows, accrued revenues, expenditures and financing, and other economic flows.

42. The most comprehensive fiscal reports provide information not only on accrued revenues, expenditures and financing but also on other economic flows, including changes in the value and volume of assets and liabilities. These nontransactional “other economic flows” include, for example, the cost of writing of a government loan, some changes in the value of pension liabilities, or changes in the market prices of shares and other equities. Such information would be reported by countries that are implementing accrual accounting in full and are achieving advanced practice in terms of the coverage of stocks (see Principle 1.1.2 above). Providing such information enables full reconciliation of flows with changes in net worth shown in a comprehensive balance sheet.

Principle 1.1.4. Coverage of Tax Expenditures The government regularly discloses and manages revenue loss from tax expenditure.

43. Disclosure of foregone revenue from tax concessions and exemptions (referred to as tax expenditure) helps to illustrate the extent of indirect government support to corporations and households through the tax system. There is a large literature on the concept and methodological questions related to tax expenditures and their fiscal impact.37 By making exceptions in the tax law or regulations for certain classes of taxpayers, activities, or transactions—in the form of special deductions, exemptions, allowances, rate reliefs, deferrals, or credits—the government decides to forego revenue that it otherwise would have collected, in pursuit of social or economic objectives. Since the foregone revenue benefits some taxpayers, activities, or products and not others, it is equivalent to a subsidy on the expenditure side of the budget. Tax laws should require taxpayers to file a tax return even when tax concessions and exemptions are granted so that the authorities can assess the revenue cost of the tax expenditures. The extent of the loss of revenue through tax expenditures should be disclosed in budget documentation.38 Disclosure of tax expenditure estimates should be accompanied by appropriate methodological notes.

44. Available evidence suggests that tax expenditures vary greatly across countries (Figure 2.2).39

45. Before estimating the cost of tax expenditures, it is necessary to clearly identify all government policy measures and initiatives that can be defined as tax expenditures. These measures include:

  • Exemptions. Amounts excluded from the base on which tax liabilities are calculated.

  • Allowances. Amounts deducted from the benchmark tax (see later in this chapter) to arrive at the tax base.

  • Credits. Amounts deducted from tax liability.

  • Rate relief. A reduced rate of tax applied to specified classes of taxpayer or taxable transactions.

  • Tax deferral. A relief that takes the form of a delay in paying tax.

46. To estimate the revenue loss from tax expenditures, a “benchmark tax” needs to be defined. A benchmark tax is defined as the tax rate structure, tax deductions, and tax accounting treatment prevailing in the absence of any tax expenditure (Box 2.13). Three estimation methods may be used to assess the extent of the tax expenditure (OECD, 1984; Villela, Lemgruber, and Jorrat, 2010):

  • Initial revenue loss. The amount by which tax revenue is reduced as a result of the introduction of a tax expenditure, based on the assumption of unchanged behavior and unchanged revenues from other taxes.

  • Final revenue loss. The amount by which tax revenue is reduced by the introduction of a tax expenditure, taking into account any changes in the behavior of taxpayers, and the effects on revenues derived from other taxes, which result from the tax expenditure.

  • Outlay equivalence. The direct expenditure that would be required in pretax terms to achieve the same after-tax effect on taxpayers’ incomes as the tax expenditure.

Figure 2.2.Revenue Loss from Tax Expenditures in Selected Countries

(Percentage of GDP)

Data are presented for illustration purposes rather than for comparison purposes.,

Sources: IMF, FTE assessments.

Box 2.13.OECD Approaches for Defining a Benchmark Tax System

The OECD outlines three broad approaches used by member countries for defining a benchmark tax system:

  • Conceptual approach seeks to link the benchmark to some concept of a “normal” tax structure.” It uses an “optimal” tax system as the norm based on theoretical concepts of income, consumption, or value-added taxes. This norm may be modified to address data limitations and technical problems in applying a pure theoretical concept.

  • Legal/regulatory approach seeks to link assessments to the taxation laws of a country. It largely uses a country’s own tax laws as a basis to define the benchmark, isolating differential or preferential treatment judged as tax expenditures (e.g., targeted provisions to address specific policy objectives).

  • Expenditure subsidy approach seeks to estimate the cost only of those tax concessions (or differential/preferential treatments) that are clearly analogous to an expenditure subsidy.

Source: OECD (2010b).

Levels of Practice Under Principle 1.1.4

Basic Practice: The estimated revenue loss from tax expenditures is published at least annually.

47. At the basic level of practice, the estimated total revenue loss from tax expenditures should be disclosed at least annually. Policies implemented through tax expenditures typically do not receive the same degree of scrutiny during the budget process as spending estimates/appropriations. Therefore, it is important that an estimate of the revenue loss from tax expenditures be included in the budget documentation so that it can be compared and analyzed vis-à-vis the government’s spending proposals.40 Moreover, if tax expenditures are not properly identified and reported, governments may overestimate revenues in the budget. The methodology and assumptions used for estimating tax expenditures should be clearly set out in the tax expenditure report accompanied by a discussion of the risks associated with incorrect estimation.

Good Practice: The revenue loss from tax expenditures is estimated by sector or policy area and is published at least annually.

48. Good practice requires, in addition to the above, that tax expenditures be grouped by sector or policy area.41 This allows for analysis and comparison with the government’s spending programs. The key questions to con sider are (i) what is the tax expenditure’s intended objective or purpose; (ii) whether performance measures have been established to monitor success in achieving this objective; and (iii) whether the tax expenditure has succeeded in achieving its objective. Reporting of tax expenditures by sector or policy area enhances legislative scrutiny of government policy (see Box 2.14 for the examples of India and Peru). It could also help expose the ineffective, inefficient, or inequitable character, if any, of tax expenditures.42

Box 2.14.India and Peru: Reporting of Tax Expenditures

India prepared its first statement of tax expenditures in 2006/07. Starting fiscal year 2019, the statement is titled “Statement of Revenue Impact of Tax Incentives under the Central Tax System.” It provides estimates of the revenue cost of various concessions to corporations, cooperatives, and individuals. It also analyzes the gap between statutory and effective corporate tax rates and how the effective rate varies among larger and smaller corporations depending on the tax concessions available to them. Subsequently, the government expanded the distributive analysis, which includes public/private and manufacturing/services differences in effective tax rates. The statements are submitted to Parliament as part of the Union Budget.

In Peru, the estimation of tax expenditures is an obligation under the Fiscal Responsibility and Transparency Law (2016 revised version). The tax expenditure report is prepared by the Superintendencia Nacional de Administración Tributaria (SUNAT; National Superintendence for Tax Administration) and the Ministry of Economy and Finance. In Peru, tax expenditures are measured as deviations from the benchmark system that imply a reduction in state revenue, with the aim of achieving economic and social objectives. SUNAT’s sources of information are tax returns presented by taxpayers or tax informers, national accounts statistics, official and other diverse private statistics, and requests for information from both public and private entities.

Sources: http://www.indiabudget.gov.in/ub2018–19/rec/annex7.pdf (for India) and Peru FTE (IMF, 2015d (for India) and Peru FTE (IMF, 2015d; http://www.imf.org/external/np/fad/trans/).

Advanced Practice: The revenue loss from tax expenditures is estimated by sector or policy area and is published at least annually. There is control on, or budgetary objective for, the size of tax expenditures.

49. Advanced practice requires, in addition, that once the costs of tax expenditures are well understood, governments consider establishing some control on their size. To meet the advanced level of practice, countries may implement one or more of the following policies: (i) put a numerical cap on the overall size of tax expenditures—in a similar way to a ceiling on aggregate spending—or a limit on the annual growth in the aggregate size of tax expenditures; (ii) impose a limit on the number of years between the introduction of a new tax expenditure and its expiry (a “sunset provision”); and/or (iii) ensure that estimates of spending proposals and tax expenditures are both presented in the budget documents and are reviewed together by the government so that the trade-offs between spending and tax expenditures are taken into account in making decisions on the allocation of budgetary resources.

50. This is necessary to take account of tax expenditures in assessing performance against a fiscal rule or an expenditure rule (e.g., an overall expenditure ceiling). Performance should be assessed against quantitative measures in an analogous manner to spending programs. Control mechanisms on the amount of tax expenditure should be built into the budget process. These mechanisms could include rules preventing tax expenditure to reduce the expected aggregate revenue set in the medium-term budget through mandatory compensatory revenue measure. They could also include a formal ceiling on the overall size of tax expenditure, such as an average percentage of GDP over a given period, or the inclusion of tax expenditures in ministerial or sectoral spending ceilings (see Box 2.15 for the Portugal example).43 Periodic evaluation of all tax expenditures is also necessary to determine their distributional impact, scaling back those tax expenditures that are not generating benefits commensurate to their cost,44 and to assess whether there continues to be a good justification for the tax expenditure compared to other policy goals and instruments.

Box 2.15.Portugal: Reporting and Control on Tax Expenditures

The Ministry of Finance of Portugal first published an annual report on the estimated revenue foregone from tax expenditures with its Relatório da Despesa Fiscal 2013. The report covers central, regional, and local governments and provides detailed information about the evolution of tax expenditure and some international comparison. The report also analyses tax expenditure by function (e.g., economic affairs, social protection), category of tax (e.g., taxes on income/wealth, production, imports), and the types of tax expenditure (e.g., exemptions, deductions, preferential rates, credits).

There are also controls on the size of tax expenditures. Budget documents provide targets and ceilings for tax expenditures. Under the IMF-supported program, between 2011 and 2014 tax expenditures were set to be reduced by €4.8 billion or 35 percent. Of this total saving, fiscal year 2014, in particular, provided for a reduction of €640 million, which represents a decrease of 6.7 percent compared to 2013.

Source: Portugal FTE (IMF, 2014c; http://www.imf.org/external/np/fad/trans/).

Dimension 1.2. Frequency and Timeliness of Fiscal Reports. Fiscal reports should be published in a frequent, regular, and timely manner.

51. Regular and timely publication of fiscal reports allows for a timely comparison of planned and actual fiscal performance, and helps ensure that fiscal forecasts and decisions are based on an up-to-date assessment of the government’s financial operations. Accordingly, the two principles under this dimension of the Code call for:

  • High frequency in-year fiscal reporting, in the form of budget execution reports and fiscal statistics (1.2.1). This is critical to monitoring budget execution, enforcing fiscal discipline, and establishing a sound base-line for fiscal projections and policies; and

  • Timely preparation and audit of the government’s annual financial statements or accounts at year-end (1.2.2). This is critical to ensure that the annual financial statements inform the preparation of future bud-gets and any irregularities identified by the auditor are addressed in a timely manner.

Table 2.2 provides a list of relevant standards, norms, and guidance material related to dimension 1.2 of the Code.

Table 2.2.Relevant Standards, Norms, and Guidance Material
Standards/Guidance MaterialBrief Description
IMF Data Dissemination StandardsThese standards are designed to enhance the dissemination of economic and financial data.
  • The General Data Dissemination System (GDDS) was established for IMF member countries with less developed statistical systems as a framework for evaluating their needs for data improvement and setting priorities (IMF, 1998).

  • The Special Data Dissemination Standard (SDDS) was established to guide IMF members that have, or might seek, access to international capital markets in providing their economic and financial data to the public.

  • The SDDS Plus was created as an upper tier of the IMF’s Data Standards Initiatives to help address data gaps identified during the global financial crisis.

  • In 2015, the enhanced GDDS (e-GDDS) was created.

https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/45/Standards-for-Data-Dissemination

Guides on the use of e-GDDS, SDDS, and SDDS Plus can be found at: http://dsbb.imf.org/Pages/GDDS/Home.aspx; http://dsbb.imf.org/Pages/SDDS/Home.aspx; and http://dsbb.imf.org/Pages/SDDS/Home.aspx; and http://dsbb.imf.org/Pages/SDDS/Home.aspx?sp=y
OECD Principles of Budgetary GovernancePrinciple 4 requires that budget documents be open, transparent, and accessible. (OECD, 2014a).

http://www.oecd.org/gov/budgeting/principles-budgetary-governance.htm
PEFAIncludes two related indicators: PI-28.2 on the timing of in-year budget reports; and PI-30.2 on the submission of audit reports to the legislature. (PEFA, 2016b)

www.PEFA.org
International Budget Partnership, Open Budget SurveyConducted bi-annually by the IBP, most recently in 2017, the Open Budget Survey measures a wide range of budget transparency issues, and calculates an overall national score for each country.

http://internationalbudget.org/what-we-do/open-budget-survey/

52. The deadlines for publication of in-year and end-year fiscal reports are typically set out in fiscal legislation or supporting regulations, though governments may choose to publish fiscal reports on a more frequent basis than required by the law to increase the transparency of its operations. Governments should, in any case, establish and adhere to clear procedures and timetables regarding the publication of fiscal reports to ensure that legislators, markets, and the public know when to expect new information.

Principle 1.2.1. Frequency of In Year Reporting In year fiscal reports are published on a frequent and regular basis.

53. Frequent and regularly published in-year fiscal reports provide policymakers, budget managers, and other stakeholders with a snapshot of the implementation of the budget. Timeliness of the in-year reporting is also critical to a government’s ability to undertake any required midcourse corrections in budget implementation. To provide useful information, in-year fiscal reports should report government revenues, expenditures, and financing operations against the budget, and monitor whether the budget targets are on track. While statistical reporting standards call for quarterly general government fiscal reports, governments should aim to publish provisional data each month. As shown in Figure 2.2, just over half of all countries currently publish consolidated fiscal reports for central government on a monthly basis, with the remainder reporting quarterly, semiannually, or annually. In addition, various daily or weekly reports are usually prepared for management purposes within the ministry of finance or the line ministries.

Figure 2.3.Periodicity and Timeliness of Central Government Fiscal Reporting (Number of Countries)

Sources: IMF (2013d) and IMF (2013e).

54. In-year reports are also needed to inform budget preparation for the following year. Budgets are typically prepared and approved before the start of the financial year to which they apply and therefore before the publication of the end-year financial statements. A lack of timely data about in-year fiscal developments may lead to inaccurate estimates during the budget preparation process and generate the need for substantial ex post revisions to these estimates. Ideally, in-year reports should include information on (i) all commitments made, invoices received, and payments made against approved budgetary allocations; (ii) revenues collected and pending for collection (e.g., assessed tax revenues pending for collection) against budgetary forecasts; and (iii) all financing operations, including debt operations.

55. Ensuring frequent and timely in-year fiscal reporting requires governments to establish and enforce rigorous and efficient procedures for collecting and consolidating data from government entities. These practices include:

  • Reporting standards and templates. All relevant entities (line ministries, tax collection agencies, etc.) should be informed and comply with the government’s reporting requirements and the standards and methods to be used in reporting data. These standards, templates, and guidelines may allow for certain estimations or omissions in high-frequency reports, but would require more comprehensive and accurate data for quarterly and annual submissions.

  • Reporting deadlines. All relevant entities should be aware of and comply with the deadlines for submit-ting information to the central reporting body and face sanctions for not complying with them.

  • Reporting systems. In-year fiscal reporting is facilitated when the government’s financial management in-formation system (FMIS) generates a sufficiently wide range of automatized reports. Manual procedures, to the extent possible, should be avoided as they tend to create long delays in producing reports and re-duce their reliability.

Levels of Practice Under Principle 1.2.1

Basic Practice: In-year fiscal reports are published on a quarterly basis, within a quarter.

56. Publishing quarterly fiscal reports before the end of the following quarter ensures that the government has enough lead time to adjust its policies in case of deviations from targets. It also ensures that information about the current fiscal year is available before beginning the preparation of next year’s budget and that governments have at least two quarters of data on in-year fiscal developments before they present their fiscal plans and budgets for the next financial year, which typically happens in the fourth quarter of the fiscal year. There may be some exceptions, for example where reports are not generated automatically by the FMIS, thus requiring significant manual efforts or where an in-year consolidation of public entities is undertaken. Regularity in publishing the reports is also important—it is expected that governments should systematically publish budget execution data on a quarterly basis.

Good Practice: In-year fiscal reports are published on a quarterly basis, within a month.

57. Publishing quarterly fiscal data within one month of the end of each quarter enables the government to take timely corrective action if fiscal performance is of track. When reporting fiscal data for each new quarter, the government should take the opportunity to revise data from previous quarters taking account of information received or errors discovered in the interim. This will help to avoid substantial revisions to annual estimates of key fiscal aggregates and support the credibility of the government’s fiscal policy statements.

Advanced Practice: In-year fiscal reports are published on a monthly basis, within a month.

58. Under advanced practice, governments publish monthly fiscal reports before the end of the following month, enabling them to track fiscal developments more closely and respond to problems as soon as they emerge. High-frequency and quality fiscal data are especially important for countries that use fiscal rules in setting their fiscal policy. Publishing fiscal data each month with a one-month lag gives governments between 8 and 10 observations before they submit their fiscal plans and budgets for the next fiscal year to the country’s legislature. Where fiscal reports are generated automatically via the FMIS, such a practice should be easily achievable. While monthly data are likely to be less detailed, more volatile, and subject to greater revision than quarterly statistical data, they can help to improve policymakers’ and the public’s understanding of in-year fiscal developments and patterns. Box 2.16 provides some country examples based on FTEs conducted.

Box 2.16.Budget Execution Reports: Country Examples

Brazil, Colombia, Costa Rica, Romania, and Russian Federation’s cash-based budget execution reports are produced each month and published within 30 days after the end of the month. However, these reports tend to cover only the budgetary central government or central government. In addition, statistical in-year reports may be produced less frequently. In the case of Ireland, Portugal, and Greece, monthly budget execution reports cover the general government and its subsectors, while for the United Kingdom they cover the whole public sector.

Source: IMF, FTE Reports (seehttp://www.imf.org/external/np/fad/trans/).

Principle 1.2.2. Timeliness of Annual Financial Statements Audited or final annual financial statements are published in a timely manner.45

59. Timely publication of year-end financial statements is key to effective government financial accountability and management. The government’s annual financial statements or accounts, together with the SAI’s report, show whether the budget was implemented as intended and provide important insight into the reliability and integrity of the country’s overall PFM system. Audited annual financial statements are the principal means by which governments report to their legislature on their stewardship of public funds. A complete, reliable, and timely account of how those funds are used is critical to ensuring that any irregularities are swiftly remedied and that future budgets are based on a full understanding of past fiscal performance. However, the timeliness of these reports remains a challenge in many low- and middle-income countries. In 2005–14, out of 107 countries for which PEFA scores are publicly available, less than half submitted their annual financial statements for audit within six months of the year end (Box 2.17). In francophone countries, year-end financial statements take the form of a law for both budgetary and financial reporting. This law, known as the “loi de règlement,” provides information on the fiscal balance, and presents (i) the cash flow statement; (ii) a comparison of budget execution with the approved budget; and (iii) the annual financial accounts. SAI’s audit covers both budgetary and financial reporting. The SAI’s report on budget execution is attached to the law, and when the accounts are prepared on accrual basis, the SAI should express an opinion on the financial statements.

Box 2.17.Timeliness of Annual Financial Statements

Figure 2.17.1.Trends in Timeliness of Annual Financial Statements (Number of Countries)

Source: PEFA Scores Data Set (2005–16).

60. Timely preparation, audit, and publication of year-end financial statements is facilitated by the following:

  • Clear and legally binding deadlines for the publication of audited annual financial statements. The legal and regulatory framework should clearly specify the timeframe for preparing and publishing the financial statements, transmitting them to the external auditor, finalizing the audit opinion, and laying the audited accounts before the legislature. Ideally, the law should also require financial statements to be published both before (as provisional financial statements) and after the audit (as audited financial statements).

  • Accounting regulations, guidance, and circulars46 that define, first, the roles and responsibilities of the actors involved in preparing the financial statements; second, the format and content of the statements; third, deadlines to produce the information needed to prepare the statements; and, fourth, procedures to centralize financial data in the FMIS and ensure their consistency.

  • Open channels of communication and cooperation between the ministry of finance and the SAI to ensure that surprises are avoided and publication deadlines are met. To the extent possible, the auditor’s opinion on accounting issues should be sought in advance. These accounting issues include the format and content of the financial statements and the application of accounting policies and standards.

Levels of Practice Under Principle 1.2.2

Basic Practice: Audited or final annual financial statements are published within 12 months of the end of the financial year.

61. As basic practice, governments should publish their financial statements within 12 months of the end of the financial year. Financial information published with more than one-year lag is often only of historical importance and is of little relevance either in the fiscal decision-making process or in effectively establishing the executive’s accountability as some of the key personnel may have changed. Long delays in the publication of audited accounts make it difficult to remedy or sanction any financial irregularities or misconduct identified, as the focus of discussion, and the public attention, shifts to the next budget and policies. Publishing audited accounts within 12 months typically requires governments to prepare their financial statements and transmit them to the SAI within seven to nine months of the end of the year.

Good Practice: Audited or final annual financial statements are published within nine months of the end of the financial year.

62. Governments that comply with good practice publish audited or final financial statements within nine months of the end of the financial year (see Box 2.18 for Peru example). This helps legislators and the public to assess whether the findings and recommendations of the audit report are being addressed in the preparation of the accounts for the current year and the budget for the coming year. Governments that have comprehensive and integrated accounting systems, automated through FMIS, should be able to fulfill this requirement.

Box 2.18.Peru: Consolidated Financial Statements

Peru publishes annual consolidated financial statements for the public sector within nine months of the end of the financial year. The Accounting Unit of the Ministry of Economy and Finance (DGCP) collects annual financial statements from public-sector entities by March 31 (three months after the end of the financial year). Financial statements are prepared and submitted for audit by the General Auditor Office by June 20. After receiving the General Auditor’s report (by August 10), DGCP sends the audited accounts to the Congress (by August 15). At the same time, financial statements are published on the ministry´s website, pending approval by the Congress.

Source: Peru FTE (IMF, 2015d; http://www.imf.org/external/np/fad/trans/).

Advanced Practice: Audited or final annual financial statements are published within six months of the end of the financial year.

63. Under advanced practice, governments publish their audited or final financial statements within six months of year end, thus allowing the information to be effectively used for budget preparation (see Box 2.19 for Finland example). Publication of the annual financial statements within such a timeframe is likely to be achieved by countries that have been able to set up a comprehensive FMIS and communicate and cooperate regularly with the external auditor in the preparation of the accounts. Meeting the six-month deadline typically requires the annual accounts be prepared within three months of the end of the financial year, thus allowing a further three months for examination by the SAI and discussion of any omissions, errors, or irregularities. To avoid delays, the auditor may also perform a concurrent audit of financial transactions even before the closure of the annual accounts.

Box 2.19.Finland: Publication of Financial Statements of Central Government and Municipalities

In Finland, the annual financial statements of the central government are published in April each year as part of the government’s Annual Report, and are audited within five months of the end of the fiscal year, in time to inform the preparation of next year’s budget. Moreover, financial statements of municipalities and joint municipal boards are published within six months of the end of the fiscal year.

Source: Finland FTE (IMF, 2015a; http://www.imf.org/external/np/fad/trans/).

Dimension 1.3. Quality of Fiscal Reports. Information in fiscal reports should be relevant, internationally comparable, and internally and historically consistent.

64. The quality of a fiscal report determines its usefulness to policymakers, citizens, markets, and other users. The quality of a report is determined by the relevance and consistency of the information it contains. A similar set of characteristics has been proposed by IPSAS (Box 2.20). The fiscal information should be presented in a format that is easy to comprehend and relevant to the users; cross-country comparability is also important to assess the information presented. Accordingly, the three principles under this dimension require that

  • information is classified and presented in line with international standards (1.3.1);

  • data in fiscal reports are internally consistent and consistent over time (1.3.2); and

  • any material revisions to historical data are disclosed and explained (1.3.3).

Table 2.3 provides a list of relevant standards, norms, and guidance material related to dimension 1.3 of the Code.

Table 2.3.Relevant Standards, Norms, and Guidance Material
Standards/Guidance MaterialBrief Description
IMF, Government Finance Statistics Manual (GFSM, 2014)Provides a standard framework to design an economic classification of revenues and expenditures, and a functional classification, based on the Classification of the Functions of Government (COFOG) developed by the United Nations. (IMF, 2014b)

https://www.imf.org/external/pubs/ft/gfs/manual/gfs.htm
OECD Best Practices for Budget TransparencyRecommends that expenditures be classified by administrative unit (e.g., ministry, department, or agency), supplemented by information classified by economic and functional categories. (OECD, 2002).

http://www.oecd.org/gov/budgeting/best-practices-budget-transparency.htm
EUROSTAT Manual on Sources and Methods for the Compilation of COFOG StatisticsProvides guidance on compiling comparable statistics on government expenditure broken down by function, according to COFOG. (European Commission, 2011b)

http://ec.europa.eu/eurostat/web/products-manuals-and-guidelines/-/KS-RA-07–022?inheritRedi-rect=true
PEFAIncludes one related indicator: PI-5 on the classification of the budget. (PEFA, 2016b)

www.PEFA.org
IMF’s Data Quality Assessment FrameworkProvides a flexible structure for the qualitative assessment of data, including financial statistics, linked to the system of Reports on Standards and Codes (ROSC). (IMF, 2003a).

http://dsbb.imf.org/pages/dqrs/dqaf.aspx
European Statistical System (ESS) Guidelines on Revision Policy for PEEIsThis document—endorsed by the ESS Committee—provides guidelines on a common revision policy for Principal European Economic Indicators (PEEIs). It aims to improve the quality and comparability of macro-economic data of the EU, euro area, and national level. (European Commission, 2013a).

http://ec.europa.eu/eurostat/en/web/products-manuals-and-guidelines/-/KS-RA-13–016
European Statistics Code of PracticeThis Code of Practice – adopted by the ESS Committee – is based on 15 principles that promulgate the independence, integrity, and accountability of the national and Community statistical authorities. The Code includes a set of indicators of good practice. (European Commission, 2011a).

http://ec.europa.eu/eurostat/web/products-manuals-and-guidelines/-/KS-32–11-955
IMF Technical Notes and ManualsJacobs and others (2009); and Cooper and Pattanayak (2011).

Box 2.20.International Public Sector Accounting Standards: Key Characteristics of Financial Reporting

IPSAS identifies four principal quality characteristics for financial reporting. Information is:

  • understandable when it is presented in a manner that readers might reasonably be expected to comprehend its meaning;

  • relevant if it can be used for evaluating past, present, or future events;

  • reliable when complete in all material respects, free from any material error and bias, and represents faithfully the financial position/performance reflecting the economic substance of transactions and not merely the legal form; and

  • comparable when users can identify similarities and differences between that information and information in other reports, pertaining to the same entity or of different entities.

Source: Annex to IPSAS 1 (IPSASB, 2006a).

Principle 1.3.1. Classification Fiscal reports classify information in ways that make clear the use of public resources and facilitate international comparisons.

65. The budget classification determines the way government financial information is recorded and presented in the budget and fiscal reports. A classification system provides a framework for presenting data related to revenues, expenditures, and financing, based on clear categories such as administrative units, economic categories, functions, programs, beneficiaries, and geographical location (Cooper and Patanayak, 2011; Jacobs, Helis, and Bouley, 2009; Tommasi, 2013). A standard classification allows tracking of transactions throughout the overall public finance cycle, from budget formulation to execution and reporting. The budget classifications should be integrated with the chart of accounts (COA) used by the treasury to record financial transactions.47 A coherent, transparent, and well-understood classification system is important for policy formulation, resource allocation, budget management, financial reporting, and ex post analysis.

66. Four main internationally adopted budget classifications are most frequently used in budget documents (Table 2.4):

  • An administrative classification identifies the entities responsible for collecting and spending public resources. It usually codifies the different levels of administration, from a ministry or department to the public service delivery unit. Administrative classification is important for budget appropriations and accountability purposes.

  • An economic classification identifies the type of expenditure incurred and includes, for example, economic categories such as salaries, goods and services, transfers, interest payments, and capital spending. The GFSM 2014 provides summary economic classifications that could be further disaggregated to address specific needs.

  • A functional classification presents the allocation of resources to a set of standardized functions, or broader socioeconomic objectives, of government. A classification by functions or sectors is useful for policy design and economic analysis purposes. The United Nations’ Classification of Functions of Government (COFOG) sets out 10 functions and various subfunctions. 48

  • A program classification provides information on the allocation of resources to assess the extent to which public spending achieves its various goals and objectives. A program comprises a set of activities designed to achieve a policy objective (e.g., a vaccination program, or universal primary education).

Table 2.4.The Four Main Types of Budget Classification
ClassificationInformation ProvidedStandards
AdministrativeGovernment entity (ministry, department, directorate, agency) allowed to spend the funds and accountable for their useNo international standards as it is specific to each country’s institutional arrangements
EconomicNature of expenditure (wages, subsidies, social benefits)GFSM 2014
FunctionalPurpose of the expenditure (defense, health, education)COFOG
ProgramLink between the expenditure and the associated government policies (provide water access, reduce child mortality)No international standards as it is specific to each government’s policy priorities
Source: IMF staff.

67. To produce meaningful, reliable, and comparable information, the classification system should be consistent and be stable over the time. A classification system should remain stable to allow for effective control of budget execution, the analysis of fiscal policy over time, and the making of international comparisons. When changes to the classification structure are made, they should be disclosed and their impact on fiscal information analyzed.49Box 2.21 shows how selected low-income countries and emerging markets typically classify their budgets.

Box 2.21.How Countries Classify Budgets

As shown in Figure 2.21.1, out of a set of 110 countries for which PEFA assessments are available, nearly all classify their budgets using administrative and economic classifications; 60 countries follow at least a basic functional classification that broadly conforms to the 10 COFOG functions; and 27 of these have either detailed functional classifications or program classifications capable of producing reports by COFOG subfunctions.

Figure 2.21.1.Classification Used (Number of Countries)

Source: PEFA Scores Data Set (2005–2016). See www.pefa.org.

Levels of Practice Under Principle 1.3.1

Basic Practice: Fiscal reports include administrative and economic classifications consistent with international standards, where applicable.

68. Classifying information in fiscal reports by administrative unit and economic category is a basic requirement for expenditure control and fiscal management.

  • An administrative classification allows governments to allocate resources to different ministries, agencies, and levels of government. It also allows parliament and the public to hold them to account for the use of those resources. The administrative classification should be organized according to the different levels of responsibility and accountability in budget management. While there is no international standard for an administrative classification, changes to administrative boundaries or assignment of financial responsibilities between government agencies should be explained and reconciled.

  • Classifying financial information by its economic nature allows governments to understand and manage the impact of government activities on the wider economy and compare their fiscal performance inter-nationally. An economic classification in line with the international standard (GFSM 2014) is analytically meaningful. It allows the production of statistical tables, which, as discussed under principles 1.1.2 and 1.1.3, provide statements of operations, other economic flows, and the balance sheet. The economic classification defines a set of codes to identify the revenue, expenditures, or financing items and uses these codes to identify types of transactions, other economic flows, or the stock position.50 See Box 2.22 for the example of Kenya.

Box 2.22.Kenya: Administrative and Economic Classifications

Kenya produces fiscal reports, including quarterly economic and budgetary reviews and annual financial statements, with breakdowns of revenues and expenditures by administrative and economic classifications. Annual reports published by the Kenya National Bureau of Statistics provide GFS and COFOG compliant reports. Kenya’s reporting is supported by a standard chart of accounts introduced in July 2013. The structure provides multiple reporting segments, is harmonized across budget and accounting functions, and is shared by the national and county levels of government. Despite it being consistent with international standards, its benefits are yet to be fully realized as the improvements are still to be exploited in the annual financial statements.

Source: Kenya FTE (IMF, 2016d; http://www.imf.org/external/np/fad/trans/).

Good Practice: Fiscal reports include administrative, economic, and functional classifications consistent with international standards, where applicable.

69. In addition to the administrative and economic classification, good practice requires that countries classify expenditure by function, which facilitates both international and intertemporal comparisons of the level and composition of expenditure. As noted earlier, using a classification consistent with COFOG51 allows inter-temporal international comparisons as functions are not affected by changes in the organizational structures of governments or by administrative arrangements regarding the delivery of public services (see Box 2.23 for Tunisia example).

Box 2.23.Tunisia: Classification of Fiscal Transactions

The government of Tunisia uses administrative, economic, and functional classifications for its fiscal statistics, which are reported to the IMF and published.

The monthly fiscal statistics use an economic classification of revenue and expenditures based on the GFSM 1986, while the annual publication transmitted to the IMF uses an economic classification of revenue and expenditures based on the GFSM 2001. The fiscal statistics also include a functional classification of expenditures based on the COFOG. When classification in the different subsectors differs, the Tunisian authorities have developed a conversion table for the purpose of preparing fiscal statistics.

In addition, the government has developed a programmatic classification of budget expenditures, which is being implemented by pilot ministries as part of a results-based budgeting initiative.

Finally, the government has started taking measures to comply with the new organic budget law, which requires the implementation of an economic classification compliant with international standards.

Source: Tunisia FTE (IMF, 2016e; http://www.imf.org/external/np/fad/trans/).

Advanced Practice: Fiscal reports include administrative, economic, functional, and program classifications consistent with international standards, where applicable.

70. Advanced practice is to classify expenditure also by program, thus enabling governments to allocate resources to different policy objectives and link those resources to specific nonfinancial performance indicators (see Box 2.24 for France example). A program classification is useful for countries trying to analyze the performance of public policies or improve the delivery of public services (Robinson and Last, 2009; Robinson 2013). It is an important instrument of fiscal transparency as it informs the public on the impact of intended policies. Implementing a program classification is a demanding task that requires careful design and coordination between multiple stakeholders, in particular between the ministry of finance and line ministries/program-implementing agencies. To be meaningful, such a classification should directly link programs to outputs and outcomes.52 It should also ensure that programs provide a full cost of the policy, including civil service employment costs or capital expenditure. Moreover, the FMIS must be designed to ensure that transactions are recorded against a given program, as well as conforming to internationally compliant economic and administrative classifications.

Box 2.24.France: Program Classification

Since 2006, France has implemented performance-based budgeting with a programmatic classification based on a three-tier structure. The “Missions” are the high-level public policies. Each Mission comprises a set of “Programs,” which are the level where appropriations are allocated. Programs comprise “Actions,” which are the operational activities aimed at implementing the Programs. This reform has clarified the objectives of budget appropriations, enabled the cost of public policies to be estimated reliably, and aligned policies and programs with the related administrative structures.

Source: Chevauchez (2007).

Principle 1.3.2. Internal Consistency Fiscal reports are internally consistent and include reconciliations between alternative measures of summary fiscal aggregates.

71. Internally consistent fiscal reports are key to ensuring their credibility and accuracy. Every transaction made by the government—spending, revenue collection, or borrowing—has a counterpart, allowing the accuracy of the information to be compared against and verified by independent data. Fiscal documentation should provide a reconciliation53 of internally generated reports (e.g., the annual cash deficit in the budget) and externally generated figures (e.g., actual borrowing from domestic and external sources, plus or minus cash holdings) to provide reasonable assurance of the quality and reliability of government fiscal data and verify that the budget deficit figure is accurate and reliable (see Khemani and Wiest, 2016).

72. The key reconciliations to ensure internal consistency of fiscal reports are as follows:

  • Fiscal balance with net financing: This links the fiscal balance, calculated as revenue less expenditure (“above-the-line”), to its net financing (“below-the-line”), calculated as the net acquisition of financial assets minus the net incurrence of liabilities.54 Bank reconciliation plays an important role in achieving this.55

  • The stock of debt issued with the stock of debt held by counterparties. This links the reported amount of gross public debt—liabilities of the government—to the amount of public debt assets held by other entities, such as foreign governments, banks, pension funds, and investors.56

  • Net financing with the change in the stock of government debt. In the absence of any valuation changes, the stock of government debt should evolve consistently with the amount of net financing. For example, if the government runs a budget deficit of $10 million, and finances the deficit through issuance of $10 million of bonds, the stock of government debt should increase by $10 million. Differences between the two measures, known as stock-flow adjustments, can occur for several reasons, and should be disclosed in the reconciliation table.

73. If reconciliations are not provided, or discrepancies exist, this can raise serious questions about the validity of the government’s fiscal reports. A reported fiscal deficit “above-the-line” that is smaller than the net financing (below-the-line) may indicate that there are many off-budget operations. Large, unexplained stock-flow variations, for example, could indicate that some public borrowing is not being used to finance the budget and may be diverted to alternative uses. Any discrepancies between the government’s debt liabilities and private-sector debt holdings may indicate misreporting of public debt figures.

74. Preparing a full reconciliation of the three key measures can be a challenging task, although most of the relevant information is usually available from government and central bank reports. Where countries are producing accrual accounts, with operating, cash flow, and balance sheet statements, these reconciliations are already being provided. If countries are operating on a cash basis without financial statements, the reconciliations can be made using the available “above-the-line” and “below-the-line” information and be further informed by variations in key parameters such as exchange and interest rates and the balance of government deposits. Additional sources of data, where available, can assist in performing these reconciliations. For example, the central bank’s monetary survey and information on the balance of payments and the international investment position provide most of the counterparty data that are required.

Levels of Practice Under Principle 1.3.2

Basic Practice: Fiscal reports include one of the following reconciliations: (i) fiscal balance and financing, (ii) debt issued and debt holdings, and (iii) financing and the change in the stock of debt.

Good Practice: Fiscal reports include two of the following reconciliations: (i) fiscal balance and financing, (ii) debt issued and debt holdings, and (iii) financing and the change in the stock of debt.

Advanced Practice: Fiscal reports include all three of the following reconciliations: (i) fiscal balance and financing, (ii) debt issued and debt holdings, and (iii) financing and the change in the stock of debt.

75. The practices under this principle are defined against the three criteria above relating to the reconciliation of fiscal data. Basic practice requires one of these criteria to be met, good practice two criteria, and advanced practice all three criteria.

76. To meet the basic practice requirements, most countries are likely to apply the fiscal balance to net financing reconciliation criterion, which is the most common of the three tests. This reconciliation is usually included in the government’s main fiscal tables. It explains the difference between “above-the-line” transactions (comprising all revenue, expense, and net investment in nonfinancial assets) and “below-the-line” transactions (comprising the net acquisition of financial assets and the net incurrence of liabilities). While the above-the-line deficit relies solely on government reporting, the amount of net financing can be verified externally, using the monetary survey prepared by the central bank. Reconciliations should explain any difference between these two measures and acquisitions of financial assets that occur below the line that may increase net financing requirements but will not have any impact on the fiscal balance. Under accrual accounting, there is usually a reconciliation (provided in the notes) of the cash flow statement with the operating statement and the balance sheet.

77. To meet the good practice requirements, the second most common reconciliation test is the comparison of government debt liabilities to private-sector debt assets. This test should provide the reconciliation of the data between the debtor (debt issued) and the creditor (debt holdings).57 These data can also be compared with the monetary survey and balance of payment statistics prepared by the central bank and the national statistics agency. If necessary, they can be further cross-checked against the balance sheets of creditor entities. Such cross-checks should verify that the government’s reported debt levels are accurate, but differences may still arise for several reasons. For example, the coverage of reported general government debt may be broader than the definition used by a country’s debt management office (e.g., if the debt of state-owned enterprises/public corporations is included within the general government boundary) or valuation methods may differ (e.g., because the government reports debt on face value, but the counterparties report at market value).

78. At the level of advanced practice, the government should also provide a reconciliation of stock-flow adjustments (see Box 2.25 for Finland example). This information is usually provided in the operating statement as “other economic flows.” These flows comprise two categories: (i) holding gains and losses such as the valuation changes due to variations in exchange rates on external debt, and interest rate variations that can change the market value of debt, and (ii) changes of volume such as a reclassification of previously private or public sector debt within the general government (which often is not recorded above the line), or a write-off of public debt.

Box 2.25.Finland: Reconciliations of Fiscal Data

Fiscal statistics in Finland include all the three reconciliations required under the advanced practice of this principle of the Fiscal Transparency Code.

The reconciliation between the fiscal balance and financing is compiled from the quarterly financial and nonfinancial accounts and is published by Statistics Finland on the National Summary Data Page of Finland in line with the Special Data Dissemination Standards (SDDS) of the IMF.

The reconciliation between the financing and the change in the stock of debt (Maastricht definition) is published in line with the EU’s Excessive Deficit Procedure (EDP) notifications. The change is calculated on the following formula: Change in the Stock of Debt = Net Borrowing/Lending (opposite sign) + Net Acquisition of Financial Assets + Adjustments + Statistical Discrepancy. The adjustments include, among others, the other liabilities (derivatives and accounts payable), revaluations related to changes in the exchange rate, and the difference between interest accrued and interest paid.

The stock-flow reconciliation of the financial balance sheet as defined in the GFSM is also published. The stocks reconciliation is calculated on the formula: Opening balance sheet value + transactions+ other economic flows = Closing balance sheet value (see Figure 2.25.1).

Figure 2.25.1.Stock Flow Reconciliation of the Financial Balance Sheet, 2015

(Percent of GDP)

Sources: IMF GFS database. For charts: https://www.stat.f/index_en.html.

The debt issued and debt holdings of the central government are published monthly by the State Treasury. The data are published for long-term debt and short-term debt.

Principle 1.3.3. Historical Revisions Major revisions to historical fiscal statistics are disclosed and explained.

79. The magnitude and frequency of revisions to fiscal statistics are often used to gauge data accuracy and reliability; they should be disclosed and explained. Revisions may be critical if they exceed, say, one percentage point of GDP. They may have a significant influence on how the accuracy, reliability, and transparency of fiscal data are perceived. Revisions may arise for several reasons, which include:

  • Correction of errors and omissions in initially reported data. Errors and omissions can occur in fiscal statistics when various sources are used to compile “above-the-line” and “below-the-line” data. They can result from differences in the time of recording of information or in valuation methods (e.g., one source of data uses the cash basis of recording while the other uses the accrual basis).

  • Incorporation of improved and more comprehensive source data. There is often a trade-off between the timeliness and periodicity of data and its reliability. Government statisticians may be put under pressure to base their first estimates on incomplete data sources and replace these with better source data as these become available. Initial estimates of data may be revised because of increases in the number of reporting entities or quality checks performed after the data have been disseminated. A typical example of the later is the benchmarking of quarterly samples of data to annual data when the annual universe of data becomes available. Government statisticians should be encouraged to develop comprehensive revision policies that explain clearly how frequently data are revised due to the availability of more complete and reliable sources of data.

  • Adoption of new or revised statistical methodologies. The international statistical community continues to put major efforts into preparing and promoting improved methodological manuals and guidelines for macroeconomic statistics, such as the United Nations’ System of National Accounts (SNA 2008), the 2010 European System of Accounts (ESA 2010), and the GFSM 2014.58 Such initiatives may require countries to make substantial major revisions to their existing data. Moreover, developments in the compilation of underlying source data systems, such as the adoption of IPSAS, may also require revisions to historical data to maintain comparability and consistency. A transparent revisions policy is an important aspect of good governance in statistics and contributes to public understanding and trust in fiscal data. A policy to incorporate important changes to statistical concepts, definitions, and classifications only at wide intervals—for example, every five years—may be required to establish stability in a data series.

Levels of Practice Under Principle 1.3.3

Basic Practice: Major revisions to historical fiscal statistics are reported.

80. Basic practice requires that a note to the data should alert users that earlier reported fiscal statistics have been revised and that the revisions were significant. Revisions to fiscal data should follow an established set of policies and practices and should be regularly published, either annually or semiannually. Published data should clearly indicate whether the numbers are provisional, revised, updated, or final. Where fiscal data are reported as provisional, this practice should be clearly indicated and advance notice should be given on the expected planned changes to the data under the revision policy.

Good Practice: Major revisions to historical fiscal statistics are reported with an explanation for each major revision.

81. Good practice requires, in addition, that an explanation of any major revisions to historical fiscal data be provided for users. Information should be provided to users on the reasons for these revisions. Information should be provided if there have been changes in methodology—for example, changes in the base year, major expansions of sample size, introduction of alternative data sources, and/or a reclassification of transactions or institutional units. A note should also be included disclosing the impact of such changes on the treatment of transactions or stock positions and their estimated fiscal consequences.

Advanced Practice: Major revisions to historical fiscal statistics are reported with an explanation for each major revision and a bridging table between the old and new time series.

82. The advanced practice requires, in addition, that a bridge table be provided to reconcile the originally reported fiscal data and the revised data. This analysis should quantify the impact of specific revisions/ changes in fiscal statistics. Some countries present explanatory notes to tables or time series of fiscal data indicating whether the information is preliminary or final, and often indicate in footnotes when users should expect the preliminary data to be revised and made final (see Box 2.26 for Portugal example).59

Box 2.26.Portugal: Historical Revisions to Fiscal Data

Portugal discloses revisions to fiscal statistics in later vintages of published data. The country is required to report fiscal data to Eurostat twice a year (in April and October), in compliance with the EU protocol on the Excessive Deficit Procedure (EDP). Revisions to the data for general government deficit and debt have often exceeded the EU average by large margins. When fiscal statistics for each successive quarter within a given year are compiled, the figures for previous quarters are revised; otherwise, quarterly figures are revised at the time of the EDP notification (to ensure consistency with annual figures). Changes are explained in press releases whenever significant. The revision policy for nonfinancial accounts is presented and explained in Direção-Geral do Orçamento’s website.

Portugal’s general government deficit and debt figures have been revised up significantly over recent years mainly because of reclassifications of SOEs and PPPs within the general government perimeter (see Figures 2.26.1 and 2.26.2). Other significant changes that affect historical fiscal data are published and explained. When a new base year for the national accounts is introduced every five years, it is explained in detail to the public. Changes in the composition of the general government and its subsectors—for example, the reclassification of public corporations—are communicated and explained to the public in press releases.

Figure 2.26.1.Revisions to Government Deficit

(Percentage of GDP)

Figure 2.26.2.Revisions to Gross Government Debt

(Percentage of GDP)
Source: Portugal FTE, based on Eurostat data in 2012. (IMF, 2014c; http://www.imf.org/external/np/fad/trans/).

Dimension 1.4. Integrity of Fiscal Reports. Fiscal statistics and financial statements should be reliable and subject to external scrutiny and facilitate accountability.

83. It is essential for fiscal transparency that fiscal data are reliable and subject to effective external scrutiny. In particular, the three principles under this dimension specify that:

  • the fiscal information is prepared and disseminated in accordance with internationally accepted standards such as the GFSM 2014 and data dissemination standards for fiscal statistics, and IPSAS for financial statements (1.4.1);

  • financial statements are subject to a published audit by an independent supreme audit institution, which validates their reliability (1.4.2); and

  • information provided in fiscal reports at all stages of the budget cycle are comparable, and any differences in the data presented are clearly explained (1.4.3).

Table 2.5 provides a list of relevant standards, norms, and guidance material related to dimension 1.4 of the Code.

Table 2.5.Relevant Standards, Norms, and Guidance Material
Standards/Guidance MaterialBrief Description
IMF’s Data Dissemination StandardsThese standards are designed to enhance the dissemination of economic and financial data. They are the General Data Dissemination System (GDDS); the Special Data Dissemination Standard (SDDS); the SDDS Plus; and the enhanced GDDS (e-GDDS).

https://www.imf.org/en/About/Factsheets/Sheets/2016/07/27/15/45/Standards-for-Data-Dissemination

Guides on the use of e-GDDS, SDDS, and SDDS Plus can be found at: http://dsbb.imf.org/Pages/GDDS/Home.aspx

http://dsbb.imf.org/Pages/SDDS/Home.aspx

http://dsbb.imf.org/Pages/SDDS/Home.aspx?sp=y
IMF’s Data Quality Assessment Framework (Generic and for Government Finance Statistics)Provides a flexible structure for the qualitative assessment of data, including financial statistics, linked to the system of Reports on Standards and Codes (ROSC).

http://dsbb.imf.org/pages/dqrs/dqaf.aspx
International Standards of Supreme Audit Institutions (ISSAI)These professional standards and best practice guidelines for public sector auditors have been endorsed by the International Organization of Supreme Audit Institutions (INTOSAI).

Auditors using the ISSAI as auditing standards may refer to them in one of two principal ways: (i) audit reports may state that the audit was conducted in accordance with a national standard based on or consistent with the Fundamental Auditing Principles (ISSAIs 100–999) of the ISSAI; and (ii) audit reports may state that the audit was conducted in accordance with the ISSAI.

http://www.intosai.org/about-us/issai.html
PEFAIncludes two related indicators: PI-28.1 on the coverage and comparability of reports; and PI-30.4 on Supreme Audit Institution’s independence. (PEFA, 2016b)

www.PEFA.org.
The Mexico Declaration on SAI IndependenceThis declaration was approved at the XIXth Congress of INTOSAI, Mexico 2007. It defines eight core principles on SAI independence.

http://www.intosai.org/issai-executive-summaries/view/article/issai-10-the-mexico-declaration-on-sai-independence.html

Principle 1.4.1. Statistical Integrity Fiscal statistics are compiled and disseminated in accordance with international standards.

84. Confidence in fiscal statistics depends on the standards followed for their dissemination, and the independence and professionalism of the agency producing the statistics. In advanced economies, the statistical agencies are normally responsible for the compilation of official fiscal statistics, based on data provided by government bodies. In most other countries, the ministry of finance is responsible for producing fiscal statistics, with the statistical agency taking a secondary role.60 Fiscal statistics are often at the center of political debate, which exposes them to political and other external interference. Users of such data therefore require assurances on two main elements: (i) the integrity of the statistical agency, and the ethical standards of its staff; and (ii) the statistical policies and practices.

85. Institutional integrity requires that statistics be produced on an impartial basis and be guided by professional principles and standards. To achieve these objectives, the agency compiling fiscal statistics should adhere to the internationally accepted practices regarding (i) professional independence and ethical behavior of the statistics producing agency; and (ii) transparency in selection, compilation, and dissemination of fiscal data (Box 2.27).

Box 2.27.Professional Practices of Fiscal Statistics Producing Agency

The terms and conditions under which the statistics are produced should be in accordance with professional independence. Such an outcome is usually obtained when a law or code supports the independence of the statistics-producing agency; prohibits interference from other government agencies in the compilation and/or dissemination of statistical information; and ensures that the selection, tenure, and reporting arrangements of the agency’s head are supportive of professional independence (e.g., his/her tenure does not usually coincide with that of the government and his/her appointment and removal follow transparent processes that are clearly defined in a law or code).

Professionalism should be actively promoted and supported within the agency. Recruitment and promotion procedures should be based on relevant aptitudes and skills; provision of specific courses and on-the-job training in statistical methodology and compilation; processes and activities in the workplace that promote a culture of professionalism (e.g., professional accreditation of staff, peer review of statistical work); and the publication of relevant research.

The policies and practices of the fiscal data-producing agency and its employees should be guided by ethical standards. Staff guidelines should outline the correct behavior when the agency or its staff members are confronted with potential ethical challenges, such as con-ficts of interest. They should also provide guidelines that guard against the misuse or misrepresentation of statistics and should build a strong culture of ethical standards within the statistical profession that discourages political interference.

The selection of data sources and statistical techniques as well as decisions about dissemination should be informed solely by statistical considerations. For example, the choice of source data (e.g., from surveys and administrative records) should be based on clearly defined measurement objectives and data requirements.

There should be a formal policy to deal with cases of data misinterpretation or the misuse of statistics. The data-producing agency should actively monitor media coverage of its data and comment publicly and in a timely manner on erroneous interpretations or misuse of the statistics in the media and other forums.

Fiscal statistics compilation and dissemination practices should be transparent. This transparency requires that (i) the terms and conditions under which statistics are collected, processed, and disseminated be available to the public, in the form of relevant agency publications and/or websites, or official speeches by the head of the agency; (ii) access to statistics by cabinet members or government agencies prior to their official release be publicly identified; and (iii) information be provided on all the statistical products of the government, whether these are published by the statistical agency itself or another ministry or agency of the government.

Source: IMF staff.

Levels of Practice Under Principle 1.4.1

Basic Practice: Fiscal statistics are disseminated in accordance with international standards.

86. Basic practice requires the adherence to international data dissemination standards in the disclosure of fiscal statistics. As part of its mandate to conduct global financial surveillance, the IMF has established standards for the dissemination of data: the Special Data Dissemination Standard (SDDS) was adopted in 1996 and the General Data Dissemination System (GDDS) in 1997; subsequently the SDDS Plus was established in 2013.61 These standards guide the provision of data to the public, and the adherence to them is expected to enhance the availability of timely and comprehensive statistics and therefore contribute to the pursuit of sound macro-economic policies. The SDDS is also expected to contribute to the improved functioning of financial markets. Specifically, in relation to fiscal data, the standards require the disclosure of

  • a statement of operations providing the main components of revenue, expenditure, and financing, consistent with the GFSM framework, as discussed in Principle 1.1.3;

  • a breakdown of government gross debt, by maturity, residency of counterparty, instrument, and currency; and

  • extensive metadata on the above data, following the template defined in the IMF’s Data Quality Assessment Framework (DQAF).62

Good Practice: Fiscal statistics are compiled by a specific government agency and disseminated in accordance with international standards.

87. Good practice, in addition, requires that a specific government agency is assigned the responsibility to compile and disseminate fiscal statistics (see Box 2.28 for Romania example). This practice provides some operational independence for the compiler of fiscal statistics and encourages the introduction of policies conducive to statistical integrity and professional independence. It also provides for a more transparent delineation among the producers of source data, the statistical data compilers, and the potential users of such data. Benefits of this delineation include a more independent analysis of the quality of upstream data and procedures and mitigation of the risk of political interference in the production of statistics.

Box 2.28.Romania: Dissemination of Fiscal Statistics

The National Institute of Statistics (NIS) is a semiautonomous body that oversees the compilation of the Government Finance Statistics. The production of fiscal statistics is undertaken under a protocol agreed between the NIS, the Ministry of Public Finance, the National Bank of Romania, and the National Prognosis Commission.

The protocol regulates the cooperation arrangements among the key stakeholders who participate in the compilation of Government Finance Statistics and compliance with international regulations and standards. The protocol also specifies the data input and reconciliation requirements for each stakeholder to comply with the ESA Transmission Programme and the European Commission Excessive Deficit Procedure (EDP), for which the NIS acts as the reporting authority.

Sources: National Institute of Statistics, Romania; and http://www.insse.ro/cms/en.

Advanced Practice: Fiscal statistics are compiled by a professionally independent body and disseminated in accordance with international standards.

88. Advanced practice, in addition, requires the professional independence of the agency in charge of compiling and disseminating fiscal statistics (see Box 2.29 for Canada example). The criteria to ensure such independence are discussed in Box 2.27.

Box 2.29.Canada: Ensuring Statistical Integrity

Statistics Canada is a professionally independent agency whose main responsibilities are regulated by the Statistics Act of 1985. The agency provides statistical services for the whole of Canada and its provinces. Statistics Canada has two main objectives: (i) to provide statistical information and analysis about Canada’s economic and social structure, and (ii) to promote sound statistical standards and practices. It has legal and institutional frameworks that protects confidentiality and ensures the integrity statistical reporting. The agency has gained the public trust by being objective and providing guidelines on the ethical conduct for its staff.

The compilation and dissemination of fiscal statistics by Statistics Canada follow the principles and standards set out in the GFSM 2014 and SDDS Plus. The advance release calendar published on the SDDS web page indicates the dates on which statistics on general government operations and debt will be published. Fiscal statistics are published in both English and French, Canada’s two official languages.

The information in the press release is provided to a small number of staff of the Department of Finance, the Office of the Privy Council, and the Bank of Canada for preparation of ministerial briefings in the afternoon before official publication of fiscal statistics. Information on major changes in practices and any rebasing of data is provided in discussion papers, meetings, on the Statistics Canada website, and with the data release.

Source: Canadian authorities.

Principle 1.4.2. External Audit Annual financial statements are subject to a published audit by an independent supreme audit institution, which validates their reliability.

89. An independent and published audit of the integrity of the financial information prepared by the government is one of the most important safeguards of fiscal transparency. It provides the legislature and citizens with a written and publicly available annual audit report, prepared by an institution—the SAI—independent of the executive. The SAI’s report should be widely disseminated both to the legislature and to the public at minimal cost, or through the Internet at no cost, together with a summary of the auditor’s main findings.

90. SAIs are national institutions responsible for auditing the government’s annual financial statements and other fiscal reports. The legal mandate, reporting relationships, and effectiveness of SAIs vary widely among countries, reflecting different institutional settings, political structures, and levels of economic and social development (Shand, 2013; World Bank, 2001). Table 2.6 describes the three major models of SAI that are found worldwide. Regardless of variations in their governance structure, the primary purpose of SAIs is to oversee the regularity and prudence of the management of public funds and the quality and credibility of the government’s reported financial data and make its assessment public.

91. An SAI should be given a clear legal mandate, independent of the audited entities, and be adequately resourced to carry out its mandate. The Mexico Declaration on SAI Independence63 defines eight core principles on SAI independence, which, briefly stated, are (i) an appropriate constitutional or legal framework, (ii) functional and professional independence, (iii) a broad mandate and full discretion to perform its duties, (iv) unrestricted access to information, (v) rights and obligations to report on its work, (vi) freedom to decide on the content and timing of audit reports and their dissemination, (vii) effective mechanisms for following up on the SAI’s recommendations, and (viii) financial and administrative autonomy, and the availability of appropriate human, material, and monetary resources.

Table 2.6.Three Major Models of Supreme Audit Institutions
ModelMain CharacteristicsCountries
Judicial or NapoleonicThe SAI, usually called the “court of accounts” or “chamber of accounts,” is part of the judiciary and is independent from the legislature and the government. However, it assists the legislature and the government in regulating public finances. More specifically, it assesses the compliance of revenue collection and expenditure operations with laws and regulations. It audits financial reports prepared by the government and its agencies and, in some cases, reports of other public entities such as the legislature, state owned enterprises, and local governments.France, Italy, Spain, Portugal, Turkey, most Francophone and Lusophone African countries, and most Latin American countries
Parliamentary or WestminsterThe SAI, usually the office of an auditor general, is an independent body that reports to the legislature. It submits periodic reports on the financial statements and operations of government entities.Most Commonwealth countries and the United States
BoardThe SAI comprises a board, the members of which take decisions on a collegial basis. Its reports and opinions result from the board’s deliberations and are submitted to the legislature.Germany, the Netherlands, Argentina, Indonesia, Japan, and Korea
Source: IMF staff.

92. The validation of the reliability of the annual financial statements requires that the SAI provide an unqualified opinion after a rigorous audit based on international auditing standards. An unqualified opinion is given when the auditor is satisfied that the statements have been prepared using acceptable accounting standards and policies, that they comply with statutory requirements and regulations, that the view presented by the financial statements is consistent with the auditor’s knowledge of the agency being audited, and that there is adequate disclosure of all material matters relevant to the financial statements. If these standards are not met, the auditor may give the audited entity a qualified or adverse opinion (Table 2.7). Transparency standards require that such opinions are made available to the public.

Table 2.7.The Four Audit Opinions on Financial Statements
OpinionInterpretation
Unqualified OpinionThe financial statements are presented fairly, in all material respects, in accordance with the accounting standards.
Qualified OpinionThe auditor detected material, but not pervasive, misstatements, or obtained insufficient evidence on which to base an opinion, and concluded that undetected misstatements could be material, but not pervasive.
Adverse OpinionMisstatements are material and pervasive.
Disclaimer of OpinionThe auditor could not obtain sufficient evidence on which to base an opinion and concluded that undetected misstatements could be material and pervasive.
Source: IMF staff.

Levels of Practice Under Principle 1.4.2

Basic Practice: An independent supreme audit institution publishes an audit report on the reliability of the government’s annual financial statements.

93. As a basic practice, the SAI should be independent and publish an annual audit report indicating whether the government’s financial statements comply with the related laws and regulations. This audit report should state whether the resources appropriated by the government were used in the manner approved by the legislature in the annual budget, any supplementary budgets, and related fiscal legislation. This so-called compliance audit focuses on determining whether the budget was executed as approved by the legislature. It provides an assessment of the accurate representation and compliance of government financial operations in accordance with the regulatory and financial reporting framework. The scope of this audit could include, in addition to the audit of financial statements, various specific financial reports, such as reports on budget execution, the implementation of programs, or specific categories of revenue or expenditure.

Good Practice: An independent supreme audit institution publishes an audit report stating whether the government’s annual financial statements present a true and fair view of its financial position and without a disclaimer or adverse audit opinion.

94. Good practice, in addition, requires that the SAI’s opinion be prepared in accordance with national auditing standards and that the government’s financial statements are free from significant misstatements. In this case, the SAI needs to conduct a financial audit to ascertain the reliability of the annual financial statements and express an opinion, which, if prepared in accordance with the national auditing standards, is a strong indication of the quality of the audit (see Table 2.7). The auditor must have performed the investigations and collected the evidence required by the national auditing standards to prepare its opinion and must not have detected significant issues that would alter the quality of the information provided by the government to the legislature and the public (see Box 2.30 for Uganda example). The audit report should also identify any material gaps between the reporting standards and the statements prepared by the government.

Box 2.30.Uganda: External Audit

The Office of the Auditor General (OAG) was established by the 1995 Constitution and the National Audit Act 2008 to provide independent assurance on the use of public resources. The law guarantees the independence of the OAG by ensuring that she/he is “under the direction of no person or authority, and can only be removed from office by the President, following the recommendations of a specially appointed tribunal, for misbehavior, infirmity, or incompetence.”

The OAG audits the annual accounts of all public entities (92 ministries and agencies, 102 statutory corporations and state-owned enterprises, and 307 local government entities). Its annual audit reports are presented to Parliament within six months of the end of the fiscal year, as required by law. Audit reports are published simultaneously on the OAG’s website. Over the years, the proportion of unqualified audit opinions of audited entities has been steadily rising, from less than 50 percent in 2011/2012 to 83 percent in 2015/2016.

Sources: Office of the Auditor General, Uganda; Uganda FTE (IMF, 2017e; http://www.imf.org/external/np/fad/trans/).

Advanced Practice: An independent supreme audit institution publishes an audit report consistent with international standards, which states whether the government’s annual financial statements present a true and fair view of its financial position and without major qualifications.

95. Advanced practice requires that the SAI’s opinion be prepared in accordance with international auditing standards64 and the government’s financial statements are free from major qualifications65 (see Box 2.31 for New Zealand example). As discussed in Table 2.7, the auditor expresses a qualified opinion when there are significant misstatements and/or doubts about the quality of data in government’s financial statements. This requires collecting sufficient evidence to underpin the opinion. In addition, the auditor should have concluded that the framework used by the government to produce the financial information prevents the occurrence of significant errors or has the capacity to quickly detect and resolve them. The effectiveness of internal control, internal audit, and the quality of the FMIS is, therefore, key factor considered by the auditor in preparing his/ her opinion.

Box 2.31.New Zealand: Audit Opinion of the Controller and Auditor-General

The Controller and Auditor-General (CAG) of New Zealand audits the financial statements of the government of New Zealand. The CAG, in his/her audit opinion, indicates whether the government’s financial statements comply with generally accepted accounting practice (GAAP) in New Zealand and fairly reflect the government’s financial position. For example, the CAG concluded that the financial statements for the year ended June 30, 2017, comply with New Zealand GAAP and present a true and fair view of the government’s financial position.

Source: Controller and Auditor General, New Zealand.

Principle 1.4.3. Comparability of Fiscal Data Fiscal forecasts, budgets, and fiscal reports are presented on a comparable basis, with any deviations explained.

96. Effective fiscal management and accountability require consistency and comparability of ex ante and ex post fiscal information. This means that budget execution reports, fiscal statistics, and financial statements should be prepared and presented on the same basis as fiscal forecasts and budgets. The comparability of forecast and outturn data is especially important for those countries that have adopted numerical fiscal rules or targets, as any methodological discrepancies between the two can result in the rules or targets being unintentionally missed. The integrity and transparency of fiscal data are further enhanced if different types of fiscal reports are presented on a comparable basis. Data sources that are fully reconciled also help reduce the risk of “indicator shopping” by governments, which seek to focus attention on the figures that most flatter the current fiscal position (Irwin, 2012).

97. Still, in many countries, fiscal forecasts, budgets, statistics, and accounts are prepared on different bases. Box 2.32 discusses the different approaches and standards used in the preparation of these various fiscal documents. This divergence in the coverage, classification, and accounting bases of the various documents partly reflects that they are often produced by different institutions, for different purposes and constituencies, and are based on different standards. However, in all cases, it should be possible to reconcile information presented in different documents through bridging tables that present the main adjustments needed to move from one summary measure of fiscal performance to another.

Box 2.32.Major Sources of Difference among Fiscal Forecasts, Budgets, and Fiscal Reports

Institutional coverage of reports: Budgets typically cover those institutions specified as “budgetary” in the national constitution or budget law. Statistical standards focus on all institutions considered to be engaged in nonmarket activity, a group that is typically broader than just those entities included in the central government’s budget. Finally, accounting standards require the consolidation of all entities regarded as “controlled” by government, which is often an even broader group, as it includes public corporations. Sometimes, medium-term fiscal forecasts and ex post fiscal reports and statistics are provided for the general government (e.g., in EU member countries).

Accounting basis of reports: Most countries have cash or obligation-based budgets, while financial statements and fiscal statistics are increasingly being prepared on an accrual basis. These differences could lead to large discrepancies among various reports—for example, arrears may be reported in accrual terms in debt management reports but ignored in cash accounting. This discrepancy can also lead to underprovisioning for the full, long-term costs of government policy decisions.

Reporting standards and policies: Lack of clarity in reporting standards and policies could give rise to differential treatments of financial transactions and balances, including how the various fiscal reports will treat above- and below-the-line data for calculating headline revenue, expenditure, and fiscal balance figures. Similarly, uncertainties around the nature of acquisition of some financial assets can lead to differences in the treatment of bank recapitalizations, equity injections, and debt assumptions that in turn result in discrepancies between financial accounts and fiscal statistics.

Treatment of balance sheet gains and losses: Only a few countries (e.g., Australia, Iceland, New Zealand, and the United Kingdom) make explicit provision in budgets for depreciation, impairments, or other changes in the value of assets and liabilities. Countries that have fully adopted GFSM 2014 or IPSAS should (and increasingly do) recognize valuation gains and losses in government assets and liabilities in their final accounts and, under IPSAS, their reported fiscal balance.

Supplementary budgets: The use of supplementary budgets that change appropriated amounts can be a source of confusion when comparing fiscal outcomes with budgets. Most final accounts include a comparison of the budgeted amounts and the actuals, but, in practice, the comparison is often made using data for the revised appropriation rather than the original appropriation. Ideally, data on both original and revised appropriations should be provided in the final accounts for comparison purposes.

Source: IMF staff.

98. These differences/deviations among various fiscal documents may exist for valid reasons but should be explained and reconciled. Full comparability of prospective and retrospective fiscal data within countries will only be achieved when underlying national standards and systems used to generate the data are aligned or integrated. Until then, there is a need to provide explanations and reconciliations among the different measures for a core set of fiscal aggregates—namely, revenue, expenditure, the fiscal balance, and public debt. For example, if the government’s fiscal rule is on a general government accrual basis, the budget documentation should include a bridging table mapping the national cash revenue, expenditure, and balance measures to the general government measures, detailing adjustments to account for subnational governments, cash accrual adjustments, and any other differences.

99. Undertaking such reconciliations will require cooperation among various government agencies and an agreement on a common basis of reporting. For example, in the European Union, ESA 2010 is the agreed basis for reporting fiscal statistics. In other countries, national standards could provide for a common basis. Importantly, this does not mean that all agencies need to adopt a common standard but simply that they provide a reconciliation table to explain differences from the agreed basis of reporting. Generally, most differences can be identified/explained by a small number of high-level adjustments.

Levels of Practice Under Principle 1.4.3

Basic Practice: At least one fiscal report is prepared on the same basis as the fiscal forecast/budget.

100. Basic practice requires that at least one of the fiscal reports should be directly comparable to the budget or fiscal forecast prepared by the government before the beginning of the fiscal year. The three reports are the budget execution report, fiscal statistics, or the final accounts. This comparison should cover at a minimum the high-level fiscal aggregates but should preferably be provided at detailed levels as well. The comparison is more meaningful if the ex post fiscal reports also provide explanations for large variations between the budget/forecast and the outturns. However, many low-income countries and emerging market economies prepare fiscal reports that are either not comparable to the budget or can be compared with the budget only for the main administrative headings (see Box 2.33).

Box 2.33.Comparison of Fiscal Reports with the Budget

Out of a set of 91 countries for which PEFA assessments are available, only 10 countries prepare budget execution reports that can be directly compared with the budget, and 9 countries prepare reports that allow comparison with the budget but only with some aggregation. Forty-one countries publish reports that can be compared with the budget only for the main administrative headings, and 10 countries publish reports that cannot be compared with the budget even for the main administrative headings.

Figure 2.33.1.Comparability of Reports with Budget Estimates

(Percentage of Total)

Source: PEFA Scores Data Set (2005–16).

Good Practice: Fiscal forecast/budget and outturn are comparable, and the outturn is reconciled with either the fiscal statistics or the final accounts.

101. Good practice, in addition, calls for a reconciliation between the budget outturn report and either the financial accounts or fiscal statistics. This requires that the budget outturn reports—which are prepared by the ministry of finance and are already directly comparable to the original budget—are reconciled with either the financial accounts/statements prepared for publication and audit or the fiscal statistics prepared by the statistician. These reconciliations should at a minimum be provided for the main revenue and expenditure aggregates, as well as the fiscal balance.

Advanced Practice: Fiscal forecasts/budget and outturn are comparable, and the outturn is reconciled with both fiscal statistics and final accounts.

102. Advanced practice requires that the budget outturn report is reconciled with all the other fiscal reports. A desire to promote greater transparency and accountability has prompted some countries to fully align the reporting standards across budgets, accounts, and statistics. To provide a consistent fiscal picture at all stages of the budget process, these countries have moved to harmonize or align the reporting basis across different fiscal documents (see Box 2.34 for the examples of Australia and New Zealand).

Box 2.34.Australia and New Zealand: Aligning the Reporting Standards across Budgets, Statistics, and Accounts

One of Australia’s main ex post accountability documents is the Final Budget Outcome, which is published within three months of the end of the financial year. This document is prepared on the same basis as the budget and the midyear update and provides a direct comparison of the outcome to the budgeted amounts, both for the flows (revenues, expenditures, and balances) and for the stocks (net debt and net financial worth), with all major deviations explained. It also provides a direct comparison with the financial statements of the general government sector, as well as the nonfinancial and financial public corporation sectors. All fiscal information is based on common reporting standards, largely in line with GFSM 2001.

New Zealand produces its audited annual report three months after the end of the financial year. This report provides a detailed comparison of budgeted amounts and outturns, as well as brief analysis of the major variations, and a description of the progress the government has made in implementing its fiscal strategy, as laid out in the (prebudget) fiscal strategy report. Budgets and forecasts are prepared on the same accounting basis (mainly IPSAS) as accounts. Forecasts also comply with New Zealand’s accounting standard that, among other things, requires the forecasts be prepared using assumptions that are “reasonable and supportable,” internally consistent, and published.

Sources: Australian and New Zealand authorities.

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