Appendix 3. The Importance of Monitoring Both Gross and Net Debt

International Monetary Fund. Fiscal Affairs Dept.
Published Date:
September 2011
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In view of sizable variation in the level of sovereign assets across countries and over time, it is important to consider both gross and net debt when conducting analysis of fiscal policy and its sustainability (for definitions, see Box A3.1). Indeed, as routinely reported in the Statistical Appendix Tables to the Fiscal Monitor, some countries have very large asset holdings (e.g., Japan, Norway, and Saudi Arabia) and, as reported in the main text, asset purchases or sales in several countries have recently been reflected in significant changes in gross debt (see also Appendix 2 for revenues from privatizations).

Even at the aggregate level, changes in gross and net debt have also differed during the economic crisis. For advanced economies on average, gross debt has increased to a greater extent than net debt during the last three years. Part of the debt increase has been offset by a buildup of financial assets— including from financial sector support operations. Over the next five years, the opposite is expected: net debt is projected to increase faster than gross debt, reflecting a decline in financial assets. In emerging economies, while gross debt increased, net debt declined slightly in the last three years, implying that holdings of financial assets increased (Figure A3.1).

Figure A3.1.Change in General Government Debt

(Percent of GDP)

Sources: IMF staff estimates and projections.

Note: Weighted averages by GDP at purchasing-power parity.

Box A3.1.Debt Measures

The analysis uses the following definitions:

  • Gross debt. This captures all liabilities held in debt instruments (financial claims that require future payments of interest and/or principal by the debtor to the creditor). Under international statistical definitions, liabilities arising from equity and investment fund shares, financial derivatives, and employee stock options, as well as most contingent liabilities, are excluded from debt. The debt should be consolidated across government units so that any debt liability issued by one government unit but held by another government unit as a financial asset is netted out. One-off debt guarantees are not included in gross debt under the classification of 2001 Government Finance Statistics Manual (GFSM), unless the guarantee is called. Liabilities arising from promises to pay future pensions and other social security benefits are not included in debt (although on the asset side, holdings of pension funds may be reflected); it is recommended, however, that obligations for social security schemes be shown as a memorandum item. There is one exception to this: liabilities related to pension schemes for government or public sector employees are included in gross debt.

  • Net debt. This measure of net debt, following international statistical definitions, includes only financial assets held in debt instruments (excluding equity and financial derivatives). This avoids complications related to equity such as the difficulties of projecting future earnings. However, for countries with large equity holdings, this could present a misleading picture of their fiscal sustainability.

  • Debt, net of liquid assets. This subset of net debt includes only assets held in the most liquid instruments. In most countries, this would include currency and deposits on the asset side. In some cases other securities held for debt management purposes could also be included. Most countries would be able to report these data.

  • Net financial liabilities. This measure is defined as financial liabilities minus financial assets. It is equivalent to net financial worth, but with an opposite sign for convenience in the fiscal sustainability analysis. Balance sheet data are generally available for advanced economies, but data availability is a more serious constraint for most low-income and emerging market economies.

GFSM 2001 and the Public Sector Debt Statistics Guide (IMF, forthcoming) provide guidance on international statistical definitions and concepts.

Fiscal sustainability is commonly assessed by reference to gross debt. Data on gross debt are readily available, thereby facilitating fiscal monitoring and cross-country analysis. Gross debt also provides a better measure of fiscal vulnerabilities related to short-term liquidity and borrowing needs. Moreover, using gross debt in the sustainability analysis does not ignore the contribution from assets that have positive yields, as these bolster the capacity to service debt.

But there is a conceptual case for also conducting the fiscal analysis on a net basis. Focusing only on gross debt will not present a full picture of fiscal sustainability: a given level of debt is likely to be more sustainable in a country with large assets than in a country with few assets. When a government holds financial assets that can be used to service its liabilities, it is logical to include these in a sustainability assessment. Moreover, taking account of both liabilities and assets better reflects the cumulative consequences of past budget deficits and therefore facilitates a more complete reconciliation between stocks and flows in the fiscal accounts (see Appendix 4).

There are definitional differences across countries in the type of assets underpinning the net debt data. For some countries, the net debt data reported follow the Government Finance Statistics Manual (GFSM) 2001 definition accounting for all financial assets held in debt instruments. But more often, a narrower definition of net debt is applied taking account only of deposits on the asset side. Data constraints usually necessitate this more narrow focus, notably in emerging and low-income countries. Less commonly, for some countries the data reported actually reflect net financial liabilities taking account of all financial assets (including equity holdings) and liabilities.

The statistical international definitions of net debt and net financial worth provide a clear view on what assets to include. Net debt is calculated as gross debt minus financial assets corresponding to debt instruments (Box A3.1). Financial assets (and liabilities) that are not held in debt instruments— such as equity, investment fund shares, and financial derivatives—are excluded. Net financial worth, in contrast, is calculated as financial assets minus liabilities, including nondebt instruments such as equity and investment fund shares and financial derivatives. In some countries, data availability makes it necessary to focus on a subset of net debt, by including only very liquid assets such as government deposits.

Limiting the attention to assets and liabilities in debt instruments may be too restrictive for economic analysis. Intuitively, all financial assets that are liquid, marketable, valued appropriately, and available to meet future debt obligations should be taken into account. This would suggest that a wider focus on net financial worth may be appropriate for some countries. Liabilities and asset holdings are generally consolidated so that cross-holdings of instruments across different units are netted out. However, this is not always the case. For example, Japan does not fully consolidate intragovernment holdings (see Box A3.2).

Box A3.2.Fiscal Balance Sheet Concepts: An Illustration Using Japan’s Data

The difference between gross debt and net debt is particularly large for Japan. This box explains the difference using publicly available data from the Japanese national accounts for fiscal year 2009 and the concepts discussed in Box A3.1.1

At the end of FY2009, total financial liabilities for the general government amounted to 216 percent of GDP (on an unconsolidated basis). Gross debt, which is equal to total financial liabilities excluding nondebt liabilities (that is, shares and other equity) amounted to 210 percent of GDP. Japan also has substantial holdings of financial assets. Net financial liabilities, which are equal to financial liabilities minus financial assets, amounted to 107 percent of GDP. Net debt, which is calculated by subtracting from gross debt all assets in the form of debt instruments (that is, all assets except shares and other equities) was equal to 125 percent of GDP.

Some debt securities issued by the central government and the Fiscal Investment and Loan Program (FILP) are held as assets by the local governments and social security funds. Netting out cross-holdings of debt securities across the general government—which is the practice commonly followed in other countries—results in a consolidated general government gross debt equivalent to 192 percent of GDP. Consolidation has no impact on net debt, as the liabilities of one level of government have already been offset by the assets of another level in the course of calculating “unconsolidated” net debt. It is important to note that government debt securities that are held by public entities outside of the general government are not consolidated (and thus are included in the general government gross and net debt data).

Japan: Illustrative Calculation of General Government Balance Sheet Concepts(Percent of GDP)
Fiscal year 2009 (end-March 2010)
CentralLocalSocial securityUnconsolidatedConsolidated general
governmentgovernmentsfundsgeneral governmentgovernment1
Securities other than shares154.313.60.0167.9149.3
Shares and other equity3.
Financial assets50.915.542.4108.890.3
Currency and deposits5.
Securities other than shares2.60.422.725.67.1
Shares and other equities9.
Other financial assets22.60.17.630.330.3
Net financial liabilities123.223.2−39.2107.2107.2
Gross debt (excluding equity)2210.4191.8
Net debt (excluding equity)3124.5124.5
Sources: Economic and Social Research Institute, Japanese Cabinet Office; and IMF staff estimates.

Netting out central government securities and Fiscal Investment and Loan Program (FILP) bonds held by local governments and social security funds.

Excluding liabilities held in shares and other equity.

Gross debt minus financial assets, excluding shares and other equity.

Sources: Economic and Social Research Institute, Japanese Cabinet Office; and IMF staff estimates.

Netting out central government securities and Fiscal Investment and Loan Program (FILP) bonds held by local governments and social security funds.

Excluding liabilities held in shares and other equity.

Gross debt minus financial assets, excluding shares and other equity.

1 A complete consolidation exercise would require additional data. There may also be definitional issues related to the coverage of government, including the treatment of the Fiscal Investment and Loan Program, which are not addressed here.

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