II. Interrelations Among Macroeconomic Accounts
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Abstract

Macroeconomic statistics are the basic information used to appraise and forecast economic performance. Reliable statistics are thus indispensable to policy makers. Such statistics can be classified into four distinct, but related, categories: the national income and product accounts, the balance of payments, government finance statistics, and the monetary accounts. 1/ For countries in which there is considerable state ownership, it is also useful to have access to the accounts of state enterprises so as to be able to distinguish their activities from those of households. While the various categories of macroeconomic statistics highlight particular aspects of the economy, they should, in principle, use broadly the same basic concepts so as to form an interconnected system that is internally consistent. This workshop focuses on the most important concepts underlying the different sets of accounts and on the interconnections among them. Special reference will be made to the Hungarian data used in the workshop series.

Introduction

Macroeconomic statistics are the basic information used to appraise and forecast economic performance. Reliable statistics are thus indispensable to policy makers. Such statistics can be classified into four distinct, but related, categories: the national income and product accounts, the balance of payments, government finance statistics, and the monetary accounts. 1/ For countries in which there is considerable state ownership, it is also useful to have access to the accounts of state enterprises so as to be able to distinguish their activities from those of households. While the various categories of macroeconomic statistics highlight particular aspects of the economy, they should, in principle, use broadly the same basic concepts so as to form an interconnected system that is internally consistent. This workshop focuses on the most important concepts underlying the different sets of accounts and on the interconnections among them. Special reference will be made to the Hungarian data used in the workshop series.

Common Features of Macroeconomic Statistics

1. Residents and foreigners

The four sets of macroeconomic accounts relate to an economy defined to comprise all of its residents. Residents are those economic units which have a closer tie with the territory of the country than with any other country. Economic units that are not residents are referred to as nonresidents. The two expressions, resident and nonresident, need not have anything to do with nationality: a resident of one country may be a national of another.

To define residence, the following conventions have been used. Individuals residing permanently in a country are residents. Migrant workers are residents of the country in which they work if they have resided there for at least one year. A country’s government, including the activities it carries out abroad, such as diplomatic representation, is regarded as a resident of the home country. All enterprises operating in the national territory are classified as residents, even if they are partly or wholly foreign owned. Analogously, foreign branches and subsidiaries of resident enterprises are classified as nonresidents.

2. Economic transactions

The macroeconomic accounts represent a summary record of economic transactions. An economic transaction takes place when ownership of a real or financial asset is transferred, or a service is rendered, by one economic unit to another. In most cases, economic transactions involve exchanges: goods and services may be exchanged for financial assets (e.g., sold against money) or financial assets may be exchanged against other financial assets (e.g., a security may be sold for money). In some cases, goods and services or financial assets are transferred without an exchange taking place, for example, when medical supplies are provided free to the population of an area hit by drought. These transactions are also treated as having two sides: the movement of goods, services or financial assets on the one hand and an unrequited transfer on the other. Such transactions may take place either within one country or from one country to another.

In the national income accounts the concept of economic transactions is broadened to include certain transactions within the same economic unit. For example, a farmer may produce food for his own consumption, or an owner who occupies his own house is the recipient of housing services; in neither case is any payment made by the consumer or received by the producer. The recording of such transactions within the same economic unit is necessary, however, if the national income aggregates for production and consumption are to be comprehensive and comparable among countries. Therefore, the farmer is assumed to have sold his production, in his capacity as a producer, to himself, in his capacity as a consumer.

Similarly, the implicit rent of owner-occupied dwellings is included in both production and consumption.

The two sides of each transaction are referred to as flows, in the sense that they measure activity per unit of time (this contrasts with the concept of stock which measures the amount outstanding of a given aggregate at any point in time). These flows are normally classified as either nonfinancial (real) or financial. Nonfinancial flows refer to transactions that occur in the process of producing or acquiring goods and services, i.e., flows of goods, services, income and unrequited transfers. Financial flows include changes in financial assets and liabilities. Many financial transactions have no corresponding nonfinancial transaction, e.g., the exchange of one financial instrument for another.

Real and financial flows taken together record all incomes and expenditures of an economic entity (households, enterprises, or government). For any given entity or sector, the balance on nonfinancial transactions should, apart from statistical errors, be equal to the change in its financial assets and liabilities vis-à-vis the other domestic sectors and the rest of the world, e.g., a family’s excess of expenditure over its income must equal its dissaving or borrowing, or if a surplus, must equal its saving or lending.

With respect to the timing of transactions, in the national income accounts and balance of payments the convention is to record them when an obligation is incurred (typically when legal ownership of assets changes) rather than when it is settled, or on what is referred to as an accrual basis. In the case of Hungary, however, the balance of payments is on a cash basis. Government finance statistics, on the other hand, are generally recorded on a cash basis; this is the case in Hungary. Since monetary statistics are derived from balance sheets which are constructed in accordance with the rules of business accounting, they are also, in principle, on an accrual basis. They would, for instance, record liabilities before they are settled. However, since most transactions of banks are carried out immediately in cash this distinction is in general of little practical importance. The main exception in the case of Hungary relates to interest earned on bank deposits, which through late 1991, were paid at year-end rather than when they accrued.

National Income and Product Accounts and the Balance of Payments

1. National income and product accounts

The starting point for the national income and product accounts is the identity between output produced and the disposition of that output. The supply of goods and services in a given year may be viewed as the sum of domestically produced output and imports. The disposition of this supply is composed of aggregate expenditures by domestic residents on consumption and investment, plus the exports purchased by foreigners. In symbols:

Y+IM=C+Ig+X(1)

where:

  • Y = a measure of domestic output

  • IM = imports

  • C = consumption expenditure of households, enterprises, and government

  • Ig = gross investment expenditure of households, enterprises and government (including inventory changes); and

  • X = exports

  • Rearranging the above accounting identity, one obtains:

Y=C+Ig+(X-IM)(2)

Output, Y, can be defined in several ways. Gross domestic product (GDP) is a measure of the total value added in all resident producing units; it is similar (but not completely identical) to the output produced in the territory of a given country. The term gross implies that no deduction has been made for the consumption (depreciation) of fixed capital that is used up in current production. Once such a deduction is made, net domestic product (NDP) would be derived. 1/

Another output measure is gross national product (GNP). It is a measure of the income earned, whether domestically or abroad, by the factors of production owned by residents. More specifically, GNP is defined as GDP plus payments from abroad to residents for services of factors of production owned by residents but located outside the reporting country, less payments to foreigners for services of factors of production they own and that are located in the home country. The difference between GDP and GNP is called net factor income from abroad and may be positive or negative.

How Does the Concept of “Net Material Product” (NMP) Relate to GDP?

In centrally-planned economies the variable used as a measure of output is Net Material Product (NMP), which has its origins in the input-output tables underlying the central plan. The difference between NMP and GDP is primarily accounted for by the omission of depreciation and much of the value added of the nonmaterial service sector. Only those services connected with the distribution of physical products, such as shipping and storage and marketing, would, in principle, be included in NMP since such services are considered to be a “continuation” of material product. In addition, nonmaterial services used as inputs in production would implicitly be included as they are not recognized as inputs and thus are not netted out of NMP. Practices as to what constitutes a nonmaterial service, however, differ widely among countries. GDP can thus be constructed by adding to NMP depreciation and the total value added of non-material services, however defined, and subtracting from it non-material services used as an input in production so as to avoid the problem of double counting. In Hungary, in 1989 GDP was 24 percent higher than NMP.

Such payments and receipts relate to investment income, e.g., returns on direct investment and interest earnings (payments) on reserves and financial assets (liabilities); labor income, e.g., from migrant workers in so far as they are considered residents of their home countries rather than the country where they work; and rents on land and building and royalties (for books, films, music, etc.).

As a measure of changes in the income available to a country, GNP is superior to GDP, particularly where international factor income payments are large and fluctuate widely. As with GDP, net national product (NNP) can be derived by deducting depreciation.

The definition of output that is selected, thus, influences what is included in “X” and “IM” in equation (2). If Y is GDP, then exports and imports will include goods and nonfactor services. Adding net factor income from abroad, YF, to equation (2) we obtain GNP, i.e.,

GNP=Y+YF=C+Ig+(X-IM+YF)(3)

Factor Cost vs. Market Prices for Measurement of Output

The activity of government in the economy causes a discrepancy between the sum of all factor payments or incomes produced (valued at “factor cost”) and aggregate expenditure (valued at “market prices”). Because of the existence of indirect taxes and government subsidies, the final price paid in a transaction is different from the actual receipts of the factors of production involved. Specifically, indirect taxes net of subsidies are compulsory payments to the government which producers treat as an expense of engaging in production. In other words, these costs are deducted in the calculation of the operating surplus of enterprises. They are not, as are direct taxes, paid out of incomes of the factors of production. As a result, in order to move from the concept GDP, measured from the income side at factor cost, to the concept of GDP, measured from the expenditure side at market prices, the amount of net indirect taxes must be added back. In addition, in the case of Hungary there may be significant valuation differences related to, among other things, CMEA trading arrangements and the valuation of inventories.

Output data by sources of income are not readily available for Hungary (Tables 78 of the statistical appendix, however, contain output measured at factor cost by branches of economic activity). The figures below are estimated for illustrative purposes using the available information so as to highlight the differences between GDP measured from the income side at factor cost and from the expenditure side at market prices.

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Differs from households’ disposable income primarily as it excludes social benefits and other government transfers, and is calculated before the deduction of income taxes.

Obtained as a residual. Part of this surplus is paid by producers in income taxes and what is left over after tax payments represents property income in the form of dividends, interest, or retained earnings.

Obtained from Table 8 of the Statistical Appendix.

There is one other measure of output that may be useful, which is called gross national disposable income (GDI). To derive this, the value of net transfer payments from abroad, TR, is added to equation (3) to yield:

GDI=Y+YF+TR=C+Ig+(X-IM+YF+TR)(4)

GDI is the total income that is available to residents for spending on consumption and gross capital formation if they are not, on balance, receiving or providing any foreign financing. The importance of adding current transfers to factor incomes to measure adequately income available to an economy can be made clear by considering the residency status of migrant workers. If such workers are treated as residents of the country in which they work, their remittances to their home countries are classified as transfers; if they are treated as residents of their home country, they become factor payments. Using GDI as the measure of income, the income available to the countries making or receiving the transfers is not affected by whether the workers are classified as residents of one country or the other. Net national disposable income (NDI) can be derived by deducting depreciation from GDI.

The term in brackets on the right-hand side of equation (4) now includes exports and imports of goods and all services and net foreign transfers. This sum is equal to a broad definition of the external current account of the balance of payments, CAB. The three definitions of output and the corresponding concepts of external balance are shown in Box 3.

National Income and Product Accounts and the Current Account in the Balance of Payments

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Equation (2), (3), and (4) demonstrate that, whatever the definition of output that is used, any external imbalance must be reflected in a domestic imbalance in which residents’ expenditure on domestic and foreign goods and services—the sum of consumption and investment expenditure, which is often called absorption—either exceeds or falls short of domestic output.

Rearranging Equation (4):

GDI-A=X-IM+YF+TR=CAB(5)

where:

  • A = residents’ expenditure on domestic and foreign goods and services, i.e., C + Ig

Alternatively, the domestic imbalance can be rewritten in terms of an imbalance between saving and investment.

Given the definition of GDI, gross saving, Sg, can be defined as that part of GDI not consumed:

Sg=GDI-C(6)

Substituting equation (6) into (4):

Sg-Ig=X-IM+YF+TR=CAB(7)

Equation (7) indicates that to the extent that investment exceeds saving, it will be reflected in an external current account deficit. It should be emphasized that equations (5) and (7) are identities. Without additional information, no inference can be made from these equations as to whether the source of the imbalance was external (e.g., terms of trade deterioration) or domestic (e.g., expansionary financial policies).

Table 1 summarizes the various product and income concepts and the uses of disposable income as applied to the Hungarian economy in 1987–88. National product and income concepts were derived by adding to GDP (the measure of output conventionally used in Hungary) net investment income from abroad and external transfers as recorded in the balance of payments. 1/ Line 15 indicates that the excess of investment over saving was Ft –24 billion in 1988 and Ft –2.7 billion in 1988. While in principle these figures should be equal to the external current account deficit as recorded in the balance of payments, in practice they were not, particularly in 1988.

Table 1.

Hungary: Relationship of Income and Product Concepts

(In billions of forint at current market prices)

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Source: IMF Institute data base.

What accounts for these discrepancies? The Hungarian balance of payments is recorded on a cash basis, whereas the national accounts are recorded on an accrual basis. This could lead to substantial differences because of leads and lags in payment settlements. For example, if certain goods are exported in December but payment is not received until February of the following year, the national accounts would record the transaction in the year they were shipped while the balance of payments would record it in the following year. There may also be differences in coverage, valuation, and in classification. 1/ Finally, there may be statistical errors. Discrepancies such as those described above make it more difficult to appraise and forecast the economic performance of an economy by reducing the reliability of the statistical information. This is particularly so when there are large year-to-year swings in the size of these discrepancies.

It is useful to rewrite equation (7) in terms of the contributions of the different sectors of the economy to total saving. The conventional approach is to distinguish the government’s position from that of the rest of the economy: the intention here is to separate the net saving of the government, which broadly speaking are under the authorities’ control, and the net saving of the private sector which the authorities can influence only indirectly through various policy measures. In countries where state ownership of enterprises dominates and where the authorities can resort to extensive administrative controls over these enterprises, a different classification may be more appropriate in which the positions of households and enterprises are separately identified to reflect their different behavior. Sectorizing equation (7):

(SgH-IgH)+(SgE-IgE)+(SgG-IgG)=CAB(8)

where:

  • SgH = gross saving of households

  • IgH = gross investment of households

  • SgE = gross saving of enterprises

  • IgE = gross investment of enterprises

  • SgG = gross saving of government

  • IgG = gross investment of government

Procedures for calculating the sectoral nonfinancial transactions balances for the case of Hungary are discussed later in this chapter. It should, nevertheless, be noted here that the nonfinancial transactions balance of the government is equal to the overall budget balance after adjusting for capital transfers and net lending.

For purposes of economic analysis, equation (7) and (8) are frequently expressed in terms of proportions to total income or output so as to indicate the relative size of the imbalances of each sector as well as to facilitate inter-year comparisons. Moreover, by focusing on these ratios, the policy effort that needs to be implemented toward, for example, raising the rate of investment and an economy’s domestic saving effort, can more clearly be measured.

For example, using the figures in Table 1 one can derive the gross saving and investment ratios for Hungary in relation to GDP [lines 13 and 14, respectively, divided by line 1]. Notably, gross saving increased from 24.7 percent of GDP in 1987 to 25.2 percent of GDP in 1988 while gross investment, despite increasing in absolute terms, fell from 26.7 percent of GDP in 1987 to 25.2 percent of GDP in 1988. The result was an improvement in the foreign balance, as measured in the national accounts, of 2 percentage points, i.e., from a deficit 2 percent of GDP to virtual balance.

As noted earlier, the external current account balance, as recorded in the balance of payments, shows somewhat different figures. Notably, the external current account deficit fell from only 2.6 percent of GDP to 2.0 percent of GDP [line 16 divided by line 1]. For reasons already discussed, such divergences could raise questions as to whether, on the one hand, the improvement in saving or decline in investment are overestimated in the national accounts or, on the other, the external accounts of the balance of payments underestimate the economy’s improved position vis-à-vis the rest of the world. Answers to these questions carry policy implications.

Tables 710 of the Statistical Appendix provide data on the national accounts of Hungary. Tables 7 and 8 classify GDP by branches of economic activity (at factor cost) in constant and in current prices, respectively. Tables 9 and 10 present output from the expenditure side (at market prices) also in both constant and current prices. Chapter IV discusses issues relevant to forecasting output and prices.

2. Balance of payments

The balance of payments comprises the external current account balance, i.e., a record of transactions of residents with foreigners in goods, services and unrequited transfers (as discussed in the previous section), and the capital account balance, which provides summary statistics on the change in the net foreign asset position of domestic residents arising from transactions such as external borrowing or repayments, foreign direct investment, and short term capital movements.

The balance of payments recording system takes the form of a double-entry accounting system, in which each transaction is reflected in both a credit and a debit entry. Credit entries are used for (i) real resource flows denoting exports; and (ii) financial flows reflecting either a reduction in the economy’s foreign assets or an increase in its foreign liabilities. Obversely, the compiling economy records debit entries for (i) real resource flows denoting imports, and (ii) financial items reflecting either an increase in assets or a decrease in liabilities. For example, an export transaction in which the foreign exchange receipts are deposited abroad would be recorded as:

exports of goods: credit

short-term capital: debit

Following the convention that credits are indicated by a positive sign and debits by a negative sign, and given that each transaction in principle involves a credit and debit entry in the same amount, the sum of all entries should be zero. In practice, however, information on the debit and credit components of a transaction is usually obtained from different statistical sources. Deficiencies in coverage, as well as variation in the time of record and in the methods used for valuing transactions, necessitate the insertion of a balancing item in the accounts. This is usually referred to as net errors and omissions.

How then can one talk of an overall balance of payments surplus or deficit when the sum of all entries, including net errors and omissions, by definition equals zero? A surplus or deficit in the balance of payments involves summing up a subgroup of external transactions and distinguishing the transactions within this group (“above the line”) from items outside it (“below the line”). The decision on where to draw the line reflects a normative view as to what set of transactions best indicates the need for balance of payment adjustment.

The standard practice is to place below the line only the changes in short-term assets and liabilities of the monetary authorities, i.e., the change in net official international reserves. 1/ However, if the net foreign position of commercial banks and other economic units is sizable and under the effective control of the authorities, it can be argued that their foreign position should also be placed below the line in the definition of the overall balance. In the case of Hungary only changes in net official international reserves held by the monetary authories are placed below the line.

Insofar as there are limits to the change in reserves that countries are willing or able to accept, an overall imbalance represents an important indicator of the need for balance of payments adjustment. The adequacy of reserves is often discussed in gross terms (i.e., excluding short-term liabilities), and in relation to the level of a country’s imports. 2/

The balance of payments identity can be written as:

ΔR=CA+ΔFI(9)

where:

  • ΔR = the change in net official international reserves of the monetary authorities.

  • ΔFI = the change in net foreign indebtedness of domestic residents other than what is classified as official reserves.

Equation (9) highlights the way in which the balance of payments acts as a constraint to resource use in the economy. Specifically, a current account deficit—which was shown above to be equal to an excess of absorption over income—can be sustained only as long as capital inflows persist and/or net official international reserves are not depleted.

Imbalances in the current account do not necessarily imply a need for policy adjustment. A country might, for example, wish to have a current account deficit financed by long-term capital inflows linked to development expenditure. An important determinant of these flows is the judgment of creditors as to the debt servicing capacity of the country and how efficiently the borrowed funds will be used. Alternatively, a country might wish to have a current account surplus in order to finance external investment or reduce its external indebtedness.

Tables 11 and 21 of the Statistical Appendix present summary data of the balance of payments for Hungary in convertible and nonconvertible currencies. The current account is divided into balances for the trade, services, and unrequited transfers transactions. From an economic point of view, the distinction between the flow of goods and flow of services is arbitrary: a unit of foreign exchange earned by the export of services goes as far to strengthen the external balance as a unit earned by the export of goods. Use of the trade balance concept lies essentially in the timely availability of merchandise data from customs reports, as well as the quality of trade statistics.

Trade in merchandise is defined on an f.o.b. (free-on-board) basis. This implies that the costs of distributive (transport and related) services performed up to the customs frontier of the exporting country are included in the value of merchandise, while such expenditure incurred beyond that point are treated as shipment services. The other major categories of services include travel (goods and services acquired by travelers outside their own country); and investment income (earnings from financial assets, with interest earnings and payments representing a major item under this heading). Unrequited transfers largely consist of government grants of goods, financial resources and technical assistance, but they also include workers’ remittance.

The capital account distinguishes between short term and medium-and long-term capital. Note that in 1982–89 external borrowing was the main source of capital inflows. The short-term capital account, which includes errors and omissions, fluctuated significantly over the period. Issues relevant to balance of payments forecasting are discussed in Chapter V.

Monetary Accounts and the Other Macroeconomic Accounts

The institutions in the monetary system can be divided into two sub-sectors: the monetary authorities and the commercial banks. The monetary authorities usually comprise the central bank, in its capacity of issuer of currency, holder of national external reserves, borrower for balance of payment purposes, mainly from the Fund; and head of the monetary system. 1/ The typical commercial bank obtains funds from deposits, that are normally transferable by check or in other ways in settlement of the obligations of the deposit holder, as well as from central bank and/or external credits. These funds are primarily used for making loans.

Monetary statistics are consolidated at three different levels: the assets and liabilities of the monetary authorities, the assets and liabilities of commercial banks and, finally, the monetary survey. The latter is a summary presentation of the consolidated balance sheets of the entire banking system, netting out all inter-bank transactions. 2/

A major purpose of the monetary survey is to allow analysis of the financial aggregates most influenced by the monetary authorities and which play an important role in the determination of output, prices, and the balance of payments. The monetary survey highlights that the liabilities of the banking system to the private sector and state enterprises—i.e., the money supply, consisting of currency in circulation, deposits, and other instruments issued by the banking system—are the counterpart of the sum of net foreign assets (valued in local currency) and net domestic credit extended by the banking system:

M=FA+DC(10)

where:

  • M = liabilities of the banking system (money supply)

  • FA = net foreign assets of the banking system, including net official international reserves, R

  • DC = net domestic credit extended by the banking system, including other items (net)

For each foreign asset transaction of the banking system, there should be a counterpart entry in the balance of payments, reflected either in the overall balance or above the line in the capital account. Specifically, the change in net foreign assets of the banking system should be equal to (1) the change in net official international reserves as reflected in the overall balance; and (2) the change in net foreign assets of the banking system not included in the definition of official reserves, as reflected in the capital account.

To reconcile changes in net foreign assets as recorded in the balance of payments and the corresponding stocks of net foreign assets in the monetary survey, changes in the valuation (in local currency) of assets and liabilities denominated in foreign currency as a result of exchange rate movements need to be taken into account. For example, an exchange rate change will change the value of net foreign assets of the monetary survey. Since this change produces no monetary effect, there would be a counterpart entry in other items (net). 1/ The balance of payments accounts, on the other hand, will not have a valuation entry unless they are compiled in local currency, except for changes in the value of reserves caused by changes in exchange rates between the accounting currency and the currencies in which reserves are denominated. In certain countries, such valuation changes would be deducted from reserve changes through a counterpart entry to valuation changes in the reserve accounts of the monetary authorities.

The relationship between the monetary survey and national income and product accounts is not directly governed by accounting identities. Rather, the relationship reflects behavioral links, i.e., the response of components of the national income and product accounts (such as consumption or investment) to changes in components of the monetary survey (such as domestic credit or the money supply). Moreover, changes in output and expenditure will influence the current account of the balance of payments which, in turn, results in a change in net foreign assets, thus having a secondary “feedback” effect in the monetary survey. Integration of the accounting framework with the relevant behavioral relationship will be elaborated in subsequent chapters.

The monetary survey and the accounts of the monetary authorities for Hungary are shown in Tables 15 and 16, respectively, of the Statistical Appendix. The main headings of the tables are in the format of equation (10). The reconciliation of net foreign asset movements as recorded in the monetary accounts and the balance of payments is made difficult by the fact that the capital account of the balance of payments in Hungary does not separately identify banking system capital flows above the line. It should be noted, however, that gross foreign assets of the National Bank of Hungary were some 10–20 percent higher in 1986–89 than recorded gross international reserves (Tables 16 and 17 of the Statistical Appendix), which mainly reflects the exclusion of certain less liquid foreign assets from the definition of reserves. Movements in these less liquid foreign assets, if excluded from the definition of net official international reserves, should be recorded above the line in the capital account.

Several comments should be made as regards net domestic credit.

(1) Claims on the general government are shown “net” of government deposits. This treatment facilitates measurement of the impact of general government operations on the liquidity of the economy. Also, the government is the authority responsible for economic policy and, consequently, its decisions concerning expenditure are not usually bound by liquidity considerations like those which apply to other sectors, but on wider considerations. In Hungary, all credits to the general government are extended by the National Bank of Hungary. Net bank credit to the government sector is the most significant component of the domestic resources available for financing the fiscal deficit.

(2) Since the establishment of a two-tier banking system in 1987 virtually no credits have been extended (nor deposits received) to (from) the nongovernment sector by the Central Bank.

(3) Credits extended to commercial banks by the National Bank of Hungary are, by definition, netted out when constructing the monetary survey.

(4) The counterpart entry to valuation changes of net foreign assets are included in other items (net).

Issues relevant to forecasting the monetary accounts are discussed in Chapter VII.

Fiscal Accounts and the Other Macroeconomic Accounts

1. The fiscal balance

The operations of the government—through purchases of goods and services, resource transfers, revenue raising measures, and financing decisions—influence the level and growth of economic activity, the allocation of resources between different uses, and the distribution of income. The focus of these workshops is the macroeconomic impact of budgetary operations on income growth, inflation, and the balance of payments. A preliminary indication of the stance of fiscal policy is often obtained from a review of the major budgetary aggregates and the analysis of various concepts of budget balance.

The sum of all kinds of budgetary receipts must by definition equal the sum of all kinds of expenditures. Consequently, as with the balance of payments, the concept of budget balance involves separating out for analytical purposes a subset of total budgetary transactions. Box 4 provides a summary of the main aggregates that enter a budget statement.

Summary of Government Finances

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An overall surplus or deficit is normally defined as the difference between total revenue and grants (A+B+C) and total expenditure and net lending (D+E+F). 1/ Inasmuch as taxes and other government revenues absorb purchasing power of the private (nongovernment) sector and government expenditure increases aggregate demand, an overall deficit may be indicative of an expansionary fiscal stance. Similarly, an overall surplus may indicate a contractionary impact. Such an interpretation would, however, need to be qualified by analysis of the type of financing, the structure of receipts and expenditures, and the factors that may be causing the surplus or deficit. Nevertheless, sharp changes in the government’s overall balance, particularly when measured in relation to output, may provide an important signal that the impact of government operations on the economy needs to be carefully reviewed.

A further concept that is often used in fiscal analysis is the current account surplus or deficit. This is defined as the difference between current revenue and current expenditure, and is a measure of government sector saving. A high level of government saving is sometimes interpreted as representing a contribution to development inasmuch as it allows a substantial amount of capital formation to be financed. 2/

Government transactions as recorded in the different categories of the national accounts can be linked directly to the fiscal accounts. For example, government consumption can be derived from the fiscal accounts by totaling current expenditure on goods and services, including wages and salaries. 3/ 4/ This balance may, however, differ from government consumption in the national accounts for several reasons.

(1) In measuring government consumption, the national accounts normally impute a value for contributions to unfunded employee welfare benefits and for consumption of fixed capital. This is a so-called “cost side” approach. The reason for including a value for fixed asset depreciation is to arrive at a measure of the “true” cost of government provided services that approximate the commercial methods applied in the nongovernment sector.

(2) As already noted, the national accounts are on an accrual basis while the fiscal accounts are on a cash basis.

(3) The definition of government used may differ among the accounts. In the national accounts, the common practice is to use the concept of general government, i.e., the central government, the political subdivisions of a federation, and local governments at all levels. In the Hungarian case, the concept of the general government is used in both sets of accounts.

Government capital formation in the national accounts definition is equal to the acquisition by the government of new and existing fixed capital assets less sales of assets plus purchases of stocks. Apart from differences arising from the second and third points noted above with regard to consumption, the definition of real capital formation in the fiscal accounts would differ from that in the national accounts to the extent of any sale of assets, e.g., through privatization of state enterprises. These would be reflected as capital revenue in the fiscal accounts.

Table 13 of the Statistical Appendix summarizes the general government accounts for Hungary. Government saving declined from 7.8 percent of GDP in 1988 to 5.2 percent of GDP in 1989. Capital expenditure in relation to GDP (including capital transfers) also declined—from 7.7 percent of GDP to 6.5 percent of GDP—which limited the deterioration in the overall deficit to just over 1 percentage point of GDP.

It should be noted that there is a large discrepancy between government consumption figures in the national accounts and those derived from the fiscal accounts (see Table 2). Although the same concept of general government is in principle used in both accounts, classification differences exist. The most significant one is that the wages and salaries of government employees and other current expenditures incurred to provide social benefits in kind to the population are included in private consumption in the national accounts, whereas, they form part of the government wage bill and expenditures on other goods and services in the fiscal accounts. 1/

Table 2.

Hungary: Government Consumption

(in billions of forint)

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Source: IMF Institute data base.

The simplest method for circumventing these difficulties when trying to forecast government consumption is to use the information highlighted in Table 2—that the ratio of government consumption calculated in the fiscal accounts to government consumption calculated in the national accounts has been relatively stable. Unless there is reason to believe that this ratio will change significantly in the future, it can be assumed to remain unchanged. Otherwise, the distribution of consumption between the private and government sectors would need to be revised to conform more closely to the fiscal accounts.

Government investment is approximated by general government fixed capital formation in the fiscal accounts since the national accounts classification in Hungary is by decision making authority rather than by the sector responsible for the investment expenditure.

2. Financing

The impact of a given overall surplus or deficit on aggregate demand depends on the way the balance is financed. Financing covers all transactions involving holdings of currency, deposits, government liabilities, and any financial assets held by the government for the purpose of liquidity rather than public policy. Transactions in claims on others undertaken for public policy purposes are normally classified as net lending and are included above the line. An example of such lending is the extension of trade or agriculture credits to state enterprises, often at subsidized rates. Financing of government operations is usually divided into external and domestic borrowing.

External financing is defined on a net basis. For example, it would include disbursements by nonresidents of new loans after deducting amortization payments on outstanding debt. Note that external interest payments are not included as a negative financing item, but are recorded above the line in current expenditure. Each external financing transaction of the government would have a corresponding entry in the capital account of the balance of payments, the classification of which would depend on the maturity and type of instrument used.

Domestic sources of financing are normally divided into two parts: bank and nonbank borrowing. Bank borrowing can be obtained from the monetary survey, although in practice differences in the coverage and time of recording of transactions may prevent an exact reconciliation of the fiscal and monetary accounts. In particular, it should be noted that the fiscal accounts are maintained on a “checks issued” basis rather than a “cash” basis. As discussed in the previous section, bank borrowing is defined to be equal to the change in banking system credit extended to the government, less any change in government deposits. Nonbank borrowing consists of other forms of domestic financing such as the sale of government debt instruments (bonds, treasury bills, etc.) to the nonbank sector of the economy. Information on such borrowing is normally obtained directly from government sources.

In many developing countries, borrowing from the banking system represents a major source of budgetary finance and thus is an important factor influencing monetary developments. In these circumstances, monetary and fiscal policy are closely linked and any attempt to control monetary expansion is unlikely to succeed unless supported by an appropriate fiscal policy. Issues relevant to forecasting the fiscal accounts are discussed in Chapter VI.

Financial Transactions: The Flow of Funds

As explained previously, an economy’s saving is equal to national disposable income less consumption (equation 6). The gap between saving and investment (including changes in stocks) is referred to as the economy’s balance in nonfinancial transactions vis-à-vis the rest of the world, or the external current account balance (equation 7). This balance was seen to be financed by a corresponding capital flow or reserve change in the balance of payments (equation 9).

When the national income accounts are disaggregated by sector, and a record of financial transactions of each sector is added, then each sector’s statement is quite similar to a balance of payments statement. Notably, each sector’s balance on nonfinancial transactions—which is determined as the difference between sectoral saving and investment—should, in principle, be equal to the change in its financial assets and liabilities vis-à-vis the other domestic sectors and the rest of the world. Since transactions between domestic sectors cancel out, the sum of sectoral balances so defined should likewise, in principle, add to the balance of payments on current account (equation 8). If changes in financial assets and liabilities of a sector are defined in the same manner as capital movements in the balance of payments, then the sum of the financial transactions of all the domestic sectors should again, in principle, add to the international capital movements within each category. The phrase “in principle” is intended to indicate that the identities can be obscured by errors and omissions and other statistical problems discussed earlier.

A schematic flow of funds is shown in Table 3. Transactions are identified among four domestic sectors (households, enterprises, government, and a banking sector) and between these domestic sectors and the rest of the world. The government sector is represented by the general government; the banking sector is defined to cover those institutions whose positions are recorded in the monetary survey; and the enterprise sector comprises state enterprises and cooperatives, nonbank financial institutions, and small private enterprises. While it could be argued that private enterprises should be included with the household sector, in practical terms it makes little difference since the size of their operations, as recorded in the official statistics, is very small, and is likely to be substantially underestimated.

Line 1 indicates the sectoral nonfinancial transactions balances that need to be financed. For simplicity, the balance on nonfinancial transactions of the monetary sector is assumed to be zero, i.e., transactions in goods and services by the banking sector are attributed to other sectors. The convention is followed that from the point of view of the sector in question an increase in an asset takes a negative sign and an increase in a liability a positive sign, and vice versa. The sum of all rows and columns should thus equal to zero. For example, an increase in the money stock held by the household sector, which is a liability of the banking sector and an asset of the household sector, would be recorded twice in row 4a, in columns 1 and 4. Thus, the increase in the money stock would appear as a negative entry in column 1 and a positive entry in column 4. Dashes in column 5 indicate that transactions among domestic sectors in the relevant rows do not directly affect the balance of payments.

Table 3.

A Schematic Flow of Funds

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In constructing a flow of funds tables, each sector’s nonfinancial transactions balance must first be calculated. Table 4 shows these sectoral balances for Hungary over the 1985–88 period. Given the lack of data on state enterprise accounts, the sectoral balance for enterprises was treated as a residual.

Table 4.

Hungary: Sectoral Nonfinancial Transaction Balances

(In billions of forint at current prices)

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The nonfinancial sector balance for the economy as a whole (line 3a) was derived by adding net factor income and transfers from abroad (balance of payments data—Tables 11 and 21—converted into forint at the average exchange rate) to the national accounts definition of the foreign balance (lines 4a–d). Total gross investment was obtained from the national accounts (line 2a), with total gross saving being derived as a residual, i.e., (3a + 2a = 1a).

As regards sectoral balances, government saving and investment were obtained from the accounts of the general government (Statistical Appendix Table 13) with the government’s overall nonfinancial balance being equal to the overall fiscal balance excluding capital transfers, which were treated as a financing item in the flow of funds (lines 1c, 2c, 3c). 1/ The household sector’s gross saving (line 1b) was calculated as the difference between household disposable income (line 5) and consumption, as defined in the national accounts. Data for gross household investment (line 2b), consisting largely of housing investments, is found as a memorandum item in Statistical Appendix Table 10. The sectoral balance of enterprises is then derived as a residual (lines 1d, 2d, 3d). 2/

Table 5 constructs the flow of funds for Hungary for 1988. Row 1 summarizes the nonfinancial transactions balances of each sector derived in Table 4 (shaded box). Government capital transfers, which are assumed to be directed to the enterprise sector, are shown in row 2. By definition, total external financing (including changes in official international reserves) must be equal to the external current account deficit (from both the convertible and nonconvertible currency areas; Tables 11 and 21) expressed in terms of forint (column 5, row 3a: 572 x 50.413/1000). The net external borrowing of the government sector was obtained directly from Statistical Appendix Table 13 on general government operations (row 3b). Net external borrowing of the banking system was derived from the monetary survey (Statistical Appendix Table 15), with the change in the latter position being adjusted for changes in valuation (included in the other items (net) position of the monetary survey) so as to arrive at a better approximation of foreign capital transactions undertaken by the banking system (row 3d). External borrowing of households was assumed to be zero. The net external borrowing of enterprises was then derived as a residual (row 3c).

Table 5.

Hungary: Flow of Funds, 1988

(In billions of forint

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Source: IMF Institute data base.

Data for the change in bank credit and its distribution among sectors were obtained from the monetary survey (rows 4a–d). Domestic nonbank borrowing of the government sector (row 5) was obtained as the difference between the overall domestic financing obtained by the government (as recorded in the table on general government’s operations) and net government bank financing (row 4c). The definition of broad money used here corresponds to the concept of liabilities of the banking system to the nongovernment sector as recorded in the monetary survey (row 6). In the absence of the necessary information, it was assumed that all currency in circulation is held by households.

Other items (net) position are derived as a residual. The discrepancy in the banking sector column (row 7, column 4) corresponds to the change in other items (net) of the monetary survey, excluding valuation changes. In the external sector column (row 7, column 5), the discrepancy represents the gap between the external current account balance on a national accounts and balance of payments basis. The fact that the latter two discrepancies cannot be allocated among different financing items has its counterpart in the discrepancies that remain in the accounts of households and enterprises.

As a cross-check, it should be recalled that the figures in column 3 should be consistent with the table on general government operations, row 1 being equal to the “above the line” overall balance (excluding capital transfers) and rows 2–7 to the “below the line” financing of the overall balance (including capital transfers). Column 4 should coincide with the “change” in the monetary survey and column 5 with the consolidated balance of payments expressed in local currency units.

Exercises and Issues for Discussion

1. Exercises

a. Using the Statistical Appendix Tables derive the nonfinancial transaction balances for each sector for 1989 using the format of Table 4.

b. Prepare a flow of funds for 1989 in the format of Table 5. Assume that government net domestic repayments to households is Ft 2.3 billion, with the remaining funds being repaid to enterprises.

2. Issues for discussion

a. Based on the above exercises:

  • (1) What changes took place in the sectoral nonfinancial transactions balances between 1988 and 1989? How well does this reconcile with developments based on balance of payments data? (expressing variables in relation to GDP may be useful).

  • (2) How were the sectoral balances financed in 1989 compared with 1988?

b. Suppose the Hungarian government had decided to raise its expenditures above the level actually recorded in 1989.

  • Indicate how:

  • (1) the nonfinancial transaction balances might have changed

  • (2) the flow of funds might have been affected

In discussing these points, alternative methods of financing the increase in expenditure should be considered (e.g., tax increases vs. an increase in central bank credits).

STATISTICAL APPENDIX

Table 6

Hungary: Selected Economic Indicators

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Source: IMF Institute data base.

Excluding other items (net).

End of period external debt divided by GDP for the year as a whole in local currency units and converted into U.S. dollars at the period average forint/U.S. dollar exchange rate.

As a percent of merchandise exports, travel and investment credits.

Table 7.

Hungary: Gross Domestic Product by Sector

(In billions of forint, at approximately 1986 prices)1/

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Source: IMF Institute data base.

The value of the deflator for GDP at market prices in 1986 is 101.5 (see Memorandum item).

Turnover taxes, customs taxes, and other business taxes, less government transfers to enterprises. Also includes valuation changes and a statistical discrepancy.

Table 8.

Hungary: Gross Domestic Product by Sector

(In billions of forint, at current prices)

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Source: IMF Institute data base.

Turnover taxes, customs taxes, and other business taxes, less government transfers to enterprises. Also includes valuation changes and a statistical discrepancy.

Table 9.

Hungary: Components of Aggregate Demand

(In billions of forint at 1986 prices)

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Source: IMF Institute data base.

Standard definition: consumption of residents at home and abroad.

Standard definition: including foreign tourism.

Table 10.

Hungary: Components of Aggregate Demand

(In billions of forint at current prices)

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Source: IMF Institute data base.

Standard definition: consumption of residents at home and abroad.

Standard definition: including foreign tourism.

Table 11.

Hungary: Balance of Payments in Convertible Currencies

(In millions of U.S. dollars)

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Source: IMF Institute data base.
Table 12.

Hungary: Nonruble Trade, Customs Basis

(In millions of US$ and percentage change)

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Source: IMF Institute data base.

Adjustments account for freight and insurance, leads and lags, and trade under clearing arrangements in currencies other than the ruble.

Table 13.

Hungary: Operations of the General Government

(In billions of forint)

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Source: IMF Institute data base.

Including profit transfers from government-owned financial and nonfinancial enterprises.

Including capital revenue.

Including a small amount of lending less repayments.