Fiscal developments and policies play a central role in determining overall economic developments and policies. Fiscal policy directly affects an economy’s use of aggregate resources and level of aggregate demand. Together with monetary and exchange rate policies, it also influences the balance of payments, the debt levels, and the rates of inflation and economic growth. Policies that deal with taxation, public spending, and borrowing affect the behavior of producers and consumers and influence the distribution of income and wealth in the economy. Frequently, large macroeconomic imbalances, both internal and external, can be traced to a fiscal imbalance that policy has failed to correct.

Fiscal developments and policies play a central role in determining overall economic developments and policies. Fiscal policy directly affects an economy’s use of aggregate resources and level of aggregate demand. Together with monetary and exchange rate policies, it also influences the balance of payments, the debt levels, and the rates of inflation and economic growth. Policies that deal with taxation, public spending, and borrowing affect the behavior of producers and consumers and influence the distribution of income and wealth in the economy. Frequently, large macroeconomic imbalances, both internal and external, can be traced to a fiscal imbalance that policy has failed to correct.

In order to assess the overall fiscal performance of an economy in the context of stabilization and structural reform, it is essential to have a firm grasp of the basic principles of fiscal accounting and analysis. This chapter is devoted to an exposition of this basic framework of fiscal accounting and analysis.

The first part of this chapter opens with a discussion of key concepts set out in the IMF’s Manual on Government Finance Statistics (GFS).1 The GFS provides an internationally accepted framework for presenting data on a government’s fiscal operations. This framework is designed to facilitate the analysis of government transactions with respect to income, outlays, capital accumulation, and financing. Subsequent sections focus on the definition of the government sector, the measurement of government operations, and some basic concepts employed in the classification and accounting treatment of government operations. Main classifications of revenues and expenditures are also outlined, and the concept of the conventional overall deficit is discussed.

The second part discusses the main analytical issues in fiscal analysis, including the notions of government saving and investment, alternative measures of fiscal imbalance, alternative methods of financing a fiscal deficit and their macroeconomic implications, and the sustainability of the fiscal policy. A more detailed analysis of the methods of assessing developments in government revenues and expenditures is provided also. The third part of this chapter contains background information on the fiscal sector in Poland, including a brief description of the structure of the fiscal sector, coverage of recent fiscal developments, tax and expenditure policies, and the financing of the deficit. The last section contains exercises and issues for discussion.

Fiscal Accounting

Defining the Government Sector

The GFS Manual identifies several layers of government: (i) the central government; (ii) the state or regional government; (iii) local government; and (iv) any supranational authority. For most countries, the fiscal operations of the government sector cover, at a minimum, the central government, which formulates national budgets. But in many countries, fiscal operations are also performed by local and regional governments. The term general government includes all levels of government: central, state, provincial, and local.2 In order to emphasize the separation between the functions of the government and the monetary sectors, government finance statistics exclude from both definitions any banking or monetary transactions the government performs. In particular, all functions of the monetary authorities, irrespective of the institutions that carry them out, are treated as activities of the monetary rather than the government sector. In order to distinguish fiscal policy from monetary policy and reconcile monetary and financial statistics with government finance statistics, analysis must separate the activities of these two sectors. Chart 3.1 presents some criteria for differentiating among the sectors.3

Chart 3.1.
Chart 3.1.

Criteria Determining the Borderline Between the General Government Sector and Other Sectors

Source: IMF, A Manual on Government Finance Statistics (Washington, 1986).

The broadest level of government is the public sector, which includes the general government and nonfinancial public enterprises such as publicly owned railways and airlines or public utilities. Some of the central government’s revenues and expenditures typically reflect transfers from or to local governments and public enterprises. Such transfers have to be netted out so that “double counting” is not an issue when aggregates for the different levels of government operations are compiled. The process of netting out and combining accounts at different levels of the government is referred to as consolidation.

At each level of government, there are three groups of operations: budgetary, extrabudgetary, and social security. Budgetary operations are, by definition, covered in the budget. Extrabudgetary operations, which are carried out outside the budget, raise resources through compulsory levies and provide nonmarket goods and services. For example, an extrabudgetary fund is often established to raise revenue through special taxes on fuel and then uses these resources to maintain roads.

Social security schemes are a special category of extrabudgetary operations. In transition economies, these schemes typically comprise a pension fund, an employment fund, and a social insurance fund that covers disability and welfare programs.

Irrespective of how the government sector is defined, actual budgetary practices in many countries often lead to seriously distorted measurements of government operations. Two of the most important distortions arise from off-budget or extrabudgetary accounts and the use of counterpart funds. In some countries, particularly the economies in transition, governments set up off-budget or extrabudgetary accounts to conduct what would otherwise be budgetary operations. The extensive use of extrabudgetary funds (particularly if they are not consolidated with fiscal operations) distorts the fiscal position, reduces flexibility in fiscal management by earmarking revenues for specific purposes, and, most importantly, leads to a loss of control over funds channeled through these accounts.4 To remedy this situation, many countries have set aside funds within the budgetary framework to replace the extrabudgetary accounts. In this way, governments maintain the necessary control, accountability, and scrutiny.

Counterpart funds are another source of fiscal distortions in many transition economies. Counterpart funds are the domestic currency equivalent of foreign loans or grants (including commodity grants). These funds are often a source of financing for the deficit and of credit (on-lending) to institutions and enterprises. Often, the loans are not recorded in the budget and thus escape parliamentary scrutiny, distorting the overall fiscal position and generating interest subsidies.5 Not only must these counterpart funds be properly reflected in any measure of the budget, but they also must not become an indirect source of subsidized credit for ailing enterprises.

Measuring Government Operations

Government finance statistics compiled in accordance with GFS standards record transactions on a cash or payment basis rather than on the accrual basis used in the national income and product accounts, the monetary accounts, and the balance of payments that make up the System of National Accounts (SNA). Receipts and payments recorded on a cash basis are documented as of the time of monetary settlement, while transactions recorded using the accrual method reflect the point at which a claim or liability arises or becomes due.

Recording government transactions on a cash basis provides analysts with a basis for comparison with the monetary accounts and thus makes measuring the impact of government operations on the monetary aggregates easier. From the standpoint of economic analysis, such a comparison is particularly important when the difference between those transactions recorded on a cash basis (government finance statistics) and those recorded on an accrual basis (monetary accounts) stems from payments arrears. Arrears reflect a government’s inability to meet its expenditure commitments—often interest payments—on time and result in serious inconsistencies between the accrual and cash deficits (see below). The accrual deficit, which shows the government’s net use of resources, reflects the government’s full interest obligations (both domestic and foreign), while the cash deficit reflects actual interest payments. A government with a cash deficit that is smaller than the accrual deficit is typically behind on its interest payments and other payment obligations.

The GFS Framework

The GFS framework is designed to provide comprehensive coverage of the government’s transactions with the rest of the economy and the world and measures primarily government receipts, payments, and unpaid obligations. Chart 3.2 illustrates the classification of various government transactions within the GFS framework. The main principles underlying this framework are discussed below.

Chart 3.2.
Chart 3.2.

Analytical Framework for Classification of Government Operations

Source: IMF, A Manual on Government Finance Statistics (Washington, 1986), p. 101.
  • Revenues, receipts, payments, and expenditures. To assess the government’s overall fiscal position and the resultant macroeconomic impact, analysts must make a clear distinction between revenues and expenditures. In this respect, it is important to remember that while all revenues are receipts, all receipts are not revenues. Revenues consist only of those receipts that do not give rise to an obligation of repayment. Receipts from loans to the government are not revenues, because the loans must be repaid. Similarly, not all payments are expenditures. For example, a loan repayment is not an expenditure, because it arises out of an obligation incurred when the loan was received. Interest payments, however, are an expenditure item.

  • Gross and net. As a general principle, revenues and expenditures are shown on a gross basis, so that the statistics reflect the full magnitude and impact of the government’s revenue-raising operations—and the disposition of revenues. Thus, school fees are not counted as an offsetting item to the cost of providing education, nor are the costs of collecting taxes deducted from tax revenues as “negative revenues.” The main exception to this rule is lending and borrowing; in this case, the rapid flows from and to the government make net lending the only meaningful item.

  • Requited and unrequited transactions. Requited transactions are those in which money is paid or received in exchange for goods or services. Unrequited transactions are those in which payment is made or received but nothing is received or given in return. Transfers and grants are examples of unrequited transactions.

  • Tax and nontax revenue. Revenue includes all nonrepayable receipts except grants. Revenues are divided between current and capital receipts (which include only receipts from the sale of capital assets). Taxes are defined as compulsory and unrequited receipts collected by the government for public purposes. Tax revenues (shown net of refunds of earlier overpayment) include compulsory social security contributions and profits transferred to the government by its fiscal monopolies. Nontax revenues include receipts from property income, fees and charges, fines, and operating surpluses of public enterprises.

  • Grants. Grants are unrequited receipts from other governments or international institutions. The GFS Manual groups grants together with revenues as transactions that reduce the deficit rather than with deficit financing items.6 Nevertheless, for purposes of fiscal analysis and budgetary planning, it is necessary to recognize that grants differ from revenues in a fundamental way. Because grants are not predictable or sustainable, expenditures planned and incurred on the assumption that they will be available can seriously distort fiscal planning and force a severe adjustment in the future. Despite the GFS convention of recording grants above the line, it is often preferable, in analytical presentations of the fiscal accounts, to treat them as a financing item.

  • Government net lending. Net lending (loans minus repayments) comprises government lending undertaken to achieve public policy objectives rather than to manage government liquidity.7 Examples of such lending include subsidized loans to farmers, students, or small businesses. Net lending is grouped with expenditures rather than with financing under GFS guidelines.8 This treatment reflects the asymmetry between the reasons for government lending and those that motivate its borrowing. Fluctuations in the government’s holdings of currency and deposits, or changes in the cash balance, are treated as financing rather than as net lending.

  • The recapitalization of banks. In some countries, banks that are fully or partly owned by the government have been facing large losses and are now undercapitalized. In such cases, governments may inject capital into the banks and in some cases take over their debts. As noted earlier, the GFS framework is cash based and therefore does not treat the government’s noncash assumption of debt as an expenditure at the time the debt is assumed. However, future cash interest payments are included as expenditures and cash amortization payments as negative financing. In other words, according to GFS methodology, only the interest payments on the assumed debt affect the size of the fiscal balance.

  • Privatization receipts. The GFS Manual recommends treating the proceeds of the sales of equity in public sector assets as negative net lending. This is to be distinguished from sales of government physical assets that are recorded in nontax capital revenue. The rationale behind this thinking is that privatization proceeds are sales of government equity in enterprises acquired earlier, either through transfers or capitalization. This treatment results in a one-time reduction in the fiscal deficit. While they are formally treated as an above-the-line item, it is often useful to record privatization receipts below the line in analytical presentations of the fiscal accounts, along with other transactions that affect the government’s net financial position. The one-time reduction in the fiscal deficit is offset by deficits in future years, reflecting the loss of government revenue from the enterprise’s remitted profits. These future deficits, however, can be offset exactly if the government uses the proceeds from the sale of enterprises to purchase other assets or to retire a portion of its own debt. Under such a scenario, the government and the private sector have simply exchanged assets without affecting the demands for real resources. However, if the government uses the proceeds to raise current expenditures, to cut taxes, or both, the deficit in the year of the sale will be unchanged, while future deficits will be larger, and the fiscal policy stance will be affected by privatization. The United Kingdom, which has had significant privatization receipts in recent years, has shown the fiscal deficit in the macroeconomic accounts both inclusive and exclusive of these receipts. This practice is useful because it clarifies the analysis by recognizing that privatization receipts represent an exchange of assets.9

  • Central bank profits. The profits of the central bank that are actually transferred to the government are treated as revenue. However, it should be noted both that these profits should not include unrealized profits stemming from the revaluation of holdings of foreign exchange or gold reserves and that they should cover the entire operations of the central bank, and not just its selected operations (for instance, sales of foreign exchange or gold).

Classifying Revenues and Expenditures

Government transactions are classified into broad categories under “revenues” and “expenditures.” The primary classifications are economic, including total, current, and capital revenues and expenditures. Within these categories, taxes are broken down according to the type of activity on which they are imposed, and expenditures according to their purpose—defense and education, for example. The economic classifications are relatively more important for purposes of fiscal analysis. The main categories of taxes and the economic classifications are given in Tables 3.8 and 3.9, respectively. A more extensive presentation of the GFS fiscal data for Poland is shown in Table 3.7.

Conventional Fiscal Deficit10

In terms of the cash flow of government operations, total receipts are always equal to total payments, and therefore the government’s fiscal accounts are always, in one sense, in balance. However, for analytical and policy purposes, it is more useful to focus on the difference between government revenues and grants, and government expenditures, including net lending. The conventional concept of the fiscal deficit does precisely this, defining the fiscal deficit as the difference between total revenues and total expenditures:


A government deficit thus represents the portion of expenditure and net lending that exceeds receipts from revenue and grants. The government covers the deficit by borrowing and/or by running down its liquidity holdings. This conventional concept of the fiscal deficit is of central importance to fiscal analysis because it offers a comprehensive picture of the government’s overall financial position and of the resulting impact on monetary conditions, domestic demand, and the balance of payments. This concept of the fiscal deficit, while the most common, suffers from a number of shortcomings when used as a measure of the impact on aggregate demand, the allocation of resources in the economy, and on the distribution of income. First, the same deficit level may have substantially different macroeconomic effects depending on the associated structure of taxation and expenditure. It has long been established that changes in taxes affect macroeconomic aggregates differently from equal changes in expenditures. Second, different ways of financing a given fiscal deficit clearly have different macroeconomic effects. As explained below, central bank financing of the fiscal deficit has substantially different macroeconomic effects from, say, nonbank financing or foreign financing.

Fiscal Analysis

Government Saving-Investment Gap

As with other sectors, two key relationships define the fiscal sector’s resource balance and the ways in which the balance is financed.

The saving-investment gap of the government sector is broadly equivalent to the overall fiscal deficit. That is,
If total government expenditure (Eg) is defined as the sum of current government expenditures (Cg) and government investment (Ig), it follows that:
The government sector’s resource balance can also be written as
The government has a limited number of ways to finance this gap. It can obtain net foreign borrowing (NFBg); it can borrow from the domestic banking system (ΔNDCg); or it can borrow from the nonbank private sector (NB). Therefore, if Fg is total net financing available to the government sector (in other words, the financing needed to cover its gap), then
Thus, the government financing gap will be covered ex post, so that

Measures of the Fiscal Imbalance12

Although the GFS concept of the overall deficit is widely used, there is no single or best measure of the fiscal deficit. Alternative concepts of the deficit defined according to different analytical criteria can also be useful, depending on the purpose at hand. The overall deficit measured as a proportion of GDP is often used as a summary measure of fiscal performance and is perhaps the most widely accepted measure of a country’s fiscal situation. But even this conventional measure should be supplemented by some or all of the other measures discussed in this section. The summary measures should take into consideration structural aspects of fiscal policy, such as those involving taxes and expenditures.

The choice of an appropriate concept of the deficit is based on several factors: (i) the type of imbalance involved; (ii) coverage (central government, general government or public sector); (iii) accounting method (cash or accrual); and (iv) the status of any contingent liability. Chart 3.3 summarizes the factors involved and the analytical distinctions possible in assessing the fiscal deficit. The various measures of fiscal deficits are discussed below.

Chart 3.3.
Chart 3.3.

Measuring and Monitoring the Fiscal Deficit

Source: M. Blejer and A. Cheasty, 1992, “How to Measure the Fiscal Deficit,” Finance Development, Vol. 29 (September).
  • The public sector borrowing requirement is the conventional concept of a fiscal deficit defined for the entire public sector. It is also the most comprehensive standard measure of the fiscal deficit as it includes the net claim on financial resources by the entire public sector. The comprehensive deficit concept can be applied at each level of government. The central government borrowing requirement and the general government borrowing requirement are subsets of the public sector borrowing requirement, which can in fact be derived from the general government and the public enterprise sector borrowing requirements, with appropriate netting out of transfers among the sectors.

  • The current fiscal deficit (current account deficit) is defined as current revenue minus current expenditure. It is often used as a measure of government saving and therefore as a measure of the government’s contribution to the economy’s total saving. It can be written as

    There are, however, limits to the usefulness of this concept in practical fiscal analysis. The concept hinges on the distinction between capital and current expenditures and revenues. Capital expenditures include purchases of assets that are expected to be used in production for a period of more than one year and capital transfers; all other expenditures are classified as current. This distinction and the conventions for classifying expenditures as current or capital are inherently arbitrary.13 More importantly, the underlying assumption that all government investment spending contributes to growth and is therefore desirable is questionable in view of the many instances of highly wasteful public investment projects. Moreover, spending on investment to the detriment of expenditure on maintenance of the existing capital stock may in fact misallocate resources and ultimately reduce (rather than raise) the rate of economic growth.

Thus, while attractive at first glance, the current fiscal deficit is not a very useful indicator. It also is not helpful in analyzing the impact of fiscal developments on either the external or the domestic macroeconomic balance.

  • The primary or noninterest deficit accurately measures the effects of current discretionary budgetary policy by excluding interest payments from the conventional measure of the deficit.14 This type of deficit indicates how the current fiscal actions of the government affect the government’s net debt and therefore is important in assessing the sustainability of government deficit. It can be written as
  • The operational deficit is the conventional deficit less the inflation-induced portion of interest payments or, equivalently, the primary deficit plus the real component of interest payments. Inflation reduces the real value of the outstanding (nominal) stock of public debt, although creditors are compensated through higher nominal interest rates. This compensation, which is often referred to as the “monetary correction,” represents a return of capital and not a return on capital. In other words, a part of the government’s interest payments on its debt is actually amortization (repayment of principal), and, if this amount is not removed from the interest payments above the line, the deficit will be overstated. The concept of operational deficit overcomes this problem. This concept is particularly important in countries with high inflation and large public debt because it measures the extent to which fiscal policy in a given year affects the real stock of public debt.

    In an inflationary environment, the evolution of real public debt provides a more accurate perspective on the sustainability of fiscal policy than the evolution of nominal public debt. In countries with high inflation, the conventional and operational deficit measures show large differences, and trends in the two measures may diverge markedly.

The relationships can be expressed as

Financing the Deficit

The macroeconomic impact of the government deficit depends largely on the way the deficit is financed. As previously indicated, there are four ways of financing a deficit: (i) borrowing from the central bank, or “monetizing” the deficit; (ii) borrowing from the rest of the banking system; (iii) borrowing from the domestic nonbank sector; and (iv) borrowing abroad, or running down foreign exchange reserves.

In a broad sense, each form of financing is associated with a major macroeconomic imbalance: excessive money creation with inflation; excessive foreign borrowing with an external debt problem; depletion of reserves with an exchange rate crisis; and excessive domestic borrowing with high real interest rates—and possibly with explosive growth in public debt from the dynamic interactions between interest payments, deficits, and debt.15 However, the links between these alternative methods of financing and their consequences can be far more complex.16

  • Borrowing from the central bank (monetizing the deficit). Government borrowing from the central bank is equivalent to the creation of highpowered money. Creating money at a rate that exceeds demand at the current price level creates excess cash balances and eventually drives up the overall price level.17 In many transition economies, a high proportion of government deficits are monetized and are therefore the principal source of inflation. A government’s ability to control real resources by printing money is sometimes known as seigniorage.18 As discussed in Box 3.1, the notion of seigniorage is closely linked to that of the “inflation tax.” In fact, seigniorage is equal to the inflation tax whenever the public keeps its demand for real cash balances constant. Seigniorage can be decomposed into pure seigniorage and an inflation tax component. It should be noted that:

    • Seigniorage accrues not just to the government; banks also “collect” part of the seigniorage. However, in many countries, banks “redistribute” their share of the seigniorage by making loans at below market interest rates. In this case, borrowers will also get a portion of the seigniorage.

    • The inflation tax “paid” by the public is significantly higher than that “collected” by the government. Put differently, the cost inflicted on the public by the government’s policy aimed at covering part of the deficit through an inflation tax is considerably more than the real resources appropriated by the government. In this sense, the inflation tax is highly inefficient.

    • As inflation accelerates, the demand for real cash balances is likely to be reduced as the public adjusts to the higher inflation including by substituting the heavily “taxed” national currency by foreign currency (e.g., U.S. dollars).

    • A reduction in the real cash balances in response to higher inflation amounts to a shrinkage in the base of the inflation tax. Such an erosion in the base implies that, in order for the government to “collect” the same revenue from the inflation tax, a higher inflation rate (“tax rate”) must prevail.

    • Revenue from seigniorage follows an inverted U-shaped curve. As inflation increases, so will the revenue from seigniorage but up to a maximum, beyond which any increase in inflation will lead to a reduction in revenues.

    • In most industrial countries, the maximum seigniorage has been estimated in the range of 1 percent of GDP to 2 percent of GDP while in some developing countries and transition economies, the maximum has fluctuated in the range of 5 percent of GDP to 10 percent of GDP.

  • Borrowing from the rest of the banking system. Unlike borrowing from the central bank, borrowing from deposit money banks does not automatically lead to the creation of high-powered money. If the central bank accommodates the extra demand for credit from the deposit money banks by supplying them with additional reserves, then this type of borrowing is similar to borrowing from the central bank. But if the central bank does not accommodate the extra demand for credit, the deposit money banks will be forced to reduce credit to the private sector in order to meet the higher demand for government credit, This phenomenon, which is referred to as the crowding out of private spending, takes place principally through interest rate increases.

The Inflation Tax and Seigniorage: Some Implications

A government can finance spending by raising tax revenue from the public, by borrowing, or simply by printing money. Revenue raised through the printing of money is called seigniorage. It arises because of the government’s monopoly power to supply fiat or paper money to the economy. Since the cost to the government of printing a currency note is negligible, but it acquires purchasing power over resources equivalent to the face value of the banknote, it gains revenue simply by providing money to the economy. In a modern economy, banks also create money and hence also get “seigniorage.” Thus, seigniorage can broadly he defined as the total amount of real resources appropriated by those that issue the money stock in an economy. Formally, seigniorage (S) in this case is given by:

where μ=M/M or the percentage growth in nominal money stock. Seigniorage is thus defined as the change in nominal money balances held by the public (M) expressed in terms of the price level (P) or equivalently, the percentage growth rate of nominal money stock (μ) times the real money stock. m=(M)1P

The seigniorage received by the government (Sg) will, of course, be much smaller and will only reflect the government issuance of reserve money or high-powered money (H):

where β=H/H, that is, the percentage growth in reserve money.

Seigniorage (S) can be decomposed into a “pure seigniorage” component and an “inflation tax” component.2

  • The pure seigniorage component is the change in real cash balances (m). It comes about because of real growth in the economy or a favorable shift in the demand for money.

  • The inflation tax component is equal to the inflation rate which acts in this case as the “tax rate” (π) times the stock of real cash balances held by the public m (which constitute the tax base). In the absence of inflation, the inflation tax will obviously be zero, but seigniorage will still be collected unless there is no growth in real cash balances.


For any variable x, X denotes dx/dt or the change over a given period of time.

It can be seen that the rate of change in real cash balances is equal to
MP=(MP)+PP.MPor ifPP=π,S=m+πm,wherem=(MP).

For discrete data, the equivalent formula for equation 3 above is:

St = Δmt + ΔPt/Ptmt−1, where for any variabler xt Δxt is defined as Δxt = xtxt−1.

Also note that seigniorage as a ratio of GDP (st) is defined as

st = ΔMt/GDPt, where GDPt is nominal GDP.

  • Nonbank borrowing. A nonmonetary way of financing the deficit is by the issuing of domestic public debt.19 Nonbank borrowing allows governments to sustain, in the short run, a deficit without increasing the monetary base or depleting international reserves. Because of this, it is often considered an effective way to avoid both inflation and external crises. However, nonbank borrowing carries its own dangers if used too often. First, bond financing of the deficit, while it postpones inflation, may lead to significantly higher inflation in the future if the stock of government debt is not kept in check.20 Second, like bank borrowing, borrowing from the public directly crowds out the private sector, putting upward pressures on domestic interest rates (Box 3.2). Not only do high real interest rates hurt economic growth, but issuing public debt at such rates adds to the cost of future debt servicing and thus to future fiscal deficits. If real interest rates exceed rates of economic growth, debt service can grow explosively, making public debt unsustainable.

    In countries experiencing high inflation, the value of government bonds erodes rapidly, and voluntary demand for such bonds is limited. Governments are often tempted to coerce (directly or indirectly) banks and even the public to hold these bonds, but such actions, and even past episodes of confiscation, can severely damage the credibility of governments for years to come. In such cases, the government must undertake a patient process of building up trust and credibility that is grounded in the sustained pursuit of noninflationary macroeconomic policies and financial stability.

  • External borrowing. Governments can finance deficits abroad by issuing bonds to nonresidents or by running down foreign exchange reserves. There is, however, a limit to using reserves to finance a deficit. If the private sector expects that this limit is about to be reached, the result can be capital flight and an exchange rate depreciation that adds to inflation pressures. The debt crisis of the 1980s was triggered by the virtual exhaustion of reserves in Mexico in August 1982, which followed a loss of fiscal control that was reflected in large and unsustainable fiscal deficits in the early 1980s.

    Financing the deficit with foreign borrowing and running down reserves tend initially to appreciate the exchange rate, damaging the competitiveness of the traded goods sector. For many developing (and some transition) economies, overborrowing in the past and a lack of creditworthiness severely limit this source of financing for the present. Even when available, foreign borrowing from commercial sources carries interest rates that can be prohibitively high.

Debt Neutrality

According to the debt neutrality (or Ricardian equivalence) hypothesis, borrowing is no more than deferred taxation.1 Specifically, for a given government expenditure, a reduction in current taxes would clearly raise the budget deficit and hence borrowing. Insofar as the private sector recognizes that increased government borrowing today means higher taxes in the future, under this hypothesis, it increases private saving in order to provide for increases in taxes in the future. The Ricardian equivalence hypothesis in its pure form stipulates that a shift from tax financing to debt financing would not change total national savings, as the initial reduction in government saving will be fully and exactly offset by an increase in private sector saving. Thus, a tax cut financed by government borrowing does not reduce the tax burden; it only postpones it.

The debt neutrality hypothesis gets little support from available empirical evidence in either industrial countries or developing countries. While in industrial countries the evidence has been inconclusive, in developing countries, the hypothesis finds no support.2


This is also sometimes referred to as the Barro-Ricardo debt neutrality theorem. See Robert J. Barro, “The Ricardian Approach to Budget Deficits,” Journal of Economic Perspectives, Vol. 3 (Spring 1989).


In industrial countries, there seems to be a tendency for a partial but not a full offset of a decrease in government savings.

If fiscal accounts are presented on an accrual basis, another form of financing enters the picture—payments arrears. In many transition economies, governments have incurred large payments arrears, resulting in cash deficits that are significantly lower than deficits measured on an accrual basis. When the government clears the arrears, however, the accrual deficit will be smaller than the cash deficit. Arrears are also a coercive form of financing a deficit and should be avoided as far as possible (Box 3.3).

The Sustainability of Fiscal Policy

In recent years, the issue of the sustainability of fiscal policy has attracted considerable attention. When can one say that the stance of fiscal policy is unsustainable? How can one devise an operational indicator to guide policymakers? While there is no generally accepted definition of what constitutes a sustainable fiscal policy, there is a broad agreement that fiscal policy is not sustainable if the present and prospective fiscal stance results in a persistent and rapid increase in the public debt-to-GDP ratio. Thus a key indicator of sustainability is based on the size and growth rate of the debt-to-GDP ratio. Indeed, as the experience of many countries has shown, persistently high debt-to-GDP ratios are costly and will eventually become unsustainable, in the sense of requiring policy revisions. High debt ratios are costly because they tend to put pressure on real interest rates and increase the debt service component of the deficit, thereby reducing the scope for fiscal maneuver and policy flexibility.21 They are unsustainable because at some point, financial markets will alter their expectations as they realize that present policies are not credible and will have to be revised. This changed expectation will make it increasingly difficult—and eventually impossible—for the government to sell its debt. In fact, the market will realize that the higher the outstanding debt-to-GDP ratio, the more difficult it becomes for the government to meet the budget constraint through fiscal retrenchment (i.e., through higher primary surpluses), hence the higher is the risk for the monetization of the deficit or debt repudiation and restructuring.

The above discussion suggests that one approach to fiscal sustainability is to define a sustainable fiscal policy stance as one that does not lead to an increase in the debt-to-GDP ratio, that is, one that stabilizes the debt-to-GDP ratio under reasonable rates of growth, interest rates, and inflation. While this criterion does provide a simple indicator of sustainability, it suffers from two main shortcomings. First, economic theory generally provides little guidance about an optimum or desirable debt-to-GDP ratio.22 Second, it turns out that stabilizing the debt-to-GDP ratio can impose too stringent a condition on policy. A less restrictive requirement has been developed based on the notion of solvency. Solvency, a necessary condition for fiscal sustainability,23 requires only that debt-to-GDP ratios grow at a rate below the real interest rate minus the real growth rate of GDP. Equivalently, the nominal stock of debt must grow at a rate below that of the nominal interest rate.24

To see how the notion of solvency has been useful in the development of an operational indicator of sustainability, consider the government’s budget constraint. It can be shown that the temporal budget constraint can be written in terms of GDP as


  • d = rate of change in the debt-to-GDP ratio in the current period

  • d = debt-to-GDP ratio in the previous period

  • pd = primary balance in GDP terms25

  • r = real interest rate

  • g = real growth of GDP

  • s = seigniorage in GDP terms (broadly defined).

Note that the temporal budget constraint of the government (equation 3.5) implies that:

  • The change in the debt-to-GDP ratio is determined by the primary balance, seigniorage, and the growth term, or built-in momentum of the debt-to-GDP ratio. When interest rates exceed the growth rate, the debt ratio will tend to rise by feeding on itself, since interest payments add more to public debt than growth adds to GDP, unless (pds) is kept negative. This latter condition will be automatically satisfied whenever the government is running a primary surplus (pd < 0). However, in the presence of a primary deficit (pd > 0), the primary deficit would have to be kept below what can be financed by seigniorage. Put differently, when interest rates exceed the growth rate, it becomes impossible for the government to run a permanent primary deficit in excess of revenues that can be raised through seigniorage. Further, since the amount of seigniorage is limited, it eventually becomes necessary for the government to run a primary surplus. The more the policy adjustment is delayed, however, the higher the debt-to-GDP ratio will be and the lower the room to maneuver for the government.

  • If, on the other hand, the real interest rate is lower than the growth rate, then the country could grow out of its debt. This means essentially that the country can bear a higher level of debt-to-GDP ratio and can afford to run a primary deficit permanently in excess of the desirable level of seigniorage. It does not, however, mean that there is no constraint on the debt-to-GDP ratio. Indeed, if the country increased its borrowing substantially, it would risk raising interest rates to a point where they exceed growth rates. This would make unsustainable what had been sustainable policies.

  • Whether fiscal policy is sustainable depends not only on factors that the fiscal authorities control, such as revenue and spending programs, but also on other factors, such as the interest rate on government obligations, the long-run growth rate of the economy, and demographic trends.

  • The proper measure of debt for the government budget identity is net rather than gross debt, because it corresponds most closely to the overall, or general, government deficit. Net debt comes close to measuring the net worth of the government (assets minus liabilities), although it records financial assets at book value and may not adjust for unfunded liabilities and nonfinancial assets.

  • The government budget identity can be used to calculate budget targets that would achieve specific debt objectives, such as stabilizing or making specific reductions in the debt-to-GDP ratio. It can easily be shown that stabilizing the debt-to-GDP ratio requires that the ratio of the deficit to GDP, inclusive of interest payments on the debt, not exceed the initial debt-to-GDP ratio multiplied by nominal GDP growth.

Expenditure Arrears

Government expenditure arrears, which indicate delays in government payments to suppliers or creditors, have become an important fiscal issue in many transition economies. Arrears can lead to underestimates of spending and of the size of the fiscal problem facing a country. Since arrears are a form of forced deficit financing, the government’s borrowing requirement is also understated, leading to a distorted picture of the sources of credit expansion in the economy. While deficit financing can allow the government to absorb more of the economy’s resources than would otherwise be possible, this initial effect is offset as the rest of the economy responds by raising suppliers’ prices or holding back payments for taxes and fees. Ultimately, expenditure arrears raise the cost of providing government services.

The accumulation of government arrears may also have a serious adverse impact on the private sector’s confidence in the soundness of government finances. Private consumers and investors may anticipate an increase in the tax rate, higher inflation, or a general worsening of the financial situation in the medium term. Arrears may accumulate throughout the economy as a result of government arrears, with severe consequences for the stability of the financial system and prospects for economic growth. Late payments for government wages and transfers are likely to have an impact on aggregate demand that needs to be taken into account in a proper economic analysis of the government deficit.

Arrears are often caused by an unrealistic, overly optimistic revenue forecast or a lack of proper mechanisms for monitoring and controlling government spending. A well-functioning Treasury can therefore play an important role in preventing the emergence of payment arrears.

Adapted from Ke-Young Chu and Richard Hemming, eds., Public Expenditure Handbook (Washington: International Monetary Fund, 1991).

In terms of the intertemporal budget constraint

where PDV is the present discounted value using as the discount rate the difference between real interest and real growth.

Solvency can be defined as a situation in which the government is in a position to meet its obligations fully (i.e., to service the outstanding public debt fully).26 Assessing the solvency of a government involves not only considerations pertaining to current revenues and expenditures but also expectations of future revenues and expenditures. The starting point in assessing solvency has traditionally been the balance sheet of the public sector, i.e., a summary of government assets and liabilities. Government assets include the current stock of assets (both domestic and foreign) as well as anticipated future revenues (i.e., the present value of future revenues). Government liabilities include current obligations as well as the present value of future expenditures. In this way the balance sheet of the public sector becomes a forward-looking balance sheet integrating both the short-term and long-term fiscal performance. Using the above expanded notion of assets and liabilities, one can define the government’s (or more generally the public sector’s) net worth as the difference between assets and liability. If the net worth is positive (i.e., assets exceed liabilities), then the government (public sector) is said to be solvent. Otherwise, the government is regarded as insolvent; that is, without an increase in its assets (current or future), it is not able to meet its obligations.

Thus, if the government adheres to the budget constraint above (equation 3.6), then the initial debt stock ratio must be matched by the present discounted value of expected future primary balances and seigniorage in terms of GDP.27

Some useful indicators of fiscal sustainability have been developed, including the concept of primary gap, net worth, and medium-term tax gap (see Box 3.4).

Analysis of Revenues


Any assessment of revenue developments and performance should focus on revenues as a proportion of GDP in light of revenues-to-GDP ratios in comparable economies. When fiscal deficits need to be reduced, the economic cost of raising taxes must be weighed against the costs of reducing public spending. As a general rule, both will be required. In the short term, most governments are tempted to rely on ad hoc increases in revenues, which are administratively and politically convenient. However, this approach often leads to complex, inefficient, and highly distortionary tax systems that not only fail to bring in sufficient revenue, but also damage incentives to work and save, thereby reducing economic growth. In assessing the efficiency of a tax system and determining the scope for necessary reforms, analysts find the concepts of tax elasticity and tax buoyancy useful.

Tax Elasticity and Buoyancy

The elasticity of a tax is defined as the relative change in revenues from that tax under a given tax system (which remains unchanged) compared with the relative change in the tax base. Elasticity provides a tax system with built-in flexibility. It can be written as
If GDP is taken as a proxy for the tax base, then elasticity with respect to GDP is


  • AT = is the tax receipts from an unchanged tax systems.28

  • Δ = refers to the change during a period.

A tax system is elastic when it has an elasticity value greater than one, suggesting that tax revenues are increasing at a higher rate than GDP without new taxes or increases in tax rates, that is, with no discretionary change in tax policy. Elasticity is desirable in a tax system and should be encouraged in countries where government expenditures tend to increase more rapidly than GDP. The tax system is likely to be elastic with respect to GDP when taxes are levied on growing economic sectors; when tax rates are progressive, and are ad valorem rather than specific; and when taxes are collected promptly. This last point is especially important during periods of high inflation, when an unduly long lag between the assessment and collection of taxes erodes the real value of tax revenues.

Measures of Sustainability

The indicators of fiscal sustainability presented below aim at assessing the magnitude of the required adjustment, to ensure solvency and measure the size of the permanent fiscal adjustment necessary to stabilize the debt-to-GDP ratio.1 They assume that the permanent level of seignorage is negligible.

  • Positive net worth. This requires that government net worth be non-negative, that is, the present discounted value of the primary fiscal balance be larger than or equal to the debt stock. A measure of the needed fiscal adjustment to ensure sustainability under-this approach is the difference between the initial debt-to-GDP ratio and PDV of the primary balance.2

  • Primary gap.3 The primary gap is equal to the present discounted value of the primary balance that would stabilize the initial debt-to-GDP ratio minus the actual primary balance. If the gap is positive, then fiscal retrenchment will be necessary for the debt-to-GDP ratio to be stabilized. This measure is useful and requires minimal information—the actual primary balance, initial debt-to-GDP ratio, real interest rates, and output growth. This indicator is equivalent to the positive net worth approach when the initial debt is stabilized.

  • Medium-term tax gap.3 This indicator measures the required adjustment in the tax ratio needed to stabilize the outstanding public debt-to-GDP ratio, given the projected path of noninterest expenditures and transfers (in terms of GDP), real interest, and growth rates.


Based on Jocelyn Home, “Indicators of Fiscal Sustainability,” IMF Working Paper 91/5 (Washington: International Monetary Fund, January 1991).


The PDV of a variable can be approximated by the value of the variable divided by the discount rate, so that PDV (x, i) is x/i where i is the discount rate.


See also Olivier Jean Blanchard, “Suggestions for New Set of Fiscal Indicators,” OECD Working Paper, April 1990.

An elastic tax system is useful from the point of view of economic growth, which generally calls for a sustained rise in spending on social and economic infrastructure and maintenance. If these increases in expenditures are not accompanied by rising revenues, they can lead to undue reliance on deficit financing, either external (with consequences for the external debt burden) or domestic. With an elastic tax system, there is usually no need for the frequent and unanticipated tax increases that can adversely affect work and reduce confidence in the government.

Elasticities are calculated not only for overall tax revenues, but also for individual taxes. For example, ad valorem taxes are generally more elastic than specific taxes. Individual income taxes are another example of a relatively elastic tax.

The buoyancy of a tax is defined as the increase in the revenue collected compared with the relative increase in GDP. The change in revenue includes any effects of changes in the tax system, including discretionary changes in the tax structure. The algebraic expression of the formula for tax buoyancy is

In the case of buoyancy, the ΔAT measures the change in actual tax revenues over the period, but in the elasticity formula, ΔAT measures the change in tax revenues adjusted for the estimated impact of changes in the tax system over the period (i.e., excluding the impact of all discretionary changes). If the changes in the tax system are revenue enhancing, then buoyancy will exceed elasticity, because the actual tax revenue will exceed the amount that would have been generated in the absence of changes in the tax system.

Assessing a Tax System

Analysts engaged in considering a country’s tax system will want also to consider the appropriateness of that system and explore possible directions for reforming it. While the primary objective of taxation is to generate revenue, it has often been used to correct market failures and to help redistribute incomes. Given these objectives, a number of criteria have been developed to assess how well a tax system works. The Tanzi Diagnostic Test (summarized in Box 3.5) can be a useful guide to evaluating a country’s tax system.29

Tax Effort Analysis

Generating adequate revenues in the most efficient manner is one of the essential functions of a tax system. More specifically, a tax system needs to transfer economic resources from private users to the government in an orderly and noninflationary way. This criterion, revenue productivity, can be assessed for any tax system using a methodology known as tax effort analysis.30

The question underlying the assessment of a system’s revenue productivity is whether the government can raise the level of tax revenues if necessary with few adverse effects. In this context, a commonly used indicator of tax performance is the ratio of tax revenue to GDP, or the actual tax ratio. International comparisons of such tax-GDP ratios are used to make broad statements regarding the efforts a government makes to raise tax revenues. However, using the actual tax ratio to judge these efforts can be misleading, because the actual tax ratio ignores the taxable capacity of a country by assuming that the GDP is the appropriate indicator of this capacity.

Taxable capacity is defined as the level of tax revenue that would result if tax bases were taxed at some average intensity. The amount of tax revenue actually collected as a proportion of the taxable capacity therefore indicates tax effort. Taxable capacity, of course, is not a precise concept, but it nevertheless provides broad guidance in assessing tax effort. Three major factors that can determine capacity have been identified: (i) the degree of openness of an economy; (ii) the level of development and income; and (iii) the composition of income.

Tax effort analysis, while useful in assessing tax performance, has obvious limitations. It is not a normative measure, in that a country with below-average “tax effort” may nevertheless find the tax ratio appropriate in light of national preferences. Tax effort analysis is also purely static in nature, because it does not take into account rapid changes in the tax ratios and tax efforts unless it assesses tax effort over time. In the dynamic sense, the elasticity of tax revenue with respect to GDP is often regarded as a more useful indicator.

The Tanzi Diagnostic Test for Revenue Productivity

Vito Tanzi has proposed eight qualitative diagnostic tests to help assess the “revenue productivity” of a given tax system. These tests are as follows:

  1. Concentration index: Does a large share of total tax revenue come from relatively few taxes and tax rates?

  2. Dispersion index: Are there very few, if any, low-revenue-yielding, nuisance taxes?

  3. Erosion index: Are actual tax bases as close as possible to potential ones?

  4. Collection lags index: Are tax payments made by taxpayers without much time lag and close to the time when they should be made?

  5. Specificity index: Does the tax system depend upon as few taxes as possible with specific rates?

  6. Objectivity index: Are most taxes levied on objectively measured bases?

  7. Enforcement index: Is the tax system enforced fully and effectively?

  8. Cost of collection index: Is the fiscal cost of collecting taxes as low as possible?

A positive answer to all these questions simultaneously, according to Tanzi, should entitle a country’s tax system to high marks for revenue productivity.

Source: Vito Tanzi, “Tax System and Policy Objectives in Developing Countries: General Principles and Diagnostic Tests,” unpublished IMF paper, November 28, 1983.

Analyzing Expenditures31


Public expenditure represents the cost of the government‘s activities, which involve the provision of goods and services, production, and income transfers. The government provides two types of goods and services: those that can be consumed directly by the population, individually or collectively (such as public passenger transportation and national parks), and those that enhance the productivity of factors of production (such as industrial ports). Many expenditures, including those for infrastructure such as highways, combine the two. Some public expenditures—pensions and unemployment compensation, for example—represent direct transfers to households and business enterprises. The next sections discuss the main categories of public expenditures, with particular emphasis on subsidies, the role of the state, macroeconomic implications of public expenditures, and the interaction of macroeconomic and structural aspects of public expenditures.

It is important to evaluate the level and composition of public expenditure in an appropriate analytical framework. Such a framework should be systematic, containing five elements:

  • An aggregate spending level and deficit that are consistent with the macroeconomic framework;

  • Judicious use of the private sector in the delivery of certain goods and services (even when public financing is necessary, public spending should be concentrated first on programs that provide public goods, externalities, and benefits to those falling within the social safety net—things that the private market is not providing or that are underprovided);

  • Spending that is allocated on the basis of outcomes within and across programs;

  • Careful analysis of capital and current spending within a program or a sector to ensure a balanced allocation for each; and

  • A similarly careful analysis of budgetary institutions, to ensure that incentives and rules help to control aggregate spending, and facilitate efficiency and equity in the composition of spending.32

Adjustment strategies often require a substantial degree of fiscal retrenchment. The adverse effects of higher rates for existing taxes and a lack of alternative revenue sources may dictate that a substantial share of this retrenchment be achieved through expenditure cuts. In transition economies facing increasingly tight resource constraints, adjustment programs have to focus on spending priorities. Governments seeking to reform spending must identify areas in which markets can effectively substitute for public sector involvement and consider how scarce government sector resources can best be utilized in those areas where public sector involvement is considered appropriate.

Types of Public Expenditures

The main economic categories of public expenditures are wages and salaries, goods and services, subsidies, and capital expenditures.33

  • Wages and salaries. Government policies on civil service employment and pay have a major impact on the efficiency of government expenditures. Low pay and inadequate salary differentials for skilled and technical staff may discourage workers and contribute to low productivity in the government sector. At the same time, the widespread practice of using the public sector as employer of last resort may substantially increase wage costs. Recent reforms in several countries have sought to reduce the government wage bill through a variety of measures, including a civil service census and the elimination of “phantom” workers; the elimination of vacancies and temporary positions; hiring freezes; the suspension of employment guarantees; voluntary retirement programs; wage cuts, caps, and freezes; and the most difficult measure, layoffs. Attempts have also been made in some countries to increase salary differentials in favor of senior staff.

  • Goods and services. This category represents a significant portion of current spending in most countries and accounts for the administrative and overhead costs of running the government. Although substantial economies are often possible under this heading, it is important to ensure that cuts in goods and services do not compromise the efficient delivery of government services. An important part of current spending on goods and services goes for the operation and maintenance of capital stock. Inadequate spending on operations (whether supplies or personnel costs) can lead to low levels of effectiveness in areas such as education and health. Similarly, inadequate spending on maintenance can lead to the rapid deterioration of physical capital. Pursuing a policy that focuses on creating new capacity while allowing existing infrastructure to deteriorate can be costly and counterproductive. In some cases, if the rate of depreciation on existing assets is measured accurately, net investment may be negative. Similarly, across the-board cuts in materials, supplies, and services in macroeconomic adjustment programs should be avoided in order not to undermine the programs’ effectiveness.

  • Subsidies.34 Subsidies are defined as any government assistance to producers or consumers for which the government receives no compensation in return. Subsidies can take many different forms, including (i) direct payments to producers or consumers (cash grants); (ii) loans at interest rates below the government borrowing rate and with government guarantees (credit subsidies); (iii) reductions in specific tax liabilities (tax subsidies); (iv) the provision of goods and services at below market values (in-kind subsidies); (v) government purchases of goods and services at above-market prices (procurement subsidies); (vi) implicit payments through government regulatory actions that alter market prices or access (regulatory subsidies); and (vii) maintenance of overvalued currencies (exchange rate subsidies).

Whether explicit (direct) or implicit (indirect), subsidies are a major drain on government budgets in many transition economies. Subsidies are explicit if they are fully reflected in the budget as expenditures, and implicit if they are not. Implicit subsidies may arise as a result of administered prices that are set at levels below or above free market values—for example, for energy—or may support unrealistic interest rates and overvalued exchange rates. Since a significant portion of government subsidies are implicit, budgets do not fully reflect their range and value. Subsidies also affect resource allocation by reducing the flexibility of the economy, and are often an obstacle to structural adjustment. One example of the distortions that subsidies can cause is the pricing of energy products below market levels, leading to wasteful energy consumption.

Any assessment of subsidies should take account of the following:

  • Effectiveness. Not all subsidies are bad, but only those that meet given policy goals by transferring a minimum of resources with a minimum of distortions to the incentive system can be called effective. Effective subsidies are also well targeted—that is, they do not spill over into groups and activities for which they are not intended.

  • Duration. How long subsidy programs last is a serious concern because people change their behavior in order to be included in these programs and may resist being excluded even when their circumstances change. It is this behavior that makes many subsidies ineffective over time. While some subsidies should be limited from the outset, effectively implementing a subsidy program requires regular periodic reassessments of the rationale behind the subsidy, and, if needed, revision, retargeting, or termination of the program.

  • Transparency. The size of a subsidy program and the implied financing requirement should be made explicit in public budgets. Transparency is desirable from both public and private perspectives in order to identify clearly the benefits and costs of individual programs. As a general rule, governments should aim to identify subsidy expenditures and financing explicitly in public budgets and should to the extent possible provide them as cash grants, rather than as procurement, tax, interest, or regulatory supports. Only cash grants provide both government and beneficiary with a clear and explicit picture of the amounts involved. In turn, this transparency provides a basis for judging the affordability and desirability of subsidies.

  • Financing. Subsidies should always be financed through the budget. Attempting to solve financing problems either with extra-budgetary instruments such as government marketing boards, parastatal agencies, and specific extrabudgetary funds, or through the central bank is dangerous. Such methods frequently reduce transparency and lead to reductions in producer prices, with adverse effects on producer incentives.

  • Selecting a pragmatic approach. Subsidy programs must be consistent with a government’s institutional and administrative capabilities. Implicit (indirect) subsidies may be more difficult to control effectively than explicit (direct) subsidies. To simplify administrative burdens, subsidy programs should be made as explicit as possible.

  • Spending on social insurance. Expenditures aimed at protecting the poorer sections of society, including pensions for the elderly and unemployment insurance, constitute a major part of budgetary spending in many countries. Under central planning, public enterprises were responsible either directly or indirectly for a significant part of social insurance expenditures. As these enterprises are reformed during the transition and their social responsibilities reduced or eliminated, there is an urgent need for governments to establish adequate social safety nets (see Box 3.6).

  • Capital expenditures. Growth-oriented adjustment requires productive government investment, combined with policies to correct distortions in relative factor and commodity prices. However, it is important to ensure that the investment program is well designed and that projects are economically sound, because the cost of poorly designed or inefficiently implemented projects can be high. Emphasis should be given to government investment that complements and supports rather than competes with market-determined activities. Education, health, urban services, and rural infrastructure are priority areas for government involvement.

Public Expenditure and the Role of the State

Governments often engage in production activities because markets have failed to fill a need. Markets will not provide public goods such as national defense, law enforcement, and national parks, because these goods are consumed collectively and do not enable producers to make profits. Governments compensate for these market failures through public expenditures, regulations, and taxes.

Over the long run, the government can aim at either a limited role or a more extensive role—through taxation, expenditures, and regulations. It is desirable to make the role of the public sector as transparent as possible (see Box 3.7 on quasi-fiscal operations). One could defend more extensive roles for government on the ground of market failures and the need for equity. However, such an expansion can entail direct and indirect economic costs to society. In most transition economies, reducing the excessive role of the state in economic life is both an economic and political objective of the authorities. In many developing countries, however, the relatively low public expenditure-to-GDP ratio may reflect the government’s limited financing capacity and distorted prices rather than a limited role for the state.

Social Safety Nets

Many transition economies have begun to put in place social safety nets designed to mitigate the short-term adverse effects of economic reforms on the poor, such as the increases that result from the reductions in subsidies on basic necessities and unemployment caused by the reform of state enterprises and the civil service. Social safety nets need to be tailored to the circumstance of each country, including its administrative framework and formal and informal social support systems.

Major components of social safety nets include:

  • Targeted commodity subsidies and cash compensation aimed at protecting people’s ability to buy basic foodstuffs during inflationary periods;

  • Social security arrangements, including pension and disability insurance and child care allowances, with effective targeting and incentive structures; and

  • Unemployment benefits and public works schemes that mitigate the impact of rising joblessness on low-income groups.

The main issues in the design of social safety nets are targeting and incentives. Social benefits should be limited to those most in need. In the absence of sophisticated means testing, many countries rely on categorical targeting, such as limiting benefits to children or pensioners. In terms of incentives, the fiscal cost of social safety nets is reduced if benefits are phased out as household incomes increase, but this is at the cost of increasing the implicit marginal tax rate facing beneficiaries, and the potential adverse impact on incentives.

Adapted from Guidelines for Fiscal Adjustment, IMF Pamphlet Series, No. 49 (Washington: International Monetary Fund, 1995).

Public Expenditure Policy Issues

How can productive public expenditures be distinguished from unproductive public expenditures? Three basic issues are important here.

Quasi-Fiscal Operations

In many transition economies, central banks and other public financial institutions are involved in activities that give rise to financial transactions affecting the effective size of the fiscal deficit.1 Some of the main types of quasi-fiscal operations are:

  • exchange rate subsidies administered through the exchange system;

  • subsidized lending to government, public enterprises, or private entities; and

  • unfunded or contingent liabilities such as exchange rate guarantees.

Where these quasi-fiscal operations are significant, their costs need to be included in any comprehensive measure of the public sector deficit, for several reasons. In many countries, central and public sector bank losses are so large that they contribute to financial instability. Their existence also means that the conventional measures of government’s fiscal balance are misleading indicators of the role of fiscal operations in the economy. The taxes and subsidies associated with quasi-fiscal operations may have distortionary effects on resource allocation.

Although they are not always easy to quantify precisely, quasi-fiscal operations need to be extracted from the accounts of the central bank and public financial institutions. To the extent possible, quasi-fiscal activities should be transformed into normal budgetary operations—that is, quasi-fiscal taxes and subsidies should be replaced with explicit taxes and subsidies. The longterm objective should be to address the root causes of quasi-fiscal operations such as lending activities that are essentially substitutes for explicit subsidies that otherwise would be in the budget and the lack of a unified exchange system. The legal authority of the central bank may need to be revised to limit the extent to which it can carry out quasi-fiscal operations. Such structural reforms are essential to minimize and eventually eliminate the need for quasi-fiscal operations.


See International Monetary Fund, SM/95/65, April 5, 1995, “Quasi-Fiscal Operations of Public Financial Institutions.” Also see Guidelines for Fiscal Adjustment, IMF Pamphlet Series, No. 49 (Washington: International Monetary Fund, 1995).

  • The level problem. How much should the public sector spend? At any given time, a country has a certain capacity to finance public expenditure through taxation and borrowing. Efforts to exceed this limit are counterproductive and lead to macroeconomic and financial imbalances.

  • The efficiency problem. How can public sector outputs—whether they are roads, educational services, or defense services—be provided efficiently? Efficient provision implies achieving given objectives at minimum costs, including not only financial and administrative expenses, but also the costs of any negative effects public expenditures and their financing may have on private sector production.

  • The mix problem. What is the appropriate combination of public sector outputs? With aggregate public expenditure limited by its financing capacity, a country needs to find the right mix of public sector production. Any mix of goods or services chosen should reflect the collective interests of the population.

The level problem is mainly a macroeconomic issue, while the efficiency and mix problems are largely structural. In the short run, the financing capacity of many developing countries effectively limits public spending (see also Box 3.8).

The level and the efficiency problems are largely positive questions. Analysts can look at the macroeconomic implications of aggregate public expenditure or the efficiency of public sector production in a fairly objective manner. The mix problem has both positive and normative aspects: it is possible to prepare a technical analysis of the combination of investments in human and physical capital required to achieve a growth target, but not to compare the relative merits of education and national defense or the geographical distribution of public investments without making a value judgment. In practice, these positive and normative issues are intertwined, making assessment of public expenditure a particularly controversial subject.

The Macroeconomic Implications of Public Expenditure

Public expenditure affects both aggregate supply (or production) and aggregate demand (or spending). Productive public investment—in physical and human capital—increases the return to investment in general, encouraging private investment and economic growth. The effects on supply may be fairly immediate, removing a few key infrastructure bottlenecks. In general, however, the returns to public investment are fully realized only in the long term, especially in areas such as education. At the same time, the public sector competes with the private sector for limited resources, and public expenditure (whether financed through taxation or borrowing) crowds out private expenditure, including private investment. Transition economies are often limited in their ability to finance expenditures through either taxation or borrowing. In the short run, they have neither the administrative capacity to raise taxes nor the well-developed domestic capital markets necessary to support public borrowing, and borrowing from the central bank is costly because it is inflationary. In this situation, a government’s attempts to spend more may actually exacerbate its financing difficulties by triggering higher inflation, inducing taxpayers to delay tax payments and thus reducing the real value of tax revenue.

Sequestering Expenditures

In many transition economies, the authorities have implemented a number of mechanisms to control public spending, in response to revenue shortfalls or limited access to financing. These mechanisms include sequestering, or limiting government spending to levels below those authorized in the budget. Although governments have found this measure useful, it is a short-term emergency step and can have several adverse effects. Since sequestering expenditures often involves an across-the-board cut in spending, it detracts from an efficient allocation of expenditures; it also interferes with elected officials’ oversight of spending priorities and the process of rational, long-term planning

An increase in public sector borrowing can raise domestic interest rates, increase the cost of investment and the government’s borrowing costs, reduce the country’s long-term growth potential, and create a debt burden. Unless the government uses borrowed resources productively, generating the output and income required to raise tax revenues sufficiently to finance future debt repayments and interest, the public sector will have to finance the debt burden by cutting services in the future. With international capital mobility, an increase in domestic interest rates can induce large capital inflows, an exchange rate appreciation, and a deterioration in the country’s external competitive position.

Interactions Between Macroeconomic and Structural Relationships

The macroeconomic and structural aspects of public expenditure policy represent two sides of one problem. Public sector programs—such as those for defense, economic services, and social services—cannot be properly designed unless policymakers take into consideration both the need for efficient delivery and the macroeconomic consequences. The efficiency consideration implies that the distribution of public expenditure among outputs cannot be determined independently of the economic composition of expenditure (wages, other goods and services, transfers, and so forth). The design and implementation of sectoral programs need to be integrated into a coherent macroeconomic framework aimed at achieving sustainable economic growth with stable prices, a viable external payments position, and distributional equity.

Fiscal Sector

Fiscal Structure35

The fiscal structure in Poland, as in other transition economies, is a byproduct of the dominant and active role of the state in the prereform economy. The tax system came to be dominated by taxes on enterprises, which were often negotiated between the government and each enterprise. Under this system, enterprise taxes were a kind of ex post profit-sharing system for the enterprises and the government. In order to finance the many economic and social functions conducted by parastatal entities, the government used a system of extrabudgetary funds supported by levies on enterprises. The result was a large and complex extrabudgetary sector. Because the state had extensive control over prices of inputs and outputs, it changed the rates of turnover taxes frequently, with a view to clearing markets for commodities. On the expenditure side of the budget, state-administered price controls led to massive outlays for subsidies to both consumers and producers. The state also played a very active role in incomes policy, especially in determining wages in the public enterprise sector. With wages nominally fixed at low levels, wages and salaries comprised a relatively small proportion of budget expenditures, while a large proportion of spending was devoted to subsidies and the social welfare system. Since the inception of economic reforms in 1990-91, the Polish authorities have made significant progress in reforming the system of public finances to meet the needs of a market-based economy.

Poland’s state budget covers the fiscal operations of the central government and the local authorities. It runs on a calendar year basis and must be approved by parliament. In 1993-94, state budget revenues amounted to about 65 percent of general government revenues, and state budget expenditures were about 70 percent of general government expenditure. (The general government consists of central and local governments and extrabudgetary funds.)

Local government expenditures, which in recent years have amounted to about one-third of total budgetary expenditures, are financed by certain revenues that accrue directly to these authorities (the bulk of the revenue from the tax on wages, real estate taxes paid by socialized entities, and receipts from turnover and income taxes from the private sector in the area) and by transfers from the central government. Local authorities cannot directly borrow from the banking system. In recent years, the local governments have recorded surpluses, which they are not required to transfer to the central government.

A number of extrabudgetary funds are responsible for carrying out spending related to various social, educational, and infrastructural matters. The funds receive transfers from the state budget equal to about 30 percent of their expenditures, as well as revenues from levies and contributions from the private sector. The funds cannot borrow from the banking system. In 1993-94, spending by these funds amounted to over 60 percent of state budget expenditures. These funds are also generally allowed to keep any surpluses.

Tax revenues typically account for over 80 percent of the general government’s total revenues. Income and turnover taxes and social security contributions made up over 70 percent of tax revenues in 1994- Other sources of tax revenue include trade taxes, which have recently grown in importance; the wage tax; and the excessive wage tax (EWT), which penalizes enterprises that increase above the average level. The yield from profit taxes has declined in recent years, although this fall has been partially offset by the requirement that state-owned enterprises transfer part of their profits to the government in the form of dividends. These transfers are considered nontax revenues, along with transfers from financial institutions and privatization receipts.

Current expenditures accounted for over 90 percent of total general government expenditures in 1993-94, and subsidies for 12-13 percent of current expenditures. The most important subsidies were those for food, housing, and coal. Although the share of subsidies in total current expenditures has fallen sharply since 1990, other categories of spending have increased rapidly, notably social security benefits, public consumption, and interest payments.

The five largest extrabudgetary funds (the Social Insurance Fund, the Social Insurance Fund for Farmers, the Foreign Debt Servicing Fund, the Central Fund for the Development of Science and Technology, and the Export Development Fund) dominate the financial position of these operations. The Social Insurance Fund is the largest, accounting for about 60 percent of extrabudgetary expenditures in 1994. This fund is responsible for most social security benefits (the Social Insurance Fund for Farmers services the private agricultural sector) that were previously paid through the state budget. Its revenues consist mainly of contributions from enterprises, and spending on pensions makes up the bulk of its expenditures.

The Foreign Debt Servicing Fund was created to take over from the budget the servicing of the government’s foreign debt and the disbursement of subsidies to Bank Handlowy for servicing the foreign debt of the banking system. Its main revenue source has been transfers from the state budget. A substantial portion of debt service obligations on external debt have either been rescheduled or gone into arrears, reducing somewhat the fund’s commitment to reimbursing the banking system.

Revenues of the Central Fund for the Development of Science and Technology are provided largely by a compulsory levy charged to enterprises. Spending from the fund finances research and development. The Export Development Fund receives the revenues from taxes on foreign trade and finances export subsidies and promotion.

Recent Fiscal Developments

Following a sharp deterioration at the beginning of the 1980s and some corrective measures implemented in the mid-1980s, the general government accounts were in broad balance in 1984-88. In 1989, the general government deficit rose sharply to about 7.4 percent of GDP, reflecting a decline in revenues relative to GDP and, to a lesser extent, the growth of expenditures.

The authorities’ efforts at a major fiscal reform met with some success in 1990, most visibly in a reduction in the general government deficit. The deficit was eliminated, and the government accounts recorded a surplus of over 3 percent of GDR The brunt of the massive fiscal adjustment was borne by expenditures, which fell by over 7 percentage points of GDR These reductions were achieved mainly through a sharp cut in subsidies on food and energy, but restraints on wages and salaries also contributed to the decline.

The fiscal adjustment achieved in 1990 was sharply reversed in 1991-92, with the general government deficit climbing to over 6.5 percent of GDP Revenues from enterprise income taxes fell as the sharp drop in output and substantial increases in wages awarded by the Workers’ Councils led to large losses in enterprise profitability. Although subsidies continued to be reduced and capital expenditures were contained, all other categories of expenditures increased in relation to GDP. The rise in social expenditures was particularly marked, largely because of the rise in unemployment benefit payments, but also because of significant (and unanticipated) increases in pensions that reflected the number of workers retiring early or claiming disability.

Since 1993, as the economic recovery has gathered steam, substantial progress has been made in reducing the fiscal imbalance. The general government deficit was reduced to about 3 percent of GDP in 1993 and further to about 2 percent of GDP in 1994. The pressures on public finances, however, continued to pose a challenge to the authorities; these pressures stem in part from the effects of the transformation on the most vulnerable sections of the population—those with little or no income, pensioners, and the unemployed—and in part from increasing demands for a variety of public services—a trend that reflects the growing aspirations of the population. At the same time, the tax base has been narrow, and there have been concerns about the equity of the taxation burden.

Developments in Tax Policy

The authorities took some steps toward reforming the tax system (see the Appendix for a summary of the tax system as of 1994).36 The changes include:

  • (1) Frequent adjustments in the structure and levels of the turnover tax rates since 1989, with a view toward reducing their number and complexity. Despite these adjustments, the numerous exemptions and lax administration have kept the effective yield of the turnover tax low. In 1991, the average effective tax rate was 5.5 percent, compared with a general turnover tax rate of 20 percent, and half of all turnover tax revenue came from three products: alcohol, fuels, and tobacco.

  • (2) A revision of the enterprise profits tax to make it less discretionary. Enterprise profits are now taxed at a flat rate of 40 percent. The new regulations also allow accelerated depreciation allowances and generous reserves for bad debts. However, there are still many exemptions—for example, total exemptions for all agricultural activities.

  • (3) The introduction of a personal income tax (effective January 1, 1992). The new tax is progressive and covers all earned income—wages and salaries, fringe benefits, and rental incomes—as well as pensions. The three tax rates (20 percent, 30 percent, and 40 percent) are indexed to wage growth. The exemption level is high enough to keep low income earners outside the income tax net. Income from certain interest payments and dividends is subject to a tax of 20 percent. Capital gains from the sale of stocks and bonds were exempt for 1992 and 1993 but are now taxed; gains realized on the sale of real estate are taxed at 10 percent. Agricultural incomes and interest on individual savings accounts remain exempt from taxation.

  • (4) A value-added tax (VAT) was introduced in 1993 to replace the turnover tax. There are three rates—a standard rate of 22 percent, a preferential rate of 7 percent for basic necessities, and a zero rate on exports. Additional excise taxes are levied on alcohol, fuels, and tobacco.

An important factor behind the shortfalls in tax revenues has been the rapid buildup of tax payment arrears by state enterprises. As of early 1993, arrears were estimated at about 2.5—3 percent of GDP. The authorities continue to be concerned about the financial health of the enterprise sector. While a few state-owned enterprises are financially sound, the overall financial position of these firms deteriorated in 1990-92, with the gross profit rate falling from 7.7 percent in 1991 to 6.1 percent in 1992. Another indicator of financial weakness has been the accumulation of interenterprise arrears, which were estimated to be nearly as large as the outstanding stock of bank credit to enterprises at the end of 1991.

Poland, along with the Czech Republic, has pioneered the use of the EWT as an instrument of incomes policy. The wage norm was first defined in terms of the total wage bill for enterprises, and after 1991, in terms of average wages. Although initially the EWT was considered primarily a regulatory device and not a revenue raiser, it eventually became an important source of budgetary revenues, yielding receipts of over 3 percent of GDP in 1991. The EWT was abolished in 1994.

Developments in Expenditure Policy

Total public expenditure remained broadly stable at about 50 percent of GDP in 1991-94, but its structure shifted substantially. The drop in subsidies—especially to state enterprises—was matched by a rise in cash benefits, in particular unemployment benefits and pension outlays. As in other transition economies, public investment has borne a disproportionate share of expenditure cuts.

Poland’s greatest difficulties in controlling expenditures have been in the area of social protection and benefits. The social safety net in Poland consists of three basic benefit programs—social insurance, social assistance benefits, and unemployment benefits. The social insurance system operates on a pay-as-you-go basis and is financed through employee and employer contributions; the general rate for employers was raised from 43 percent to 45 percent in February 1992. Unemployment benefits are funded through a 2 percent employer payroll contribution.

After early 1990, pensions were supposed to be revalued at the end of each quarter and brought in line with the increase in average wages for the previous quarter. However, in practice these revaluations have not taken place, and the real value of pensions has continued to erode. The problems with the social protection system included too-generous access to disability pensions and a lack of targeting of family allowances. Reforms in 1992 tried to address some of these problems but did not succeed in containing the rapid rise in social expenditures. Unemployment benefits have been curtailed by restricting recipients to 12 months of benefits and limiting the benefits themselves to a uniform 36 percent of the average wage.

The large and growing pension system presents a potentially important challenge for public finances. Under the present system, transfers from the state budget cover the growing gap between contributions and benefits. The authorities have increasingly been considering reforming the pension system to address a variety of problems, including the overly liberal eligibility criteria, deteriorating dependency ratios, poor compliance with regulations governing contributions by employers and individuals, and weak administration.

Poland has a large number of regional and local authorities, and therefore the issues of fiscal relations between the central and local authorities are important. In 1991, local authorities were granted increased autonomy, and their revenues and expenditures were separated out of the state budget; only transfers from the budget to the local authorities continued to be recorded as an expenditure item. These transfers are now determined by local need and potential revenue in contrast to the past practice of simply adding on predetermined increases each year.

Financing of the Deficit

In view of Poland’s relatively high debt level and the difficulties the country has faced in servicing it (a problem that has manifested itself in the buildup of arrears), access to voluntary sources of external financing was limited. As a result, the predominant source of financing the fiscal deficit was the domestic banking system. This situation contributed to inflationary pressures, which would have been worse but for the cushion provided by increased private savings, the bulk of which are deposited with the banking system, and the relatively subdued demand for loans from the nongovernment sector on account of the downturn in economic activity. The authorities’ efforts to tap the nonbank domestic sector for financing initially met with only limited success. Since late 1989, the government has issued treasury bills, and in 1991, introduced an auction system. However, these bills were held mostly by the banking system, industry, and the central bank, with the nonbank public purchasing only relatively small amounts.

Exercises and Issues for Discussion


  1. The illustrative data given below show that the government’s cash flow is in balance—total receipts equal to total payments. Reclassify the information in an analytical way to calculate the conventional deficit and the primary deficit. Show where each item below should be classified (e.g., revenue expenditure, net lending, financing).

    Cash Flow of the Government

    (Billion rubles)

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  2. On the basis of the information provided below, compute the conventional, primary, and operational deficits in 1994 and 1995 assuming that the debt stock in the beginning of 1994 equals 100 billion rubles.

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    What is the size of the “monetary correction”? Why should it be treated as if it were an amortization payment?

  3. On the basis of the data in Table 3.1, calculate Poland’s primary deficit for the period 1990-94. Analyze and compare the developments in the conventional and primary deficits during the period.

  4. Comment on the evolution of the tax-to-GDP ratio during 1990-94- Is it a good measure of the Polish authorities’ tax effort? Comment on the structure of revenues and expenditures on the basis of Tables 3.33.6.

  5. Calculate the buoyancy of total tax revenues for 1991–93. Could you have deduced the buoyancy on the basis of the observed changes in the tax-to-GDP ratios over the period? Is the available information sufficient to calculate the elasticity of tax revenues with respect to GDP? If not, why?

  6. On the basis of the tax revenue data, discuss how the Polish tax system fares using the Tanzi Diagnostic Test given in Box 3.5.

  7. Assume that the income (GDP) elasticity of demand for base money is about 1.2 and that base money represents 20 percent of GDP What will be the level of seigniorage that can be obtained from the economy without adding to inflation (i.e., pure seigniorage) if the growth rate is estimated at 7 percent? What will happen if the financing requirements of the government are much larger?

  8. With reference to the table below, in both absolute terms and in relation to GDP,

    • (a) compute the seigniorage in 1994 and 1995;

    • (b) compute the inflation tax in 1994 and 1995;

    • (c) explain the sharp increase in the observed inflation tax;

    • (d) explain the observed decline in seigniorage; and

    • (e) with reference to Box 3.1, show that when the rate of growth of nominal money balances are in line with the rate of inflation, the seigniorage will equal the inflation tax.

      (Monetary data in billions of U.S. dollars)

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    • (a) Consider a country with a 60 percent public debt-to-GDP ratio in the current year and an expected nominal growth rate of GDP of only 10 percent. What would be the overall fiscal deficit (i.e., inclusive of interest payments) necessary to stabilize the country’s debt-to-GDP ratio in the short run, assuming a possible seigniorage level of 1 percent of GDP?

    • (b) Suppose now that nominal interest rates are running at 15 percent a year. Why will the country have to target a primary surplus in order to stabilize the debt-to-GDP ratio, in the short run, at its initial level of 60 percent? How large would the surplus have to be?

    • (c) Show that if the above fiscal stance is continued over the long run, it will be sustainable assuming that all above parameters (growth rates, interest rates, seigniorage) will not change over time. You can show, for example, that the government net worth will not be negative or equivalently that the primary gap is zero (see Box 3.4).

    • (d) Suppose now that the spending plans call for the ratio-to-GDP of noninterest expenditure to stabilize at about 25 percent; what will be the medium-term tax gap given that the country’s tax-to-GDP ratio is currently at about 23 percent of GDP? Comment on the magnitude of the required adjustment.

  9. Complete the table that follows and show that the higher the initial debt-to-GDP ratio, the higher the required, permanent adjustment will be in order for the fiscal stance to be sustainable.

Table 3.1.

General Government Operations1

(In trillions of zlotys)

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Sources: Juha Kahkonen and others, Poland-Statistical Tables, IMF Staff Country Report No. 96/20 (Washington: International Monetary Fund, 1996); and Liam P. Ebrill and others, Poland: The Path to a Market Economy, Occasional Paper No. 113 (Washington: International Monetary Fund, 1994).

Comprising the state budget, extrabudgetary funds, and local governments.

1993 data include revenues from the VAT, which replaced turnover taxes in July 1993.

Interest obligations on external debt are recorded on a cash basis, interest obligations on domestic debt are recorded on an accrual basis.

Assume net repayment remains unchanged in U.S. dollar terms from previous year.

Includes expenditure arrears of the state budget to banks and nonbanks that were not converted into treasury bills. Excludes external interest payments arrears, which are recorded on a cash basis above the line.

Unallocated financing.

Table 3.2.

General Government Operations1

(In percent of GDP)

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Sources: Juha Kahkonen and others, Poland-Statistical Tables, IMF Staff Country Report No. 96/20 (Washington: International Monetary Fund, 1996); and Liam P. Ebrill and others, Poland: The Path to a Market Economy, Occasional Paper No. 113 (Washington: International Monetary Fund, 1994).

Comprising the state budget, extrabudgetary funds, and local governments.

1993 data include revenues from the VAT, which replaced turnover taxes in July 1993.

Interest obligations on external debt are recorded on a cash basis, interest obligations on domestic debt are recorded on an accrual basis.

Assume net repayment remains unchanged in U.S. dollar terms from previous year.

Includes expenditure arrears of the state budget to banks and nonbanks that were not converted into treasury bills. Excludes external interest payments arrears, which are recorded on a cash basis above the line.

Unallocated financing.

Table 3.3.

Summary of the General Government Operations

(In trillions of zlotys)

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Sources: Juha Kahkonen and others, Poland—Statistical Tables, IMF Staff Country Report No. 96/20 (Washington: International Monetary Fund, 1996); and Liam P. Ebrill and others, Poland: The Path to a Market Economy, Occasional Paper No. 113 (Washington: International Monetary Fund, 1994).
Table 3.4.

Summary of the General Government Operations

(In percent of GDP)

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Sources: Juha Kahkonen and others, Poland—Statistical Tables, IMF Staff Country Report No. 96/20 (Washington: International Monetary Fund, 1996); and Liam P. Ebrill and others, Poland: The Path to a Market Economy, Occasional Paper No. 113 (Washington: International Monetary Fund, 1994).
Table 3.5.

Summary of the State Budget Operations

(In trillions of zlotys)

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Sources: Juha Kahkonen and others, Poland-Statistical Tables, IMF Staff Country Report No. 96/20 (Washington: International Monetary Fund, 1996); and Liam P. Ebrill and others, Poland: The Path to a Market Economy, Occasional Paper No. 113 (Washington: International Monetary Fund, 1994).

Before 1992, various wage taxes.

Revenue from customs duties; shared between the central government and the Export Development Fund.

Excluding revenue from foreign currency auctions.

Gross receipts from privatization.

includes pensions for uniformed persons and family allowances.

Table 3.6.

Summary of the State Budget Operations

(In percent of GDP)

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Sources: Juha Kahkonen and others, Poland-Statistical Tables, IMF Staff Country Report No. 96/20 (Washington: International Monetary Fund, 1996); and Liam P. Ebrill and others, Poland: The Path to a Market Economy, Occasional Paper No. 113 (Washington: International Monetary Fund, 1994).

Before 1992, various wage taxes.

Revenue from customs duties; shared between the central government and the Export Development Fund.

Excluding revenue from foreign currency auctions.

Gross receipts from privatization.

Includes pensions for uniformed persons and family allowances.

Table 3.7.

Summary Table

(Millions of zlotys/year ended December 31)

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Source: IMF, Government Finance Statistics Yearbook (Washington: International Monetary Fund, 1995).

Note that ‘p’ stands for provisional data.