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The first draft of this paper was written while Kenji Moriyama was a summer intern in the European Department. The authors thank Carlo Cottarelli, Jorge Cunha, Philippe de Rougemont, Marc Roovers, and participants to an IMF seminar and the 2004 Bank of Italy conference on Public Debt for useful suggestions, and several IMF colleagues for providing valuable insights on individual countries’ fiscal operations
Buti, Eijffinger, and Franco (2003) discuss this issue and put forward proposals to increase transparency. Eurostat (1998) contains a detailed country-by-country list of deficit- or debt-reduction measures adopted in 1997 whose classification was doubtful.
The new Government Financial Statistics Manual (GFSM—see IMF 2001) proposes a balance sheet approach, which uses the terminology of the System of National Accounts 1993 (EC, IMF, OECD, UN and World Bank, 1993, henceforth SNA). Despite a few differences (some of them will referred to later), the SNA, GFS, and European System of Accounts (ESA) 95 manuals share the same accounting principles.
Bunch (1991) shows that U.S. states with constitutional debt limits use public authorities to circumvent borrowing restrictions, while von Hagen (1991) and Kiewiet and Szakaly (1996) find that constitutional limitations pertaining only to guarantee state debt do not affect the total amount of debt issued by state and local public authorities.
For example, changes in classification of assets and changes in the quality of existing economic assets.
In Greece, for example, currency fluctuations implied increases in gross debt much larger than the underlying flow of new government borrowing, because of the trend nominal depreciation of the drachma vis-à-vis partner country currencies.
Easterly (1999) provides several examples of ‘illusory’ fiscal adjustment undertaken by foregoing expenditures on operations and maintenance.
Debt in the Maastricht-based definition is on a consolidated basis, i.e., general government bond holdings by other branches of the general government are netted out. These include, for example, social security funds which are invested in government securities.
The idea of a separate ‘capital’ budget has a long and distinguished history (see, for example, Musgrave (1939)).
“The stock of the assets and liabilities recorded in the balance sheet is valued at the market prices prevailing on the date which the balance sheet relates” (page 197).
In an analogous fashion, one may define permanent fiscal measures (which permanently reduce the level of future spending or the need for future taxation) and one-off measures, which reduce future taxation needs, but only temporarily.
This is the case even if shares (or equivalent) are issued (ESA 95 manual page 65).
The deficit (4.3 percent of GDP) turned out to be much higher than initially reported.
Regular payments of dividends are recorded as such and thus counted in net saving of the general government.
In Italy, a second operation involving the securitization of real estate assets was conducted in 2002, and it was designed to meet the new Eurostat criteria. It yielded €6.6 billion (0.5 percent of GDP), and receipts were recorded as negative capital formation.
Quasi-fiscal activities are defined as “Activities (under the direction of government) of central banks, public financial institutions, and non-financial public enterprises that are fiscal in character — that is, in principle, they can be duplicated by specific fiscal measures, such as taxes, subsidies or other direct expenditures, even though precise quantification can in some case very difficult. Examples include subsidized bank credit and non-commercial public services provided by an enterprise” (page 76 in “Manual on Fiscal Transparency”, IMF). See also MacKenzie and Stella (1996).
Hallerberg, Strauch, and von Hagen (2002) discuss political economy determinants of growth and budgetary forecasts in Stability Programs. A more charitable interpretation is that governments that believe markets are unduly pessimistic about the country’s growth prospects run larger fiscal deficits because they expect fast future revenue growth.
For example, some countries do not include shares in public enterprises among the general government’s financial assets.
Using the estimates for the public capital stock constructed by Kamps (2004) yields similar results.
This is of course not a complete measure of the impact of fiscal policy on future tax outlays. For example, a pension reform has no impact on net worth and government debt but can reduce or increase future spending, and hence future taxes.
A weak cyclical position in several euro-area countries contributed to the unfavorable debt dynamics.
The correlation is stronger for the countries that joined the euro area.
In addition to Denmark, Sweden, and the United Kingdom, the non-euro area sample includes Australia, Canada, Iceland, Japan, New Zealand, and the United States.
The Consensus Forecast monthly reports the average of the expected GDP growth rates (annual base) computed by private research institutions in each country (there is no report for Luxembourg).
Our results are robust to different normalization methods.