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Thanks for helpful comments on earlier drafts of this paper are due to Jochen Andritzky, Marco Cangiano, Adrienne Cheasty, Kara Rideout, Ester Perez Ruis, Iva Petrova, Mike Sieferling, and Bruno Versailles. The paper has also benefitted from discussions with many colleagues, including Richard Allen, Miguel Alves, Guilhem Blondy, Sagé de Clerck, Rob Dippelsman, Phil Gerson, Kris Kaufmann, Abdul Khan, and Paolo Mauro.
The term surplus is used here to refer the change in net worth, whether positive or negative. A deficit is thus a negative surplus.
See, for example, Nobes (2006, pp. 66, 111). When several different sets of assets and liabilities and associated measures of net worth are considered, a surplus can be said to be clean or comprehensive with respect to a measure of net worth.
Expressions such as unrecognized asset and off-balance-sheet liability are troublesome in the language of any particular accounting system, because anything that is an asset or liability in that system cannot legitimately be kept off the balance sheet. See, for example, the discussion of contingent liability in Stickney and others (2010, p. 852). In each system, that is, if a given set of property rights constitutes an asset or liability, it must be recognized. In the language of the system, therefore, expressions such as unrecognized asset and off-balance-sheet liability are either contradictions in terms or refer to mistakes in the application of the accounting. To avoid this problem, this paper uses the terms assets and liabilities as they would be defined in the most comprehensive accounting system under consideration; in any other system, these assets and liabilities may or may not be recognized.
Accounting devices are also possible when assets and liabilities are valued at other than market value. For example, a government can increase its surplus by selling assets whose book values are less than their market values. In such cases, the difference between book and market value can be analyzed as an unrecognized asset or liability.
When assets and liabilities are difficult to value, book values can easily diverge from market values. This allows for the kind of devices discussed in footnote 5.
No government publishes extended accounts of exactly the kind discussed here, but the U.S. federal government now comes close, publishing, in a note to its full accrual accounts, estimates of the present values of its projected spending and receipts. See U.S. Treasury (2011) and FASAB (2009).
In the Government Finance Statistics Manual 2001, the statement of sources and uses of cash shows “net cash inflow from operating activities,” “net cash outflow from investments in nonfinancial assets,” and “net cash inflow from financing activities” (IMF, 2001, Table 4.2). For the decomposition to be complete, another component—increase in cash from changes in market prices—must be included. The most important sources of such changes are movements in exchange rates that affect the domestic-currency value of the government’s holdings of foreign currency.