This Selected Issues paper examines two key questions on fiscal policy reform in the Czech Republic. First, how can the fiscal institutional framework be strengthened to maintain discipline and enhance transparency? Second, what are the priorities in expenditure reform that can be implemented without sacrificing the quality of spending? The paper discusses the recent Czech experience with the medium-term expenditure framework and some proposals for strengthening it. It also discusses cross-country analyses of spending efficiency and flexibility, and proposes areas for fiscal adjustment that reduce inefficiencies.

Abstract

This Selected Issues paper examines two key questions on fiscal policy reform in the Czech Republic. First, how can the fiscal institutional framework be strengthened to maintain discipline and enhance transparency? Second, what are the priorities in expenditure reform that can be implemented without sacrificing the quality of spending? The paper discusses the recent Czech experience with the medium-term expenditure framework and some proposals for strengthening it. It also discusses cross-country analyses of spending efficiency and flexibility, and proposes areas for fiscal adjustment that reduce inefficiencies.

V. Presentation of Fiscal Data Using the Framework of the GFSM 2001, Preliminary results1

1. At the Executive Board seminar on November 16, 2005 Directors agreed that the use of the Government Finance Statistics Manual (GFSM 2001) framework would lead to greater transparency and consistency in the presentation of country fiscal data in staff reports (see Box 1. for background). This paper reports on the preliminary results for the Czech Republic of the pilot study which sets out to incorporate the GFSM 2001 operating statement, integrated balance sheet, and cash statement in the Article IV consultation. Section I is a general discussion of the data sources and the institutional coverage used in the Czech pilot study, followed in Section II by a description of the main results of the pilot. Finally, this paper suggests future work to improve fiscal data. Fiscal data for Czech Republic in the GFSM 2001 framework are presented as Appendix I.

2. The Czech Republic pilot study draws attention to three advantages of developing fiscal statistics using the GFSM 2001 framework. These advantages are: (i) a broadening of coverage of fiscal activities; (ii) the proper recording of events associated with privatization (or nationalization) resulting from the use of an integrated statistical framework; and (iii) using an integrated approach to achieve improvements in source data for fiscal analyses.

3. The paper concludes that the application of GFSM 2001 framework highlighted the lack of comprehensiveness of the instibtutional and transactional coverage in fiscal data, when compared with the guidelines of the GFS manual. Due to a lack of comprehensive source data, the operations of general government in staff reports do not cover all institutional units that comprise general government, as defined by international statistical principles, and therefore are also not consistent with the coverage of data disseminated to meet European Union (EU) reporting requirements. Accordingly, the analysis of fiscal policies carried out in the context of the Fund’s surveillance exercise is based on aggregates and balances that are different from those used by the EU for monitoring.

4. This pilot study suggests that improvements in the government accounting systems and reporting formats, that serve as source data for the government finance statistics, will greatly facilitate the integrated and standardized presentation of general government data. Such improvements would not only meet the needs of all data users, but will also eliminate the need to employ supplementary methods, such as surveys and questionnaires, to improve source data. Development of an integrated approach to the data compilation would facilitate economic analysis based on resource balances, liquidity, and sustainability factors, and would also allow for comparability across data sets and with the statistics for other countries.

Background for the Pilot Studies

The Executive Board seminar on November 16, 2005 discussed the joint STA/FAD paper “Using the GFSM 2001 Statistical Framework to Strengthen Fiscal Analysis in the Fund” (http://www.imf.org/external/np/pp/eng/2005/102505.pdf). Directors noted that use of the GFSM 2001 framework will lead to greater transparency and consistency in the presentation of country fiscal data in staff reports and agreed on the following:*

In principle, that the Fund should move in a phased way to present fiscal data using the GFSM 2001 framework in staff reports.

To conduct pilot studies to include the GFSM 2001 operating statement, integrated balance sheets, and cash statements in Article IV consultation reports. The pilot studies should be done for volunteer countries, over the course of two years and within the Fund’s budgetary envelope, to map out more fully the process involved in moving to the GFSM 2001 framework.

That the staff should report to the Board on the experience with the pilot studies, together with migration path proposals to fully implement the GFSM 2001 methodology.

*For a more complete summary of the discussion, see the Public Information Notice (PIN) No. 05/167 available online at http:/www.imf.org/external/np/sec/pn/2005/pn051 67.htm.

A. General Issues

5. The Czech Republic was selected for the pilot study in recognition of reforms in fiscal data reporting that the Czech authorities have made for monitoring fiscal performance. These reforms were made both with regard to cash based reporting and accrual based reporting. Following technical assistance provided by the Statistics Department (STA), reforms of cash-based reporting primarily pertain to the introduction of bridge tables that link the State budget accounts to the GFSM 2001 framework. Accrual based reporting2 was introduced to meet the reporting requirements of the EU in accordance with the European System of Accounts (ESA 95). These data are disseminated by the Ministry of Finance (MOF) and the Czech National Statistical Office (CNSO), respectively.

6. The institutional coverage in this pilot study is the general government sector. Although Article IV staff reports for Czech Republic have focused on the general government data as reported by the MOF, the institutional coverage of these data is not in line with international guidelines, and therefore differs from the coverage of general government data compiled and disseminated consistent with EU reporting requirements. The MOF general government account does not include the operations of the so called “semibudgetary3” organizations, which operate at both the central and local government levels, and it also excludes a number of state extrabudgetary institutions4 and special funds. The most important of these institutions are the Czech Consolidation Agency and its subsidiaries, the Czech Collection Company, the Railway Infrastructure administration, the Public-private–partnership centre, and public universities. The general government account nevertheless records all transactions with these institutions. However, given that the excluded entities are capable of generating their own revenue and borrowing in their own name, the main balancing items in the general government accounts of the MOF exclude these fiscal activities. Similarly, fiscal risks that may originate in these entities will not be considered in policy decisions based on the flow data recorded in the MOF general government accounts. Although staff reports consider high risk guarantees to give a rough indication of the fiscal risks associated with these institutions, it does not fully substitute for the lack of an integrated set of source data.

7. While it is conceptually easy to identify the gaps in the coverage of general government, the impact on the data is difficult to quantify. Given the lack of an integrated and complete set of data for all institutional units, an estimation of the impact of missing units on the main balancing items in the general government accounts of the MOF is very difficult. Complex institutional arrangements, differences in the basis of recording and lack of comprehensive source data complicate estimation procedures. The impact of this lack of coverage is best illustrated by approximately a 5 percentage point difference between the general government debt, reported by MOF, and general government debt, reported by CNSO in terms of the Maastricht criteria.

8. The various sets of published data, differing in institutional coverage and methodologies employed, are a potential source of confusion for the uninformed user of fiscal statistics of Czech Republic. Data on State budgetary units are compiled according to the national legislative framework and are presented in national policy documents. These data are bridged to GFSM 1986 framework and disseminated as required under the Special Data Dissemination Standard. This set of data is also the primary source of data for staff reports compiled by EUR for the Article IV consultation exercise. A third set of data is bridged to the GFSM 2001 framework from national data sources for publication in the GFS Yearbook. Lastly, a set of data compiled for the general government in terms of the national accounts is reported to Eurostat in accordance with EU reporting requirements. This set of data is based on the principles of the ESA 1995.

Summary of National Accounting Practices

The Ministry of Finance prescribes the classification and accounting rules for all agencies within the State Budget and for the State Extrabudgetary Funds. These accounts are compiled on a cash-accounting basis.

The accounts of semi-budgetary organizations, health insurance organizations, and special funds are compiled using various degrees of accrual accounting. Generally these accounts comprise a profit-and–loss statement which presents the financial results of their operations and a balance sheet which presents the stocks of assets and liabilities.

Although the accounting practices allow for classification systems that are rather detailed, they are not structured in accordance with internationally recognized standards, such as the GFSM 2001. The accounting system and framework for presentation are also not standardized and do not support an integrated approach to fiscal analysis.

Bridge tables are used to recast the national data into the GFSM 2001 framework, but limitations in the source data translate into data gaps in the bridged GFSM 2001 data.

The CNSO is the compiler of the data submitted to Eurostat for monitoring compliance with the Excessive Deficit Procedures and other EU reporting requirements. This Office needs to employ supplementary methods of collecting data from various sources because of the lack of comprehensiveness and integration in the underlying accounting framework.

B. Results

9. This section describes a number of data deficiencies and issues of appropriate methodological treatment that were identified when the fiscal data were recast from the national presentation, to the framework of the GFSM 2001. Summary tables compiled in accordance with GFSM 2001 (Tables 1, 2, and 3), are shown in Attachment 1. Table 1, the Statement of Government Operations is based on full coverage of general government and the ESA 95 accrual-based methodology, while Tables 2 and 3 are based on the limited coverage and cash data of the MOF. Box 3 provides a description of the main aggregates and balances of analytical significance used in these tables.

Table 1.

Czech Republic: Statement of General Government Operations (GFSM 2001)

(In million Czech koruny)

article image
Sources: Eurostat

The net operating balance equals revenue minus expense, when expense includes the consumption of fixed capital. The gross operationg balance equals revenue minus expense other than consumption of fixed capital.

Acquisitions minus disposals and consumption of fixed capital.

Net lending/borrowing equals the net operating balance minus the net acquisition of nonfinancial assets. It is also equal to the net acquisition of financial assets minus the net incurrence of liabilities.

Table 2.

Czech Republic: Integrated Balance Sheet for the General Government (GFSM 2001)

article image
Sources: Ministry of Finance

Other economic flows record holding gains and losses and other changes in the volume of assets and liabilities.

Table 3.

Czech Republic: Statement of Sources and Uses of Cash for the General Government (GFSM 2001)

(In million Czech koruny)

article image

10. Although the use of GFSM 2001 necessitated reclassification of certain transactions, this did not alter the major trends reflected in the staff reports, but suggests that the magnitudes of certain key balances would have been slightly different. These reclassifications pertain to EU resources, improved details on government transfers to households and non-profit organizations, and improvements in the classification of capital transfers. However, the main balancing items remain essentially unchanged because offsetting changes occurred in other categories of revenue and expenses. The overall fiscal balance as presented in staff reports amounted to 3.6 percent of GDP, while the cash deficit in the Cash Statement was calculated at 3.3 percent of GDP, the difference being the impact of lending on the balancing item in the staff report. These balances could not be compared with the net lending/borrowing as presented in the Statement of Government Operations, given the differences in coverage of government.

11. Bridging the available source data to the GFSM 2001 framework revealed a lack of source data on the stock of nonfinancial and financial assets. The lack of data on the stock of assets is particularly important in light of privatization initiatives of the government. Adjustments made in staff reports to present privatization proceeds as financing transactions, and not as net lending, brings the presentation in staff reports closer to the treatment recommended in GFSM 2001. However, the impact of such transactions is only reflected in cash receipts and there is no offsetting reduction in the investment of government in the original financial asset recorded. The GFSM 2001 framework when correctly applied clearly indicates privatization as the exchange of one type of asset for another without any impact on the net worth of the government – this would be clearly demonstrated in a full balance sheet.

12. Although staff reports make adjustments for privatization proceeds, similar adjustments for investments for policy purposes are not made. Policy lending treated in the traditional framework as an expense distorts the fiscal balance. This is especially evident in years during which the Czech government extended large policy-related loans which, for example, in 2003 amounted to almost 1 percent of GDP. The GFSM 2001 framework consistently records both the lending and privatization transactions as transactions in financial assets (shares and equity of public institutional units), which has no impact on net lending/borrowing.

13. The current lack of data on the stocks and ’other flows’ related to non-financial assets is highlighted by the GFSM 2001 framework. The availability of data on nonfinancial assets, not only in terms of the cost of acquisition and disposal, but also with regard to changes in their value as a result of price or volume changes, will facilitate the application of appropriate asset management principles and policies. Such data are important for informing government’s investment decisions with regard to the mix of its comprehensive asset portfolio.

14. Liabilities as reported by the Czech authorities are valued according to the principles of the Maastricht criteria. According to these criteria, ’debt’ is understood to be gross debt at nominal value outstanding at the end of the period and consolidated within and between the sectors of general government. In terms of an EU Council regulation, nominal value of debt is considered to be equivalent to the face value of the liability. Debt is therefore reported at the contractually agreed amount that the government will have to refund to creditors at maturity. As indicated in Table 2, the outstanding balances on foreign loans are converted into national currency at the market exchange rate on the reporting date – evidenced by the residual value between the opening and closing balance of this category of liabilities. However, the influence of other price and volume changes on other categories of assets and liabilities are not accounted. The GFSM 2001 framework when fully applied clearly indicates the impact of all price and volume changes on the stock of assets and liabilities.

The GFSM 2001 Statements and Core Balances

article image

The NOB/GOB excludes net acquisition of nonfinancial assets. The latter does not affect net worth because it represents only an accumulation of assets in exchange for an accumulation of liabilities or use of existing assets.

C. Next Steps

15. The authorities broadly agreed that they would work toward improving the compilation and presentation of fiscal data in the GFSM 2001 framework. However, no specific benchmarks for further engagement were agreed at the time. Nevertheless, it was agreed that implementation of the recommendations of STA missions will be considered. The authorities reiterated that the highest priority will continue to be given to compliance with the reporting requirements of the European Union regulations.

16. The coverage of fiscal data should be improved to agree with the coverage of data disseminated in the ESA 95 framework. Full coverage of all the units in the general government sector is essential for reconciling the data of the MOF and the CNSO.

17. Due to limited resources, the MOF is considering discontinuation of the compilation and dissemination of fiscal data compiled according to the GFSM 1986 framework. MOF staff emphasized that they prioritize dissemination of general government data in the ESA 95 framework. The potential impact on the work of Fund staff must be noted, given that currently staff reports primarily rely on the GFSM 1986 data.

18. Comprehensive fiscal analysis of the liquidity of the general government and of the sustainability of government policies is dependent on the availability of cash and accrual data, respectively. The authorities are strongly encouraged to develop the MOF data to fully comply with the requirements of reporting the Statement of Sources and Uses of Cash for the comprehensive general government (i.e. continue with improving classification and coverage). Furthermore, the authorities need to continue with developing accrual accounting to allow for improvements to and dissemination of the Statement of Government Operations and other ESA 95 based reporting.

19. While recasting existing data into the GFSM 2001 framework presents certain types of transactions, such as privatization and debt assumption, in a more consistent manner, full implementation of the GFSM 2001 will be dependent on additional accounting reforms. An integrated approach to improvements in source data systems is essential so as to facilitate the compilation of both the GFS and to provide improved source data that can used to compile the national accounts. Improving the coverage of data, the basis of recording, and providing for the valuation and recording of financial and nonfinancial assets is dependent on development and improvement of source data systems.

1

Prepared by Sagé De Clerk (STA). The Czech Republic was selected for a pilot study on GFSM 2001 in consultation with the Office of the Executive Director for the Czech Republic and the European Department (EUR).

2

In the absence of accrual accounts for all institutional units, accrual based data are partially based on cash accounting records adjusted for estimated accrual transactions.

3

Institutional units that are mainly financed from transfers received from the state budget and have limited capacity to generate own revenue or to borrow.

4

Institutional units that receive transfers from the state budget and have the power to generate significant own revenue and borrow in their own name.