Bank credit to government

The most usual fiscal performance clause in the ten years to 1978 continued to be a subceiling on domestic bank credit to the government (along with a ceiling on total bank credit). It could be argued that a single ceiling on overall bank credit would allow a member the highest degree of flexibility in solving its financial problems. In many cases, however, the government sector has been the one most subject to excessive expansion, and appropriate adaptations of fiscal policy have played a major role in securing the needed restraint on overall credit developments. A ceiling on credit expansion to this sector has proved to be a helpful technique for national authorities in obtaining political support for adequate fiscal policy actions and in retaining such support over time. The evidence suggests a close association between observance of the subceiling on bank credit to the government and of the overall bank credit ceiling. Similarly, a significant relationship was evident between failure to observe the fiscal’ criterion and a breakage of the overall bank credit ceiling. Monitoring the fiscal subceiling also frequently provided warning signals when unexpectedly large expansions in credit to the government, or the public sector, jeopardized the maintenance of overall credit ceilings. Fundamentally, a fiscal subceiling can help to ensure adequate restraint on the expansionary influence of the government or public sector, while allowing the Fund to remain neutral with respect to the alternatives provided by increased taxation or reduced expenditure and among forms of taxation and forms of expenditure. ³

Budget balance

There were 7 programs that incorporated a performance clause relating to the size of the budget balance of the government or of the public sector. This type of approach, which also maintains the Fund’s neutrality with respect to revenue and expenditure policies, can be regarded as useful and appropriate, mainly in industrialized countries, where (1) financial capital markets are well developed, (2) the markets are integrated with those in other countries, (3) the authorities are able to obtain increased government financing by open market operations, and (4) accurate statistical information is available in a timely fashion. In such circumstances, it is usually not possible to isolate sales of bonds to resident nonbankholders from sales to nonresidents. Financing obtained from the latter could not be regarded as an offset to the expansionary effects on the domestic economy of budgetary operations. In these cases, a performance clause on the overall budget balance can be a useful monitoring technique. ⁴

Government payments arrears

A number of cases were noted where arrears in government payments were built up during the program period, sometimes in an effort to observe, technically, the relevant credit ceilings. It could be argued that such a practice, while not in the spirit of the agreement, forces a diversion of financial resources away from the private sector to the government. To the extent that private outlays are crowded out, accumulation of government arrears may not weaken the necessary overall credit restraint. However, resort to accumulation of payments arrears will add to the cost of goods and services provided to the government and disrupt orderly budgetary processes. In recognition of these factors, some financial programs incorporated performance clauses on changes in government payments arrears. It could be worthwhile to experiment further in this area, but the difficulties would have to be recognized. In many cases, incomplete records of arrears of payments or “floating debt” are maintained, and in these circumstances a performance clause would not be an appropriate safeguard. When institutional and other arrangements ensure adequate records, a performance clause on changes in floating debt may be a useful ancillary instrument to the ceiling on bank credit to the government. When data are not sufficient to establish a performance criterion, general statements on policies regarding arrears in government payments could be incorporated in the letter of intent sent to the Fund by the national authorities.

Nonfinancial public enterprises

In the early years (1969-71) of the period covered by the survey, there were 6 programs that involved a performance clause on the use of bank credit by one or more nonfinancial public enterprises. It appears that in these cases the use of bank credit by these enterprises was a special problem that had to be dealt with apart from central government budgetary issues. In fact, 2 of these programs did not involve a performance clause on bank credit to government. In recent years, only one program used a separate performance clause on bank credit to nonfinancial public enterprises, and there was a significant trend over the ten years to 1978 toward bringing bank financing to them under the main fiscal provision of net bank credit to the public sector (or, in some cases, the public sector’s borrowing requirement). The subceiling relating to bank credit to government included one or more of these enterprises in nearly 50 per cent of the programs. It has to be recognized that in some cases these enterprises were established because national authorities judged it appropriate for them to have a degree of autonomy. Nevertheless, the tendency to include them within the subceiling recognizes the fact that they frequently serve as instruments of fiscal policy. Such an approach also permits the national authorities a wider range of options in the financial management of the public sector. For stabilization purposes, increases in prices or tariffs charged by nonfinancial public enterprises may have effects similar to an increase in certain taxes. In inflationary circumstances, it is necessary to increase prices charged by nonfinancial public enterprises in a flexible fashion in the same way as it is necessary to raise specific tax rates periodically or change to an ad valorem tax basis. Equally, action taken on the expenditure side of the budget for stabilization purposes (including reductions in numbers of public employees, policy regarding pay, and a spreading out of investment outlays) may apply, in principle, to all levels of government and to public enterprises. A broad definition of the government’s use of bank credit also avoids difficulties observed in some programs in which financial resources were switched between the central government and the nonfinancial public enterprises in an apparent attempt to technically observe a credit ceiling for the central government. Nevertheless, when one or more of these enterprises pose particular financial problems, a separate ceiling on their use of bank credit could be warranted.

Revenue and expenditure measures

There has been a reduction in the use made of performance clauses relating to specific revenue or expenditure measures since 1968. In 1966-67, 5 programs contained specific revenue or expenditure provisions; by contrast, there were only 7 in the ten years 1969-78, of which 4 related to specific revenue measures and 3 to specific expenditure measures. It is apparent that other, more general, performance clauses were preferred for two reasons: (1) credit ceilings or limitations on the size of the budget deficit are less likely to convey the impression that the Fund is making a judgment on the social and economic priorities of the member as reflected in governmental operations; and (2) information on credit ceilings is available more promptly and can be interpreted with greater precision. It is frequently difficult, if not impossible, to obtain information in a timely fashion on whether particular revenue or expenditure measures have been implemented in the expected form.

Revenues

Unforeseen inflation, and perhaps a conservative bias in forecasting, accounted to some extent for revenue exceeding projections in a majority of cases. The survey illustrated the difficulties of achieving a large increase in the ratio of revenue to GNP; such increases, when programmed, need to be critically examined, and meaningful descriptions of revenue policies could usefully continue to be included in letters of intent. This procedure could also be used to accommodate understandings regarding the introduction of specific revenue measures. The gain from such measures could be counted in the total revenue yield and thus be reflected in the use of bank credit by government, which could normally be designated as a performance clause.

Taxation

Substantial numbers of programs over the ten years to 1978 incorporated tax policy statements, and toward the end of the survey period these statements appeared in almost all of the programs. Tax measures introduced shortly before the start of programs were particularly helpful in boosting revenue in the context of one-year programs, partly reflecting the fact that such measures were effective for the full period of the program. Measures such as these were likely to provide a more certain basis for projecting an adequate revenue performance than were tax measures introduced in the course of the program. While Fund members are to be encouraged to modernize and improve their tax systems, experience indicates that the additional revenues generated from the latter measures within a one-year stand-by period are frequently overstated. Preparation of the necessary legislation and parliamentary approval are often protracted processes. Also, new forms of taxation sometimes cannot be productively handled in the short run by a tax administration that is already overburdened. Even if new forms of taxation succeed in generating additional revenues in the short run, there is the risk of shortfalls in other forms of revenue because of overextension of administrative capacity. New forms of taxation can be expected to have a more positive effect on the revenue yield in medium-term programs, such as those under the extended Fund facility.

A particularly careful assessment needs to be made if financial programs rely on improvements in tax administration to aid the revenue performance. Nearly 60 per cent of the programs contained general statements to this effect, but only about one half of these provided much substance as to measures to be taken. Identifiable benefits to the revenue yield were apparent in only a handful of cases. In general, it is to be expected that continuous efforts would be made by most Fund members to strengthen their tax administration practices and procedures, but caution must be exercised in taking credit for such efforts in terms of additional revenue in the context of short-term financial programs. It is likely that revenue gains would be more discernible over a longer period of adjustment than is involved in a one-year financial program.

Particular problems were posed where members were experiencing rapid inflation. In many of these cases the member took steps, and so indicated in policy statements, to adapt taxation to the inflationary circumstances. In particular, specific rates of tax on sales of goods and on imports were replaced by ad valorem rates. The collection lags were shortened and penalties for taxpayer arrears were adjusted so that the rate of interest implicit in the penalty exceeded the rate of inflation. It was recognized that, unless comprehensive action in these areas was taken, revenue, while rising in nominal terms, would decline in real terms.

Expenditures

There was a marked tendency for projections made at the beginning of financial programs to understate expenditures, and there was a disturbing trend over the ten-year period toward a progressive increase in the proportion of the programs in which expenditures exceeded projections. By 1977 and 1978, expenditures were contained as planned in less than 20 per cent of the programs, compared with over 50 per cent in 1969 and 1970. Unexpectedly rapid inflation is likely to have contributed to this result, since many elements of government spending are linked formally or informally to the price index. In addition, it appeared that projections were sometimes optimistic as to the ability of the budget control administration to keep the growth of government spending in line with the objectives of the program. In a few cases, it almost seemed as if expenditure projections represented the residual element needed to limit government use of bank credit after taking full account of all other resources, both domestic and foreign, that the government could garner. Experience has indicated the need for program projections to be totally realistic about the technical capacity to control expenditures and the likely rate of inflation. If projections are realistic, more meaningful sets of fiscal aggregates can be projected and more appropriate sets of policies can be established.

Of the 105 programs surveyed, 30 aimed for a reduction in the ratio of expenditures to GNP of 1 percentage point or more, compared with 55 programs that sought an increase in the revenue ratio of 1 percentage point or more. There was, however, an increasing trend from the mid-1970s for programs to encompass cutbacks in the expenditure ratio. The survey indicated that policies to reduce the expenditure ratio, if well designed and implemented, were capable of achieving somewhat larger quantitative results than were revenue measures.

The survey drew attention to the aspiration frequently incorporated in the programs whereby capital outlays were to be expanded while current outlays were to be constrained. The results indicated that efforts at expenditure control along these lines had a limited practical chance of success. In over 70 per cent of the programs using this approach, current expenditure in nominal terms exceeded the target or projection. In about one half of these programs, capital outlays in nominal terms were lower than projected. While the distinction between current and capital outlays and the concept of the current balance is common in the budget presentation of many developing countries, it should be noted that for short-run stabilization there is no difference between capital and current outlays. Both represent a claim on domestic resources or imports. It should also be noted that definitions of current and capital outlays of the government vary widely among member countries, and undue emphasis on control of current expenditure during a stabilization program may induce reclassification of expenditure items in ways consistent with achieving the target for current expenditures but at the expense of control of total expenditures. Moreover, even if all government capital expenditures were to eventually increase productive potential, they also lead to a continuing drain on government resources in the form of increased recurrent outlays for personnel, maintenance, and servicing costs. Of fundamental importance is the notion that the economy benefits in terms of growth from balanced, well-planned, and appropriately implemented government expenditure projects and programs, which encompass both current and capital outlays, but suffers from wasteful expenditures, regardless of whether they are current or capital. Management of all outlays, private and public as well as current and capital, is of particular importance in the context of stabilization programs. ⁵

Official policies with respect to particular projects, programs, and expenditure policies proved to be more valuable than reliance on broad statements regarding current expenditure or the current balance of the budget. Since the total wage and salary bill is a major element in government spending, national authorities need to establish policies regarding wage and salary payments for public sector workers and any needed further increase in the size of the public sector work force. A growing proportion of programs included official policy statements on wages and salaries of government workers. These policies, if based on a realistic approach and effectively implemented, were of assistance in achieving the member’s objective of controlling government outlays. Similarly, a number of member countries adopted stricter attitudes toward adding to the number of government workers in an effort to stabilize public expenditures. Many programs focused on other elements of expenditure that had proved to be a cause of instability. In some cases, consumer subsidies had grown to the extent that they absorbed a sizable proportion of available resources and contributed in other ways to an allocation of resources that was inappropriate for needed balance of payments adjustment and development of the economy. In a growing number of programs, members have indicated policies to contain the continued growth of subsidies or to reduce their value during the program period.

Nonfinancial public enterprises

In support of the trend toward incorporating bank credit needs of nonfinancial public enterprises into the subceiling on credit for government, an increasing number of programs over the ten years to 1978 included specific statements on price policies of these enterprises. Beyond these statements, programs have made limited reference to financial policies regarding nonfinancial public enterprises, and further work is necessary in many member countries and in the Fund before other substantive policy positions can be established. As a first step, it would be advisable if systems for reporting adequate financial data by these enterprises to the central authorities could be established and used as a basis for the suitable monitoring of their activities.

Nonbank budget financing

In nonbank budget financing, foreign grants and loans proved to be the most significant flows in terms of size. Projections of these flows proved particularly difficult and were realized or exceeded in less than 40 per cent of the programs surveyed. Furthermore, 21 programs had a shortfall in foreign grants and loans that contributed to nonobservance of the fiscal subceiling. Of these, at least 6 were identified in which the shortfall was sufficient to lead to a break in the subceiling, notwithstanding the fact that the overall budget deficit was reduced by more than had been programmed. This suggests that foreign financing should be programmed on a reasonably conservative basis and mainly take into account only those flows that are already committed.

Forecasts, targets, and estimates

Table 4 indicates that most financial programs in the upper credit tranches contained substantive statements on revenue matters. Some two thirds of the programs incorporated explicit revenue forecasts for the program period (generally 12 months) in the letter of intent (Table 4, line a). In about 20 per cent of the programs the estimates assumed greater significance because they were indicated as policy targets (Table 4, line b). In more than one half of the programs surveyed, the revenue forecasts suggested an increase of 1 percentage point or more during the program period in the ratio between revenue and GNP, compared with the ratio in the year before the program (Table 4, line c).

Table 4.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Revenue

Table 4.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Revenue

				Programs Without Fiscal Performance Clause	Programs with Fiscal Performance Clause on Bank Credit or Budget Balance			Programs with Other Fiscal Performance Clause
			Total		Total	Observed	Not observed
Number of financial programs reviewed			105	24	76	42	34	5
Programs in which			(in per cent)
	a.	Revenue projection incorporated in letter of intent	66	58	68	52	88	80
	b.	Revenue projection indicated as a target	21	0	26	17	38	40
	c.	Program incorporated increase in revenue: GNP ratio > 1 percentage point compared with preceding year	52	46	53	43	65	80
	d.	Of programs in (c) above, increase in revenue: GNP ratio achieved	42	55	38	61	18	50
	e.	Export shortfalls had identified adverse effect on revenue	10	0	13	5	24	0
	f.	Slowdown in domestic economy had identified adverse effect on revenue	15	8	18	10	29	0
		tax policy statements
	g.	Letter of intent contained specific statements on tax policy matters	71	54	78	76	79	60
	h.	Letter of intent contained specific statements on tax measures to be taken during period of program	50	46	50	52	47	60
	i.	Letter of intent contained specific statements on tax measures taken before start of program	53	21	64	64	64	40
	j.	Of programs in (h), evidence that measures had intended effect	40	64	37	45	19	0
	k.	Of programs in (i), evidence that measures had intended effect	50	60	51	59	41	0
		tax administration statements
	l.	Letter of intent contained general statements regarding efforts to strengthen tax administration	59	58	57	48	68	100
	m.	Letter of intent contained description of particular policies regarding efforts to strengthen tax administration	32	17	34	33	35	80
	n.	Inflation rates were 25 per cent a year or more	18	4	24	21	26	0
	o.	Of programs in (n), specific efforts taken to “inflation proof” tax system	37	0	39	44	33	0
	p.	Inflation had identified and adverse effect on revenue	9	8	9	2	18	0

View Table

Table 4.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Revenue

				Programs Without Fiscal Performance Clause	Programs with Fiscal Performance Clause on Bank Credit or Budget Balance			Programs with Other Fiscal Performance Clause
			Total		Total	Observed	Not observed
Number of financial programs reviewed			105	24	76	42	34	5
Programs in which			(in per cent)
	a.	Revenue projection incorporated in letter of intent	66	58	68	52	88	80
	b.	Revenue projection indicated as a target	21	0	26	17	38	40
	c.	Program incorporated increase in revenue: GNP ratio > 1 percentage point compared with preceding year	52	46	53	43	65	80
	d.	Of programs in (c) above, increase in revenue: GNP ratio achieved	42	55	38	61	18	50
	e.	Export shortfalls had identified adverse effect on revenue	10	0	13	5	24	0
	f.	Slowdown in domestic economy had identified adverse effect on revenue	15	8	18	10	29	0
		tax policy statements
	g.	Letter of intent contained specific statements on tax policy matters	71	54	78	76	79	60
	h.	Letter of intent contained specific statements on tax measures to be taken during period of program	50	46	50	52	47	60
	i.	Letter of intent contained specific statements on tax measures taken before start of program	53	21	64	64	64	40
	j.	Of programs in (h), evidence that measures had intended effect	40	64	37	45	19	0
	k.	Of programs in (i), evidence that measures had intended effect	50	60	51	59	41	0
		tax administration statements
	l.	Letter of intent contained general statements regarding efforts to strengthen tax administration	59	58	57	48	68	100
	m.	Letter of intent contained description of particular policies regarding efforts to strengthen tax administration	32	17	34	33	35	80
	n.	Inflation rates were 25 per cent a year or more	18	4	24	21	26	0
	o.	Of programs in (n), specific efforts taken to “inflation proof” tax system	37	0	39	44	33	0
	p.	Inflation had identified and adverse effect on revenue	9	8	9	2	18	0

Revenue forecasts or targets were supported by a variety of statements on tax policy and tax administration. Over 70 per cent contained specific statements relating to increases in existing tax rates or the introduction of new forms of taxation (Table 4, line g). As illustrated in Chart 3A, there was an increasing trend toward inclusion of such statements, and by 1977-78 they were included in almost all programs. This reflected largely a tendency (Chart 3B) for the authorities to indicate the introduction of new or additional taxes prior to the start of the financial program. As shown in Table 4 (line h), a large number of programs also made reference to measures to be introduced during the program period. ¹⁸ A recurrent theme in the majority of programs was a general and rather vague statement relating to improvements in tax administration (Table 4, line 1). These statements were supported by descriptions of specific measures (Table 4, line m) in relatively few programs.

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Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A001

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It would not be surprising if programs without fiscal performance clauses, mainly cases where fiscal issues were not of crucial importance, focused less on revenue matters than did programs with fiscal performance clauses. Nevertheless, more than half of the former did contain explicit revenue forecasts ¹⁹ in the letter of intent, and about half indicated an increase in the ratio of revenue to GNP of at least 1 percentage point during the program period. The majority referred to specific revenue measures, mainly those which were to be taken during the program period rather than before the program started. Somewhat surprisingly, these programs contained general observations on the need to improve tax administration as frequently as did programs with a fiscal performance clause.

Programs in which the fiscal performance clause was not observed were probably the most ambitious in terms of projections, targets, and policy statements. This presumably reflected the recognition that fiscal problems were unusually serious and called for extensive action. Nearly 90 per cent of these programs contained a revenue projection in the letter of intent, with over one third indicating this projection as a policy target. As many as two thirds of these programs planned an increase in the ratio of revenue to GNP of at least 1 percentage point. Indeed, several programs envisaged an increase in this ratio in excess of 3 percentage points (Table 5).

Table 5.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Revenue, Expenditure, and Overall Deficit ¹

(In number of programs)

¹Figures in parentheses indicate actual results.

Table 5.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Revenue, Expenditure, and Overall Deficit ¹

(In number of programs)

				Programs Without Fiscal Performance Clause	Programs with Fiscal Performance Clause on Bank Credit or Budget Balance			Programs with Other Fiscal Performance Clause
			Total		Total	Observed	Not observed
Number of financial programs reviewed			105	24	76	42	34	5
revenue
Programs incorporated increase in revenue: GNP ratio >1 percentage point compared with preceding year			55	11	40	18	22	4
			(23)	(6)	(15)	(11)	(4)	(2)
	Of which
		Increase of 1 percentage point	28	7	18	9	9	3
			(15)	(3)	(10)	(6)	(4)	(2)
		Increase of 2 percentage points	9	2	7	4	3	0
			(5)	(2)	(3)	(3)	(0)	(0)
		Increase of 3 percentage points	6	0	6	3	3	0
			(1)	(0)	(1)	(1)	(0)	(0)
		Increase of >3 percentage points	10	1	9	2	7	0
			(1)	(0)	(1)	(1)	(0)	(0)
		Data not available	2	1	0	0	0	1
			(1)	(1)	(0)	(0)	(0)	(0)
expenditure
Programs incorporated decrease in expenditure: GNP ratio >1 percentage point compared with preceding year			30	4	25	12	13	1
			(15)	(3)	(12)	(7)	(5)	(0)
	Of which
		Decrease of 1 percentage point	14	3	11	5	6	0
			(6)	(2)	(4)	(4)	(0)	(0)
		Decrease of 2 percentage points	4	1	3	2	1	0
			(2)	(1)	(1)	(1)	(0)	(0)
		Decrease of 3 percentage points	2	0	1	0	1	1
			(1)	(0)	(1)	(0)	(1)	(0)
		Decrease of >3 percentage points	10	0	10	5	5	0
			(6)	(0)	(6)	(2)	(4)	(0)
overall deficit
Programs incorporated decrease in overall deficit: GNP ratio >1 percentage point compared with preceding year			42	3	38	18	20	1
	Of which
		Decrease of 1 percentage point	17	2	15	9	6	0
		Decrease of 2 percentage points	8	1	7	3	4	0
		Decrease of 3 percentage points	4	0	3	1	2	1
		Decrease of >3 percentage points	13	0	13	5	8	0

¹Figures in parentheses indicate actual results.

View Table

Table 5.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Revenue, Expenditure, and Overall Deficit ¹

(In number of programs)

				Programs Without Fiscal Performance Clause	Programs with Fiscal Performance Clause on Bank Credit or Budget Balance			Programs with Other Fiscal Performance Clause
			Total		Total	Observed	Not observed
Number of financial programs reviewed			105	24	76	42	34	5
revenue
Programs incorporated increase in revenue: GNP ratio >1 percentage point compared with preceding year			55	11	40	18	22	4
			(23)	(6)	(15)	(11)	(4)	(2)
	Of which
		Increase of 1 percentage point	28	7	18	9	9	3
			(15)	(3)	(10)	(6)	(4)	(2)
		Increase of 2 percentage points	9	2	7	4	3	0
			(5)	(2)	(3)	(3)	(0)	(0)
		Increase of 3 percentage points	6	0	6	3	3	0
			(1)	(0)	(1)	(1)	(0)	(0)
		Increase of >3 percentage points	10	1	9	2	7	0
			(1)	(0)	(1)	(1)	(0)	(0)
		Data not available	2	1	0	0	0	1
			(1)	(1)	(0)	(0)	(0)	(0)
expenditure
Programs incorporated decrease in expenditure: GNP ratio >1 percentage point compared with preceding year			30	4	25	12	13	1
			(15)	(3)	(12)	(7)	(5)	(0)
	Of which
		Decrease of 1 percentage point	14	3	11	5	6	0
			(6)	(2)	(4)	(4)	(0)	(0)
		Decrease of 2 percentage points	4	1	3	2	1	0
			(2)	(1)	(1)	(1)	(0)	(0)
		Decrease of 3 percentage points	2	0	1	0	1	1
			(1)	(0)	(1)	(0)	(1)	(0)
		Decrease of >3 percentage points	10	0	10	5	5	0
			(6)	(0)	(6)	(2)	(4)	(0)
overall deficit
Programs incorporated decrease in overall deficit: GNP ratio >1 percentage point compared with preceding year			42	3	38	18	20	1
	Of which
		Decrease of 1 percentage point	17	2	15	9	6	0
		Decrease of 2 percentage points	8	1	7	3	4	0
		Decrease of 3 percentage points	4	0	3	1	2	1
		Decrease of >3 percentage points	13	0	13	5	8	0

¹Figures in parentheses indicate actual results.

Programs in which the fiscal performance clause was observed were generally less ambitious than those in which the clause was not observed. Although most contained revenue projections, these projections were indicated as policy targets in less than 20 per cent of the programs. Less than half of these programs called for an increase in the ratio of revenue to GNP of at least 1 percentage point, compared with the previous year, and the great majority planned an increase of less than 3 percentage points.

Revenue results

In the majority of the programs surveyed, revenue goals were achieved. In 60 per cent of the cases, actual revenue in nominal terms for the period equaled or exceeded the projection or target (see Table 3). No significant trend was apparent over the ten-year period as to the degree of success in meeting these projections or targets. It is possible that a generally conservative bias might have existed in the estimates drawn at the start of the programs. It is also possible that inflation during the program periods was underestimated. To the extent that this led to faster rates of increase in money incomes and expenditures, revenues in nominal terms would also have exceeded expectations. There were, however, a number of programs in which rapid inflation (defined for purposes of the survey as 25 per cent or more a year) had adverse effects on revenue growth (Table 4, line p). Special efforts were made in some programs to adapt the tax system to rapid inflation. These included action to shorten the revenue collection lags, increased penalties for late payment of tax, and adaptation of specific duties and excise rates to an ad valorem basis. ²⁰

It should also be noted that export shortfalls and unexpectedly slow growth in the domestic economy (sometimes both factors operating together) were also important factors behind undesired revenue results and nonobservance of fiscal performance clauses (Table 4, lines e and f). Given the nature of the survey and its concentration on fiscal variables, it was not possible to generate adequate statistical information on the effects of unexpected domestic or external events on the revenue yield. It was the impression, however, that these factors were significant in determining the fiscal results in several programs.

The survey also suggested that tax policy measures taken before the start of the program were more likely to have their intended effect than measures that were to be introduced during the program period (Table 4, lines j and k). As to the effects on revenue of efforts to strengthen tax administration, the evidence was not precise. However, there appeared to be few programs where the revenue yield benefited during the program period from such efforts; in some of these, Fund technical assistance was being provided concurrently.

As noted above, more than half of the programs surveyed planned an increase in the ratio of revenue to GNP of at least 1 percentage point during the program year, compared with the preceding year. Such an increase, however, was achieved in less than half of the programs incorporating such a plan. While many programs were successful in raising revenues in relation to GNP by 1 or even 2 percentage points, the survey indicated the difficulties of raising revenues by larger amounts. ²¹

The least successful programs, naturally, were those in which the fiscal performance clause was not observed. In half of these programs, nominal revenue fell short of the projection or target. The ratio of revenue to GNP rose significantly, as planned, in only 4 cases out of 22, and in no case was the increase above 1 percentage point.

In some ways, programs with fiscal performance clauses that were observed were more successful with respect to raising revenue than those without such a clause. Nominal revenue fell short of the target or projection in a smaller proportion of programs in which the clause was observed than in programs with no performance clause. Also, an increase in the ratio of revenue to GNP of at least 1 percentage point was achieved in a slightly higher proportion of programs in which the fiscal performance clause was observed than in programs without such a clause.

Forecasts, targets, and estimates

As indicated in Table 6, financial programs in the upper credit tranches contained substantive statements on government expenditure projections and targets to about the same extent as in the case of revenue. However, fewer programs (less than 30 per cent) planned a reduction in the expenditure ratio than planned an increase in the revenue ratio (over 50 per cent). While this suggests that programs were more ambitious with respect to revenue than to expenditure, two points should be noted. First, over the ten years to 1978 there was a significant increase in the proportion of programs planning a reduction in the expenditure ratio of at least 1 percentage point. As shown in Chart 3C, by 1978 over 50 per cent of the programs planned such a reduction. This trend perhaps reflected the growing realization of the limited extent to which financial programs could count on gains in revenue in the short run, as well as the realization that certain expenditure programs were out of control. Second, the size of planned reductions in the expenditure ratio was generally more ambitious than the size of planned increases in the revenue ratio. ²²

Table 6.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Expenditure

Table 6.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Expenditure

				Programs Without Fiscal Performance Clause	Programs with Fiscal Performance Clause on Bank Credit or Budget Balance			Programs with Other Fiscal Performance Clause
			Total		Total	Observed	Not observed
Number of financial programs reviewed			105	24	76	42	34	5
Programs in which			(In per cent)
	a.	Expenditure projection incorporated in letter of intent	66	58	67	52	85	80
	b.	Expenditure projection indicated as target	19	4	25	14	38	0
	c.	Program incorporated decrease in expenditure: GNP ratio > 1 percentage point compared with preceding year	29	17	33	29	38	20
	d.	Programs where decrease as in (c) achieved	50	75	48	58	38	0
current and capital expenditure
	e.	Statements incorporated on current and capital expenditures	52	71	46	40	53	60
	f.	Programs as in (e) where specific policy statements on aspects of control of current expenditures were included	31	24	34	29	39	33
	g.	Programs as in (e) where growth in current expenditure exceeded target in nominal terms	73	71	71	76	67	100
	h.	Programs as in (e) where growth in capital expenditure was less than target in nominal terms	49	59	43	47	39	66
total expenditure
	i.	Programs incorporating substantive statements on expenditure	62	38	70	67	74	60
	j.	Programs incorporating specific policies on wage policy for government employees	32	21	36	26	47	40
	k.	Programs incorporating specific policies on employment in government sector	9	0	12	18	3	0
	l.	Programs incorporating specific policies on consumer subsidies	20	8	24	21	26	20
	m.	Programs incorporating specific policies on transfers to public enterprises	21	21	22	24	21	0
	n.	Programs incorporating specific policies on repayment of government arrears	11	14	10	11	9	2

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Table 6.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Expenditure

				Programs Without Fiscal Performance Clause	Programs with Fiscal Performance Clause on Bank Credit or Budget Balance			Programs with Other Fiscal Performance Clause
			Total		Total	Observed	Not observed
Number of financial programs reviewed			105	24	76	42	34	5
Programs in which			(In per cent)
	a.	Expenditure projection incorporated in letter of intent	66	58	67	52	85	80
	b.	Expenditure projection indicated as target	19	4	25	14	38	0
	c.	Program incorporated decrease in expenditure: GNP ratio > 1 percentage point compared with preceding year	29	17	33	29	38	20
	d.	Programs where decrease as in (c) achieved	50	75	48	58	38	0
current and capital expenditure
	e.	Statements incorporated on current and capital expenditures	52	71	46	40	53	60
	f.	Programs as in (e) where specific policy statements on aspects of control of current expenditures were included	31	24	34	29	39	33
	g.	Programs as in (e) where growth in current expenditure exceeded target in nominal terms	73	71	71	76	67	100
	h.	Programs as in (e) where growth in capital expenditure was less than target in nominal terms	49	59	43	47	39	66
total expenditure
	i.	Programs incorporating substantive statements on expenditure	62	38	70	67	74	60
	j.	Programs incorporating specific policies on wage policy for government employees	32	21	36	26	47	40
	k.	Programs incorporating specific policies on employment in government sector	9	0	12	18	3	0
	l.	Programs incorporating specific policies on consumer subsidies	20	8	24	21	26	20
	m.	Programs incorporating specific policies on transfers to public enterprises	21	21	22	24	21	0
	n.	Programs incorporating specific policies on repayment of government arrears	11	14	10	11	9	2

In terms of substantive statements on expenditure policy, about one third of the programs surveyed indicated the wage policy to be followed with respect to government or public sector employees (see Table 6, line j) during the program period. Chart 4A shows a significantly increasing trend over the ten years to 1978 for programs to include statements along these lines; in the latter part of the period about one half of the programs explicitly included this important area of policy. There was also a sharp increase over time in the trend to include policy statements on consumer subsidies (Chart 4B). Few programs, however, carried policy indications on the proposed treatment of arrears in government payments.

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Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A001

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A remarkably large number of programs incorporated policy statements on desired movements in government current and capital expenditure and on the government’s balance on current account (Table 6, line e). However, in only a relatively small proportion of the programs were these statements supported by a reference to specific action to curb current outlays.

Programs that did not contain a fiscal performance clause were the least ambitious in describing expenditure policies and in setting goals or targets. While almost 60 per cent included expenditure projections, ²³ relatively few called for a reduction of 1 percentage point in the expenditure ratio or contained qualitative statements regarding policies to curb expenditure growth. Of some surprise was the inclusion of broad and largely unsupported statements regarding the current balance of the budget in nearly three fourths of the programs without fiscal performance clauses. This fact, along with the tendency for these programs to include general and rather vague statements on methods to improve tax administration, suggests that most of them were not designed to combat serious fiscal problems.

More ambitious were those programs in which the fiscal performance clause was observed. In addition to inclusion of specific forecasts and statements on expenditure policies, about one third suggested a decline in the ratio of expenditure to GNP of at least 1 percentage point. The most ambitious programs regarding expenditure policies (as was also the case for revenue) were those in which the fiscal performance clause was not observed. A relatively large proportion of these programs incorporated expenditure projections (85 per cent), expenditure targets (38 per cent), statements on wage policy (47 per cent), and statements on policies regarding consumer subsidies (26 per cent), and a reduction in the ratio of expenditure to GNP of at least 1 percentage point (38 per cent). It is probably no coincidence that programs in which the fiscal performance clause was not observed were the most ambitious in detailing policy statements on expenditure and in setting goals for expenditure constraint. As these were the programs requiring major fiscal adjustment, they tended to contain a detailed documentation of expenditure policies to be followed.

Expenditure results

Total government expenditures exceeded projections, in nominal terms, in 57 per cent of the programs. By comparison, revenue projections were not achieved in 40 per cent of the programs surveyed. More disturbing was the unmistakable trend for expenditures to exceed the program targets in a growing proportion of programs over the ten years to 1978. As shown in Chart 3D, by the latter part of the 1970s expenditure projections, in nominal terms, were being observed in less than 20 per cent of the programs, compared with over 50 per cent in 1969-70. As in the case of revenue, more rapid (and unexpectedly rapid) rates of inflation were likely to have contributed to this result. Large portions of government expenditures comprise wages and salaries of government workers, with rates of growth of such expenditures in many cases being linked to the inflation rate. Also, consumer subsidies and current transfers to public enterprises are likely, in the absence of policy changes, to rise as a percentage of GNP during periods of inflation. ²⁴

The reliance on policies to cut back current expenditure and to raise both the current surplus and capital outlays generally proved unsuccessful. In over 70 per cent of the programs using such an approach, current outlays exceeded program projections or targets (Table 6, line g). As a consequence, it frequently became necessary, for stabilization purposes, to cut back capital outlays. In about one half of these programs capital outlays fell short of aspirations. ²⁵

Regarding efforts to cut back the growth of total government outlays, the ratio of expenditure to GNP declined by 1 percentage point or more in 15 of the 30 programs seeking such a reduction. ²⁶ This was a higher rate of success than for programs planning an increase in the revenue ratio of 1 percentage point or more (42 per cent). Moreover, unlike revenue, the degree of success in effecting a change in the expenditure ratio did not depend on the size of the intended reduction, and several programs achieved reductions well in excess of 3 percentage points. ²⁷

The least successful expenditure results were for programs in which the fiscal performance clause was not observed (as was also true for revenue results). Nominal expenditure exceeded the projection in two thirds of these programs, and the expenditure ratio was reduced in only a few cases. ²⁸ Results of efforts to constrain current expenditure were as unsuccessful for this group of programs as for those without a fiscal performance clause or those in which the performance clause was observed.

As indicated above, the results for raising revenue were marginally better for programs with a fiscal performance clause that was observed than for programs without a performance clause. In the case of expenditures, the results were unsatisfactory for both of these groups of programs, and the estimates, projections, or targets were realized in fewer cases than on the revenue side. Nominal expenditure exceeded the program estimates in nearly one out of two cases for both groups of programs, and current outlays exceeded projections in a large proportion of programs in both of these groups. Reductions in the expenditure ratio were more apt to be achieved in programs without a fiscal performance clause than in programs in which the fiscal performance clause was not observed, and the success rate was not related to the size of the planned reduction.

Foreign financing

Of the 105 financial programs surveyed, over 40 per cent projected an increase or a decrease in foreign financing equivalent to 1 percentage point or more of GNP, compared with the preceding year (Table 9, line a). Of these, one third programmed a decrease in foreign financing as a percentage of GNP, presumably because of the need to limit foreign borrowing. ²⁹ In approximately 60 per cent of those programs in which a break was programmed, there were indications that the projections were based on known commitments.

Table 9.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Budget Financing ¹

¹It should be noted that these programs include those in which unplanned breaks in foreign financing and nonbank domestic financing were achieved. Figures in parentheses indicate actual results.

Table 9.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Budget Financing ¹

				Programs with Fiscal Performance Clause on Bank Credit
			Total	Total	Observed	Not observed
Number of programs reviewed			105	70	39	31
Programs in which			(In per cent)
	a.	Increase or decrease in foreign financing as per cent of GNP of 1 percentage point or more compared with preceding year	44 (39)	49 (46)	44 (54)	55 (35)
	b.	Programs as in (a) in which financing estimated on basis of known commitment	63	33	38	26
	c.	Programs in which foreign financing in nominal terms under target	48	47	33	65
	d.	Programs in which overall deficit in nominal terms exceeded target	50	56	41	74
	e.	Increase or decrease in nonbank domestic financing of 1 percentage point or more of GNP compared with preceding year	16 (7)	20 (9)	21 (15)	16 (0)

¹It should be noted that these programs include those in which unplanned breaks in foreign financing and nonbank domestic financing were achieved. Figures in parentheses indicate actual results.

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Table 9.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Budget Financing ¹

				Programs with Fiscal Performance Clause on Bank Credit
			Total	Total	Observed	Not observed
Number of programs reviewed			105	70	39	31
Programs in which			(In per cent)
	a.	Increase or decrease in foreign financing as per cent of GNP of 1 percentage point or more compared with preceding year	44 (39)	49 (46)	44 (54)	55 (35)
	b.	Programs as in (a) in which financing estimated on basis of known commitment	63	33	38	26
	c.	Programs in which foreign financing in nominal terms under target	48	47	33	65
	d.	Programs in which overall deficit in nominal terms exceeded target	50	56	41	74
	e.	Increase or decrease in nonbank domestic financing of 1 percentage point or more of GNP compared with preceding year	16 (7)	20 (9)	21 (15)	16 (0)

¹It should be noted that these programs include those in which unplanned breaks in foreign financing and nonbank domestic financing were achieved. Figures in parentheses indicate actual results.

With regard to actual performance, Table 3 indicates that the projection for foreign financing, in nominal terms, was realized or exceeded in only 39 per cent of the programs surveyed, but, as shown in Chart 5D, a marked reduction occurred in the proportion of shortfalls over the ten-year period. This improvement may be partly related to expenditure developments, discussed above, and it may also reflect an increased rate of utilization of foreign grants and loans. Nevertheless, it would appear from Table 9 that shortfalls in foreign financing contributed importantly to the nonobservance of the fiscal subceiling in a number of programs.

Domestic financing

Nonbank domestic financing was less important than other sources of financing in most of the programs surveyed. Policies in this area were also less ambitious; few programs (about 40 per cent) incorporated changes equivalent to 1 percentage point of GNP, compared with the previous year (Table 9, line e). Domestic nonbank financing, in nominal terms, was equal to or higher than the program projection in 70 per cent of all programs surveyed. A shortfall in domestic nonbank financing was not identified as a major factor contributing to the nonobservance of the subceiling on the use of bank credit by the government sector in any of the programs surveyed.