## _wp15238 - 1. Five Definitions of Government

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### I. Introduction — scope, motivation, and recent developments
- Measuring government debt and deficit is ambiguous and consequential:
  - Canadian government debt in 2010 could plausibly be as little as 38 percent of GDP and as much as 104 percent of GDP depending on definitions (Dippelsman et al., 2012).
  - The U.S. federal government’s deficit in fiscal year 2010/2011 is reported as 8 percent of GDP or 14 percent of GDP depending on whether cash-based budgets or accrual-based financial statements are used; an alternative “true deficit” estimate (change in the fiscal gap) is 39 percent of GDP (Kotlikoff and Burns, 2012, pp. 37–38).
  - The dollar values underlying the U.S. comparisons were divided by the average of the GDP estimates for 2010 and 2011 in the IMF’s April 2014 World Economic Outlook database: $15.2 trillion.
- Key drivers of definitional change since 1991:
  - Shift from predominantly cash-based deficit measurement toward accrual accounting and linked balance sheets.
  - International and national standards: International Public Sector Accounting Standards (IPSAS), Governmental Accounting Standards Board (GASB) requirements (1999) for U.S. state and local governments, and potential European Union standards.
  - IMF government-finance statistics guidance shifted from cash (IMF, 1986) to accrual (IMF, 2001).
  - Growth in fiscal-transparency initiatives and proliferation of fiscal rules: number of central governments subject to fiscal rules rose from 5 in 1991 to 78 by 2014.
- Reporting and adoption:
  - Blondy et al. (2013) identify 13 central governments producing accrual accounts meeting demanding criteria.
  - Ernst and Young (2012): 22 out of 26 central governments in the European Union say they use some form of accrual accounting.
  - At least 57 countries report fiscal statistics on some kind of accrual basis.

### II. Defining the government — five nested perimeters and implications
- Five increasingly broad institutional perimeters:
  - Budgetary central government (the state as a legal entity; budget flows).
  - Central government (adds legally distinct but government-controlled, tax-funded agencies).
  - General government (adds subnational governments and their agencies).
  - Nonfinancial public sector (adds nonfinancial government-owned corporations).
  - Public sector (adds all government-owned corporations, including the central bank).
- Reporting coverage and material impacts:
  - Increasing the perimeter from budgetary central government to general government can increase the estimate of debt by 74–109 percent, depending on the debt definition.
  - Few countries prepare fiscal data for the nonfinancial public sector or the public sector in IMF Government Finance Statistics Yearbooks.
  - Classification of public enterprises and sovereign wealth funds is often difficult and materially important for aggregates.
- Control and consolidation:
  - IPSASB defines control as “the power to govern the financial and operating policies of another entity so as to benefit from its activities” (IPSASB, 2014, vol. 2, p. 1633).
  - Determining control is complex given governments’ coercive powers and heterogeneous arrangements with local governments and public enterprises.
- Narrow perimeters and circumvention evidence (U.S. states):
  - Bunch (1991): states with constitutional debt rules limiting general-obligation and revenue debt have on average more than six times as many public authorities as states with no constitutional debt restriction.
  - Kiewiet and Szakaly (1996): debt restrictions on guaranteed state debt shifted debt to cities and counties and did not meaningfully reduce total public-authority debt.

### III. Defining the debt and deficit — framework and measures
- Four nested asset/liability sets (each yields net-asset and deficit measures):
  - C: cash only — clean cash deficit = change in cash balance.
  - F: cash + financial assets/liabilities — clean deficit = decline in net financial worth; transactions part = EU-targeted deficit.
  - R: includes real assets — “full-accrual”; clean deficit = decline in net worth; transactions component = net operating balance.
  - M: comprehensive — includes present value of projected spending and revenue under current policy; clean deficit = decline in comprehensive net worth.
- Deficit concepts:
  - Clean deficit: decline in value of government's net assets.
  - Dirty deficit: clean deficit excluding certain changes (e.g., excluding capital gains and losses).
  - Transaction deficit (government-finance statistics): part of the clean deficit arising from transactions.

### IV. Evidence of circumvention and measurement problems
- GAO (1993) U.S. survey:
  - For the most recently completed budget, 36 percent of the reported deficit gap was closed by means other than cutting spending or raising revenue.
  - Of this 36 percent, 22 percent came from transfers to the general fund from other government funds.
  - Thus at least 8 percent of the total deficit reduction came from devices that exploited the narrow definition of government.
  - For the most recently enacted budget, 10 percent of the total deficit reduction came from transfers from other funds, reduced contributions to pension funds, and the shifting of spending to cities and counties.
- European Union and UK cases:
  - EU rules apply to general government (a broad definition), but governments can shift debt by selling assets to public corporations they own and control, potentially guaranteeing the corporation's borrowing.
  - UK in June 2009: debt of the public sector including the banks (but excluding the Bank of England) was 198 percent of GDP, while the debt of general government was 58 percent — illustrating that broad public-sector measures may obscure core, tax-funded activities.

### V. Cash versus accrual accounting: trade-offs and empirical findings
- Trade-offs:
  - Cash accounting proponents emphasize public understandability and short-term liquidity relevance.
  - Accrual accounting proponents emphasize recording when value is created/extinguished and enabling balance sheets that include accounts payable and receivable.
- Empirical findings on circumvention and asset sales:
  - U.S. states defer payments to fill 13–16 percent of budget gaps not filled by genuine spending cuts or revenue increases (GAO, 1993).
  - Koen and van den Noord (2005): transactions involving off-balance-sheet assets reduced reported deficits; in three countries such transactions averaged more than half a percent of GDP.
  - Costello et al. (2012): indirect evidence of deferred payments and direct evidence of asset sales under stringent cash-based rules.

### VI. Debt-deficit residuals (stock-flow adjustments) and valuation issues
- Identity and residual:
  - debt_t − debt_{t−1} = deficit_t + residual_t
- Interpretations:
  - Large and consistently negative residuals could suggest containing debt without reducing spending.
  - Large and consistently positive residuals might indicate hiding spending.
- Cross-country findings on residual magnitudes:
  - Kharas and Mishra (2005): in 29 countries (1980–97) average debt increases faster than cumulative deficits; in seven developed countries reported deficits match evolution of public debt more closely.
  - Campos et al. (2006): in 117 countries (1972–2003) average annual residual is 5 percent of GDP; less than 1 percent of GDP in high-income countries and as much as 9 percent in sub-Saharan Africa.
  - Weber (2012): unexplained residual components are greater in countries with lower fiscal transparency.
  - Seiferling (2013): in a 22-country sample (1996–2011) the residual decomposes into (i) transactions in financial assets, (ii) transactions in liabilities not counted as debt, and (iii) valuation changes; the unexplained part is very small.
- Sources of residuals and creative accounting opportunities:
  - Transactions in financial assets treated as loans or equity to public enterprises.
  - Transactions in liabilities not classified as debt (e.g., derivatives).
  - Valuation changes (exchange-rate effects).
  - Mis-measurement of financial assets and understatement of accounts payable when mixing accrual deficits with gross-debt measures.

### VII. Real assets, investment, and full-accrual accounting
- Public investment and accounting effects:
  - Public investment can increase financial deficits even if it creates durable assets.
  - Shifting investment outside perimeter (via public enterprises) can finance investment without worsening targeted accounts.
- Evidence of anti-investment bias:
  - Easterly (1999): European governments cut public investment before euro adoption.
  - Published studies indicate fiscal discipline in Latin America may bias against investment; separate capital budgets correlate with higher capital spending (Poterba, 1995).
- Full-accrual proposals and counterarguments:
  - Full-accrual counts depreciation but not investment as a cost; proponents include Blanchard and Giavazzi (2008).
  - Counterarguments: full-accrual accounts are newer, investments may not pay for themselves, and balanced accrual deficits can still permit excessive debt accumulation (Balassone and Franco, 2000).

### VIII. Off-balance-sheet financing and contingent liabilities
- Common circumvention channels:
  - Revenue bonds, public-private partnerships (PPPs), leases, guarantees.
  - Guarantees often remain off balance sheet; valuation and recognition are difficult despite some rules requiring recognition (e.g., U.S. Federal Credit Reform Act of 1990).
  - IPSAB (2014, §32) recognizes PPP-related assets and liabilities.
- Pensions and contingent liabilities:
  - Employee pension liabilities often go unrecognized; when recognized they can raise reported deficits versus cash budgets (CBO, 2006).
  - Novy-Marx and Rauh estimate U.S. state pension obligations at at least $3.2 trillion, compared with states’ ordinary debt of $1.0 trillion.
  - Some EU transactions involved governments assuming pension liabilities of public enterprises in return for cash or assets, reducing reported debt and deficits when pensions are not recognized.

### IX. Comprehensive accounting (set M) and long-term fiscal exposure
- Comprehensive accounts:
  - Include present values of projected future spending and revenue under current policy; relate to intertemporal budget constraints (Buiter, 1983).
  - Generational accounts highlight long-term fiscal pressures from aging and health-care costs.
- Practical limitations:
  - Highly sensitive to assumptions about growth and discount rates; scope for creative accounting.
  - Require specification of “current policy”; policymakers can alter long-run rules to affect comprehensive deficits.
  - Despite uncertainty, many governments produce long-term fiscal projections enabling comprehensive assessments.

### X. Conclusions and policy implications
- Key conclusions:
  - Accounting matters: fiscal rules and salient budget targets influence behavior and encourage perimeter-driven adjustments and creative accounting.
  - Typical manipulations include transferring debt and deficits to entities outside the government perimeter, deferring payments, selling real assets and reacquiring via leases or PPPs, issuing guarantees instead of subsidies, and intertemporal tax and spending shifts.
  - Trade-offs:
    - Narrow definitions: more reliably measured and informative about short-term liquidity but vulnerable to shifting and off-balance-sheet operations and poor indicators of sustainability.
    - Broad definitions: better for sustainability but rely on harder-to-measure items and vulnerable to valuation-based creative accounting.
    - Comprehensive accounting: avoids perimeter-driven manipulation but is very sensitive to assumptions.
- Recommended protections and practices:
  - Independent measurement and auditing.
  - Use of standards set by independent bodies.
  - Publication of assumptions underlying measurements for external checking.
  - Production and reconciliation of several measures of deficit and debt to reveal manipulation and to provide a fuller picture of public finances.
  - Greater budgetary transparency to reduce incentives and room for gimmicks; reconciliation across measures helps expose manipulation.

*Source: _wp15238 - 1. Five Definitions of Government.*

### 1. Five Definitions of Government ......................................................................................

### _wp15238 - 1. Five Definitions of Government

### I. Introduction — scope, motivation, and recent developments
- Measuring government debt and deficit is ambiguous and consequential: Canadian government debt in 2010 could plausibly be as little as 38 percent of GDP and as much as 104 percent of GDP depending on definitions (Dippelsman et al., 2012).
- The U.S. federal government’s deficit in fiscal year 2010/2011 is reported as 8 percent of GDP or 14 percent of GDP depending on whether cash-based budgets or accrual-based financial statements are used; an alternative “true deficit” estimate (change in the fiscal gap) is 39 percent of GDP (Kotlikoff and Burns, 2012, pp. 37–38).
- The dollar values underlying the U.S. comparisons were divided by the average of the GDP estimates for 2010 and 2011 in the IMF’s April 2014 World Economic Outlook database: $15.2 trillion.
- Key drivers of definitional change since 1991:
  - Shift from predominantly cash-based deficit measurement toward accrual accounting and linked balance sheets.
  - International and national standards: International Public Sector Accounting Standards (IPSAS), Governmental Accounting Standards Board (GASB) requirements (1999) for U.S. state and local governments, and potential European Union standards.
  - IMF government-finance statistics guidance shifted from cash (IMF, 1986) to accrual (IMF, 2001).
  - Growth in fiscal-transparency initiatives and proliferation of fiscal rules (e.g., number of central governments subject to fiscal rules rose from 5 in 1991 to 78 by 2014).
- Empirical and policy implications:
  - Different accounting bases (cash vs. accrual) and perimeters of government create large differences in measured debts and deficits, complicating policymaking, risk assessment, sustainability analysis, and cross-country comparison.
  - Accrual reporting introduces choices (e.g., recognition and valuation of pensions and real assets) that can materially affect reported fiscal positions.
  - The rise of fiscal rules has incentivized governments to seek financing and accounting choices that keep obligations off narrowly defined balance sheets.
- Data and reporting trends:
  - Blondy et al. (2013) identify 13 central governments producing accrual accounts meeting demanding criteria (audited; recognize real and financial assets; cover the whole government; include cash-flow, balance sheet, and accrual operating statement).
  - Ernst and Young (2012) report that 22 out of 26 central governments in the European Union say they use some form of accrual accounting.
  - At least 57 countries report fiscal statistics on some kind of accrual basis.
  - Demand for better measurement has been accompanied by indices and studies of fiscal transparency (Alt et al., 2002; Hameed, 2005; International Budget Partnership, 2012).

### II. Defining the government — five nested perimeters and implications
- Five increasingly broad institutional perimeters (nested sets) commonly used to define “government”:
  - Budgetary central government (the state as a legal entity; budget flows).
  - Central government (adds legally distinct but government-controlled, tax-funded agencies).
  - General government (adds subnational governments and their agencies).
  - Nonfinancial public sector (adds nonfinancial government-owned corporations).
  - Public sector (adds all government-owned corporations, including the central bank).
- Reporting coverage and comparability:
  - Government Finance Statistics Yearbooks indicate increased reporting to the IMF and a large increase in reporting for general government between 2003 and 2013 (the Yearbooks provide country counts for each perimeter in their figure).
  - Few countries prepare fiscal data for the nonfinancial public sector or the public sector in the Yearbooks.
  - If “public” means the broad public sector, few governments publish information on public debt.
- Material impact of perimeter choice:
  - Increasing the perimeter from budgetary central government to general government can increase the estimate of debt by 74–109 percent, depending on the debt definition.
  - The classification of public enterprises and sovereign wealth funds is often difficult and materially important for aggregates.
- Accounting-based consolidation and the concept of control:
  - Accounting practice tends to consolidate entities controlled by the government (analogous to consolidation in business accounts).
  - IPSASB defines control as “the power to govern the financial and operating policies of another entity so as to benefit from its activities” (IPSASB, 2014, vol. 2, p. 1633).
  - Determining control is complex given governments’ coercive powers and heterogeneous arrangements with local governments and public enterprises.
- Narrow perimeters and circumvention of fiscal rules:
  - Narrow legal definitions of government make fiscal rules easier to circumvent via public authorities, off-budget entities, revenue bonds, lease-revenue bonds, and transfers among government funds.
  - Empirical findings from U.S. state-level studies:
    - Bunch (1991): States with constitutional debt rules limiting general-obligation and revenue debt have on average more than six times as many public authorities as states with no constitutional debt restriction; these authorities undertake a wider range of functions and issue more debt.
    - Kiewiet and Szakaly (1996): Across 50 U.S. states (1961–90) and exploiting changes in 12 states’ debt rules, debt restrictions on guaranteed state debt shifted debt to cities and counties and did not meaningfully reduce total public-authority debt; no strong evidence that guaranteed-state-debt restrictions led to substitution into unrestricted unguaranteed state debt at the state level.
  - Endogeneity concerns: the relationship between fiscal rules and circumvention may reflect voter preferences, political selection, or governments’ anticipation of circumvention possibilities; constitutional rules change slowly, and measures of rules are not strongly correlated with state ideology in the cited studies.

*Source: _wp15238 - 1. Five Definitions of Government.*

### Section III (“Defining the Debt and Deficit”) of the effects of the fiscal rules of the European

### Section III (“Defining the Debt and Deficit”)

### Scope and framing
- The section examines how definitions of government, debt, and deficit shape measured fiscal outcomes and the incentives for governments to shift liabilities and spending outside targeted measures.
- Four nested sets of assets and liabilities are used to structure definitions and measures: C (cash), F (financial assets and corresponding liabilities), R (real assets included—full-accrual), and M (comprehensive, including projected spending and revenue under current policy). Each set generates its own measures of net assets, clean deficits, and associated dirty deficits.

### Evidence of circumvention and measurement problems
- U.S. General Accounting Office (1993) survey findings:
  - For the most recently completed budget, 36 percent of the reported deficit gap was closed by means other than cutting spending or raising revenue.
  - Of this 36 percent, 22 percent came from transfers to the general fund from other government funds.
  - Thus at least 8 percent of the total deficit reduction came from devices that exploited the narrow definition of government.
  - For the most recently enacted budget, 10 percent of the total deficit reduction came from transfers from other funds, reduced contributions to pension funds, and the shifting of spending to cities and counties.
  - Footnote detail: Nineteen percent of the reduction comes from “other actions”, of which 20 percent comes from “inter-fund transfers” and 25 percent from an action by the state of California that shifted educational costs to cities and counties.
- European Union rules apply to general government (a broad definition), reducing some manipulation, but governments can still shift debt by selling assets to public corporations they own and control, potentially guaranteeing the corporation's borrowing (Blanchard and Giavazzi, 2008; Dafflon and Rossi, 1999; Prammer, 2009).
- UK case during the 2008 crisis:
  - In June 2009 the debt of the public sector including the banks (but excluding the Bank of England) was 198 percent of GDP, while the debt of general government was 58 percent.
  - This illustrated that the broadest public-sector measure may obscure the monitoring of government’s core, primarily tax-funded activities.

### Definitions and measurement frameworks
- Deficit concepts:
  - Clean deficit: decline in value of government's net assets.
  - Dirty deficit: clean deficit excluding certain changes (e.g., excluding capital gains and losses).
  - Transaction deficit (in government-finance statistics): the part of the clean deficit arising from transactions; this is the deficit most targeted by fiscal rules like the EU's.
- Four nested asset/liability sets generating measures:
  - C: cash only — clean cash deficit = change in cash balance.
  - F: cash + financial assets/liabilities — “financial accounting”; clean deficit = decline in net financial worth (the part from transactions is the EU’s targeted deficit).
  - R: includes real assets (land, buildings) — “full-accrual” or R-based accounts; clean deficit = decline in net worth; change in net worth from transactions = net operating balance.
  - M: comprehensive accounting — includes present value of projected spending and revenue under current policy; clean deficit = decline in comprehensive net worth.

### Cash versus accrual accounting: trade-offs and empirical findings
- Arguments against cash accounting stress public understandability, practicality, and conceptual issues (Bentham; IMF, 1986; Ward, 2004). Proponents note cash deficit’s relevance to short-term economic interactions (Levin, 1991).
- Arguments for accrual accounting emphasize recording transactions when value is created or extinguished, reducing window-dressing and enabling balance sheets that include accounts payable and receivable (IMF, 2001; European Commission, 2013).
- Empirical evidence:
  - Cash-deficit rules have been partly circumvented by deferment of payments and asset sales. U.S. states defer payments to fill 13–16 percent of budget gaps not filled by genuine spending cuts or revenue increases (GAO, 1993).
  - Costello et al. (2012) find indirect evidence of deferred payments and direct evidence of asset sales under stringent cash-based rules.
  - European evidence: privatizations and asset sales increased in the run-up to Maastricht; reductions in gross debt were strongly correlated with reductions in assets during 1992–97 (Milesi-Ferretti and Moriyama, 2006). Koen and van den Noord (2005) identify transactions involving off-balance-sheet assets that reduced reported deficits; in three countries such transactions averaged more than half a percent of GDP.

### Debt-deficit residuals (stock-flow adjustments)
- Identity in simple public finance: debt_t − debt_{t−1} = deficit_t, but in practice a residual exists:
  - debt_t − debt_{t−1} = deficit_t + residual_t
- Interpretation of residuals:
  - Large and consistently negative residuals could suggest containing debt without reducing spending.
  - Large and consistently positive residuals might indicate hiding spending.
- Cross-country findings:
  - Kharas and Mishra (2005): in 29 countries (1980–97) average debt increases faster than cumulative deficits; in seven developed countries reported deficits match evolution of public debt more closely.
  - Campos et al. (2006): in 117 countries (1972–2003) average annual residual is 5 percent of GDP; less than 1 percent of GDP in high-income countries and as much as 9 percent in sub-Saharan Africa.
  - Weber (2012): unexplained residual components are greater in countries with lower fiscal transparency.
  - Seiferling (2013): in a 22-country sample (1996–2011) the residual decomposes into (i) transactions in financial assets, (ii) transactions in liabilities not counted as debt, and (iii) valuation changes; the unexplained part is very small.

### Components of residuals and valuation issues
- Sources of residuals include:
  - Transactions in financial assets (e.g., transfers to public enterprises described as loans or equity).
  - Transactions in liabilities not classified as debt (e.g., derivatives liabilities).
  - Valuation changes (e.g., exchange-rate effects on foreign-currency debt).
- Creative accounting opportunities:
  - Mis-measurement of financial assets (loans or equity to loss-making public enterprises treated as investment when they are de facto spending).
  - Understatement of increases in accounts payable or overstatement of accounts receivable when deficit is accrual-based but debt is gross and excludes payables.
- Empirical relationships in the EU:
  - von Hagen and Wolff (2006): debt-deficit residuals tend to be positive, fall before euro adoption, and increase after; residuals increase when deficits are higher and when the 3 percent rule is in danger, especially during cyclical downturns.
  - Buti et al. (2007): changes in accounts payable/receivable component of the residual increases with the deficit and by about 0.5 percent of GDP after the Stability and Growth Pact; this component also increases during downturns and election years.
  - Alt et al. (2014): debt-deficit residuals grow (i) after EU fiscal rules came into force, (ii) approaching elections, and (iii) in slumps; effects are smaller in countries with greater budgetary transparency (Open Budget Index and supplementary sources).

### Real assets, investment, and full-accrual accounting
- Public investment can increase financial deficits even if it creates durable assets that ultimately pay for themselves; shifting investment outside perimeter (via public enterprises) can finance investment without worsening targeted accounts.
- Evidence of anti-investment bias associated with gross-debt and cash/financial-deficit rules:
  - Easterly (1999): European governments cut public investment before euro adoption.
  - Published studies indicate fiscal discipline in Latin America may bias against investment; separate capital budgets correlate with higher capital spending (Poterba, 1995).
- Proposals to emphasize full-accrual measures:
  - Full-accrual counts depreciation but not investment as a cost; proponents include Blanchard and Giavazzi (2008) and others. Counterarguments: full-accrual accounts are newer, real investments may not pay for themselves, and balanced accrual deficits can still permit excessive debt accumulation (Balassone and Franco, 2000).

### Off-balance-sheet financing and contingent liabilities
- Common off-balance-sheet items and circumvention channels:
  - Revenue bonds, public-private partnerships, leases, and guarantees can be used to bypass explicit debt recognition.
  - Guarantees often remain off balance sheet; some rules/counting approaches require recognizing guarantee costs (e.g., U.S. Federal Credit Reform Act of 1990; international standards advise recognition, but valuation is difficult).
  - Leases and public-private partnerships may avoid recording debt while producing similar fiscal effects to borrowing; IPSAB (2014, §32) recognizes PPP-related assets and liabilities.
  - Employee pension liabilities often go unrecognized; when recognized (accrual-based accounts) they can raise reported deficits versus cash budgets (CBO, 2006). Novy-Marx and Rauh estimate U.S. state pension obligations at at least $3.2 trillion, compared with states’ ordinary debt of $1.0 trillion.
  - Some transactions in the EU involved governments assuming pension liabilities of public enterprises in return for cash or assets, reducing reported debt and deficits when pensions are not recognized in accounts.

### Comprehensive accounting (set M) and long-term fiscal exposure
- Comprehensive accounts include present values of projected future spending and revenue under current policy and relate to intertemporal budget constraints (Buiter, 1983).
- Generational accounts and comprehensive measures highlight long-term fiscal pressures (aging, health-care costs) hidden by conventional measures; comprehensive measures have been estimated for New Zealand, EU countries, and the U.S. federal government (multiple sources cited).
- Practical limitations:
  - Comprehensive accounts are highly sensitive to assumptions about growth and discount rates; reasonable disagreements create scope for creative accounting.
  - Comprehensive measures require specification of “current policy” and can be manipulated by policymakers altering long-run rules to change the comprehensive deficit.
  - Despite uncertainty, many governments produce long-term fiscal projections enabling comprehensive assessments even if present values are not always calculated.

### Conclusions and policy implications
- Accounting matters: fiscal rules and salient budget targets influence behavior; stringent rules constrain debts/deficits as defined, but some adjustment is achieved through window-dressing and creative accounting.
- Typical manipulations include transferring debt and deficits to entities outside the government perimeter, deferring payments, selling real assets and acquiring them via leases or PPPs, issuing guarantees instead of subsidies, and intertemporal tax and spending shifts.
- Trade-offs:
  - Narrow definitions are more reliably measured and informative about short-term liquidity but are vulnerable to shifting and off-balance-sheet operations and are poor indicators of sustainability.
  - Broad definitions better capture sustainability but rely on harder-to-measure items and are vulnerable to valuation-based creative accounting.
  - Comprehensive accounting avoids perimeter-driven manipulation but is very sensitive to assumptions and therefore uncertain.
- Recommended protections and practices:
  - Independent measurement and auditing.
  - Use of standards set by independent bodies.
  - Publication of assumptions underlying measurements for external checking.
  - Production and reconciliation of several measures of deficit and debt to reveal manipulation and to provide a fuller picture of public finances.
  - Greater budgetary transparency reduces incentives and room for gimmicks; reconciliation across measures helps explain differences and expose manipulation.

*Source: Section III (“Defining the Debt and Deficit”) of the effects of the fiscal rules of the European Union (PDF chapter content provided).*

### References

### _wp15238 - References

### Fiscal transparency, political economy, and fiscal gimmickry
- Alt, James E., and David Dreyer Lassen, 2006, “Fiscal Transparency, Political Parties, and Debt in OECD Countries,” European Economic Review, Vol. 50, No. 6, pp. 1403–39.
- Alt, James E., David Dreyer Lassen, and David Skilling, 2002, “Fiscal Transparency, Gubernatorial Approval, and the Scale of Government: Evidence from the States,” State Politics and Policy Quarterly, Vol. 2, No. 3, pp. 230–50.
- Alt, James E., David Dreyer Lassen, and Shanna Rose, 2006, “The Causes of Fiscal Transparency: Evidence from the U.S. States,” IMF Staff Papers, Vol. 53, special issue, pp. 30–57.
- Alt, James E., David Dreyer Lassen, and Joachim Wehner, 2014, “It Isn’t Just About Greece: Domestic Politics, Transparency, and Fiscal Gimmickry in Europe,” British Journal of Political Science, Vol. 44, No. 4, pp. 707–16.
- Kopits, George, and Jon Craig, 1998, “Transparency in Government Operations,” IMF Occasional Paper No. 158.
- Khagram, Sanjeev, Paolo de Renzio, and Archon Fung, 2013, “Overview and Synthesis: The Political Economy of Fiscal Transparency, Participation, and Accountability around the World in Open Budgets,” in Khagram, Fung, and de Renzio (eds.), Open Budgets: The Political Economy of Transparency, Participation, and Accountability, pp. 1–50, (Brookings).
- International Budget Partnership, 2012, Open Budget Survey 2012.
- Irwin, Timothy C., 2012, “Some Algebra of Fiscal Transparency: How Accounting Devices Work and How to Reveal Them,” Working Paper WP/12/228 (Washington: International Monetary Fund).

### Measurement of deficits, debt, and fiscal condition
- Blejer, Mario I., and Adrienne Cheasty, 1991a, “The Measurement of Fiscal Deficits: Analytical and Methodological Issues,” Journal of Economic Literature, Vol. 29, No. 4, pp. 1644‒78.
- Blejer, Mario I., and Adrienne Cheasty (eds.), 1991b, How to Measure the Fiscal Deficit. (Washington: International Monetary Fund).
- Buiter, Willem H., 1983, “Measurement of the Public Sector Deficit and its Implications for Policy Evaluation and Design,” IMF Staff Papers, Vol. 30, No. 2, pp. 306–349.
- Eisner, Robert, 1984, “Which Budget Deficit? Some Issues of Measurement and their Implications,” American Economic Review, Vol. 74, No. 2, pp. 138–143.
- Gokhale, Jagadeesh, and Kent Smetters, 2003, “Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities,” Federal Reserve Bank of Cleveland, Policy Discussion Paper No. 5. December.
- Gokhale, Jagadeesh, and Kent Smetters, 2006, “Fiscal and Generational Imbalances: An Update,” Tax Policy and the Economy, Vol. 20, pp. 193–223.
- Gokhale, Jagadeesh, and Kent Smetters, 2007, “Do the Markets Care about the $2.4 Trillion US Deficit,” Financial Analysts’ Journal, Vol. 63, No. 2, pp. 37–47.
- Dafflon, Bernard, and Sergio Rossi, 1999, “Public Accounting Fudges Towards EMU: A First Empirical Survey and Some Public Choice Considerations,” Public Choice, Vol. 101, Nos. 1–2, pp. 59–84.
- Rauch, Bernhard, Gernot Brähler, Stefan Engel, and Max Göttsche, 2011, “Fact and Fiction in EU-Governmental Economic Data,” German Economic Review, Vol 12, No. 3, pp. 243–55.
- Velculescu, Delia, 2010, “Some Uncomfortable Arithmetic Regarding Europe’s Public Finances,” IMF Working Paper WP/10/177 (Washington: International Monetary Fund).

### Fiscal rules, numerical rules, and creative accounting
- Buti, Marco, Joao Nogueira Martins, and Alessandro A. Turrini, 2007, “From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules,” CESifo Economic Studies, Vol. 53, No. 1, pp. 115–52.
- Milesi-Ferretti, Gian Maria, 2004, “Good, Bad or Ugly? On the Effects of Fiscal Rules with Creative Accounting,” Journal of Public Economics, Vol. 88, Nos 1–2, pp. 377–94.
- Von Hagen, Jürgen, and Guntram B. Wolff, 2006, “What Do Deficits Tell Us about Debt? Empirical Evidence on Creative Accounting with Fiscal Rules in the EU,” Journal of Banking and Finance, Vol. 30, No. 12, pp. 3259–79.
- Koen, Vincent, and Paul van den Noord, 2005, “Fiscal Gimmickry in Europe: One-off Measures and Creative Accounting,” OECD Economics Department Working Papers 417.
- Seiferling, Mike, 2013, “Stock-Flow Adjustments, Government’s Integrated Balance Sheet, and Fiscal Transparency,” IMF Working Paper WP/13/16 (Washington: International Monetary Fund).
- Budina, Nina, Tidiane Kinda, Andrea Schaechter, and Anke Weber, 2013, “Numerical Fiscal Rules: International Trends,” in Marco Cangiano, Teresa Curristine, and Michel Lazare (eds.), Public Financial Management and its Emerging Architecture, Chap. 3., pp. 107–35 (Washington: International Monetary Fund).

### Public sector accounting standards, accruals, and reporting
- Chan, James L., and Qi Zhang, 2013, “Government Accounting Standards and Policies,” in Richard Allen, Richard Hemming, and Barry H. Potter (eds.), The International Handbook of Public Financial Management, Chap. 34., pp. 742–66 (New York: Palgrave Macmillan).
- International Public Sector Accounting Standards Board, 2014, International Public Sector Accounting Standards.
- European Commission, 2013, Report from the Commission to the Council and the European Parliament: Towards Implementing Harmonized Public Sector Accounting Standards in Member States—The Suitability of IPSAS for the Member States, Brussels, March 6, COM (2013) 114.
- European Commission, International Monetary Fund, Organization for Economic Cooperation and Development, United Nations, and World Bank, 2009, System of National Accounts 2008.
- Eurostat, 1996, European System of Accounts 1995.
- Eurostat, 2013b, European System of Accounts 2010.
- Eurostat, 2013c, Manual on Government Deficit and Debt, 2013.
- International Monetary Fund, 2014b, Government Finance Statistics Manual 2014 (Washington).
- International Monetary Fund, 1986, A Manual on Government Finance Statistics (Washington).
- International Monetary Fund, 2001, Government Finance Statistics Manual 2001 (Washington).
- Barton, Allan, 2011, “Why Governments Should use the Government Finance Statistics Accounting System,” Abacus, Vol. 47, No. 4, pp. 411–45.
- Blöndal, Jón R., 2004, “Issues in Accrual Budgeting,” OECD Journal on Budgeting, Vol. 4, No. 1, pp. 103–19.
- Efford, Don, 1996, “The Case for Accrual Recording in the IMF’s Government Finance Statistics System,” Working Paper WP/96/73 (Washington: International Monetary Fund).

### Public investment, capital budgeting, and whole-of-government accounting
- Balassone, Fabrizio, and Daniele Franco, 2000, “Public Investment, the Stability Pact and the Golden Rule,” Fiscal Studies, Vol. 21, No, 2, pp. 207–29.
- Balassone, Fabrizio, Daniele Franco, and Stefania Zotteri, 2006, “EMU Fiscal Indicators: A Misleading Compass,” Empirica, Vol. 33, Nos. 2–3, pp. 63–87.
- Blanchard, Olivier J. and Francesco Giavazzi, 2008, “Improving the Stability and Growth Pact Through Proper Accounting of Public Investment,” in Guillermo E. Perry, Luís Servén, and Rodrigo Suescún (eds.), Fiscal Policy, Stabilization, and Growth: Prudence or Abstinence? pp. 259–272 (Washington: World Bank).
- HM Treasury, 2014, Whole of Government Accounts, Year Ended 31 March 2013.
- Huther, Jeff, 1998, “An Application of Portfolio Theory to New Zealand's Public Sector,” New Zealand Treasury Working Paper 98/4.
- Bradbury, Simon, Jim Brumby, and David Skilling, 1999, “Sovereign Net Worth: An Analytical Framework,” New Zealand Treasury Working Paper 99/3.

### Pensions, contingent liabilities, and fiscal risk
- Brixi, Hana Polackova and Ashoka Mody, 2002, “Dealing with Government Fiscal Risk: An overview,” in Brixi and Allen Schick (eds.) Government at Risk: Contingent Liabilities and Fiscal Risk, pp. 21–58 (Washington: World Bank and Oxford University Press).
- Chaney, Barbara A., Paul A. Copley, and Mary S. Stone, 2002, “Effects of Fiscal Stress and Balanced Budget Requirements on the Funding and Measurement of State Pension Obligations,” Journal of Accounting and Public Policy, Vol. 21, pp. 287–313.
- Novy-Marx, Robert, and Joshua D. Rauh, 2009, “The Liabilities and Risks of State-Sponsored Pension Plans,” Journal of Economic Perspectives, Vol. 23, No. 4, pp. 191–210.
- Novy-Marx, Robert, and Joshua D. Rauh, 2011, “Pension Promises: How Big are They and What are They Worth?” Journal of Finance, Vol. 66, No. 4, pp. 1211–49.
- Munnell, Alicia H., 2012, State and Local Pensions: What Now? (Washington: Brookings).
- Phaup, Marvin, 1993, “Recent Efforts to Measure and Control Government Risk-Bearing,” in Mark S. Sniderman (ed.), Government Risk-Bearing, pp. 167–76. (New York: Springer).
- Heald, David, and Ron Hodges, 2014, “Watch the Public Sector Balance Sheet: Guarantees as the Next Big Thing in Government Accounting,” Paper presented at the CIGAR workshop, Whole of Government Accounting and Auditing: International Trends, Kristianstad University, Sweden, September, 8–9.
- Seiferling, Mike, 2013, “Stock-Flow Adjustments, Government’s Integrated Balance Sheet, and Fiscal Transparency,” IMF Working Paper WP/13/16 (Washington: International Monetary Fund).
- Weber, Anke, 2012, “Stock-Flow Adjustments and Fiscal Transparency: A Cross-Country Comparison,” IMF Working Paper WP/12/39 (Washington: International Monetary Fund).

### Empirical methods, market effects, and accounting theory
- Dechow, Patricia M., 1994, “Accounting Earnings and Cash Flows as Measures of Firm Performance: The Role of Accounting Accruals,” Journal of Accounting and Economics, Vol. 18, No. 1, pp. 3–42.
- Penman, Stephen H., and Nir Yehuda, 2009, “The Pricing of Earnings and Cash Flows and an Affirmation of Accrual Accounting,” Review of Accounting Studies, Vol. 14, No. 4, pp. 453–79.
- Sloan, Richard G., 1996, “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?” The Accounting Review, Vol. 71, No. 3, pp. 289–315.
- Tirole, Jean, 2006, The Theory of Corporate Finance (Princeton: Princeton University Press).
- Campbell, Donald T., 1976, “Assessing the Impact of Planned Social Change,” Occasional Paper 8, Public Affairs Center, Dartmouth.
- Bohn, Henning, 1992, “Budget Deficits and Government Accounting,” Carnegie-Rochester Conference Series on Public Policy, Vol. 37, No. 1, pp. 1–84.
- Bohn, Henning, and Robert P. Inman, 1996, “Balanced-Budget Rules and Public Deficits: Evidence from the U.S. States,” Carnegie-Rochester Conference Series on Public Policy, Vol. 45, pp. 13–76.

### Country reports, case studies, and institutional documents
- Government of France, 2014, Compte Générale de l'Etat.
- Government of Switzerland, 2014, Compte d'Etat: Rapport sur le compte de la Confédération.
- Office for National Statistics, 2014, Public Sector Finances, August 2014.
- U.S. Treasury, 2011, Financial Report of the US Government 2011.
- Ernst and Young, 2012, “Overview and Comparison of Public Accounting and Auditing Practices in the 27 EU Member States,” Prepared for Eurostat, Final Report. 19 December 2012.
- Eurostat, 2004, Revision of the Greek Government Deficit and Debt Figures, November 22.
- Eurostat, 2013a, EDP Dialogue visit to the United Kingdom, 24–25 January 2013.
- Joloza, Theodore, 2013, “Classification of Network Rail under European System of Accounts 2010.”

### Surveys, reviews, and edited volumes on fiscal policy and public financial management
- Boskin, Michael J., 2008, “Economic Perspectives on Federal Deficits and Debt,” in Elizabeth Garrett, Elizabeth A. Graddy, and Howell E. Jackson (eds.), Fiscal Challenges: An Interdisciplinary Approach to Budget Policy, Chap. 5, pp. 141–184 (Cambridge, UK: Cambridge University Press).
- Jackson, Howell E., 2008, “Counting the Ways: The Structure of Federal Spending,” in Elizabeth Garrett, Elizabeth A. Graddy, and Jackson (eds.), Fiscal Challenges: An Interdisciplinary Approach to Budget Policy, Chap. 6, pp. 185–220, (Cambridge, UK: Cambridge University Press).
- Blondy, Guilhem, Julie Cooper, Timothy Irwin, Kris Kaufmann, and Abdul Khan, 2013, “The Role of Fiscal Reporting in Public Financial Management,” in Marco Cangiano, Teresa Curristine, and Michel Lazare (eds.), Public Financial Management and its Emerging Architecture, Chap. 8, pp. 259–281 (Washington: International Monetary Fund).
- Khan, Abdul, 2013, “Accrual Budgeting: Opportunities and Challenges,” in Marco Cangiano, Teresa Curristine, and Michel Lazare (eds.), Public Financial Management and its Emerging Architecture, Chap. 11. (pp. 339–59) (Washington: International Monetary Fund).
- Budina, Nina, Tidiane Kinda, Andrea Schaechter, and Anke Weber, 2013, “Numerical Fiscal Rules: International Trends,” in Marco Cangiano, Teresa Curristine, and Michel Lazare (eds.), Public Financial Management and its Emerging Architecture, Chap. 3., pp. 107–35 (Washington: International Monetary Fund).
- Perry, Guillermo E., Luís Servén, and Rodrigo Suescún (eds.), 2008, Fiscal Policy, Stabilization, and Growth: Prudence or Abstinence? (Washington: World Bank).

*Source: _wp15238 - References*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15238.pdf_