Disappearing Deficits
IMF Blog, March 28, 2012
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Bibliographic details
- Authors: Tim Irwin
- Published: March 28, 2012
Overview
- Author: Tim Irwin
- Date: March 28, 2012
- Context: At the IMF, governments are sometimes found to employ accounting devices that make the reported deficit smaller without actually reducing spending or raising taxes.
How the devices work
- Governments may take over companies’ pension schemes; the government’s obligation to make future pension payments has a real cost but "doesn’t count as a liability in the accounting" in some cases.
- When the government receives a pension scheme’s assets from a company, it can treat the receipt of those assets as revenue that reduces its deficit.
- Public-private partnerships (PPPs): a private company builds and maintains an asset (for example, a road or a hospital). In return, the government agrees to pay the company for its costs over "20 or 30 years."
- Effect: The government’s deficit is lower initially, but this often comes "at the expense of bigger future deficits."
Consequences and diagnosis
- The pain of spending cuts and tax increases is postponed and potentially magnified rather than avoided.
- Accounting devices make the deficit a less accurate fiscal indicator, complicating efforts by citizens, journalists, think tanks, investors, rating agencies, and governments to understand public finances.
- Different indicators can reveal problems suppressed in one measure; an example given is the United States where a mainly cash-based measure and the "net operating surplus" diverge because pension obligations show up in the net operating surplus but not in the budget surplus.
Improving transparency — recommended actions
- Prepare audited financial statements (income statement, cash-flow statement, and balance sheet) according to international accounting standards.
- Give statisticians the resources and independence to be both expert and impartial, and the authority to revise standards in light of emerging problems.
- Monitor a variety of different indicators of the state of public finances so that problems hidden in one indicator appear in others.
- Accept that addressing accounting devices "cannot be solved with the stroke of a pen"; obtaining an accurate picture requires hard work, careful checks, and willingness to look at several different measures of the deficit.
Source: Disappearing Deficits — Tim Irwin, March 28, 2012.
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- Staff Discussion Note
