Defining the Government’s Debt and Deficit

IMF Working Papers, November 20, 2015

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There is no agreement about how the budget deficit and the public debt should be measured.
Debt and deficit measures can be defined for different sets of public institutions, including nested sets corresponding to:
- central government
- general government
- the public sector
For any definition of government, many measures of debt and deficit exist, including those generated by four kinds of accounts:
- cash
- financial
- full accrual
- comprehensive
These measures can be derived from four nested sets of assets and liabilities.
Each debt and deficit measure provides information about public finances, but none tells the whole story.
Each measure is vulnerable to manipulation, and measures are likely to be manipulated if subject to a binding fiscal rule or target.
Narrow definitions of government encourage shifting of spending to entities outside the defined perimeter of government.
Narrow definitions of debt and deficit encourage operations involving off-balance-sheet assets and liabilities.
Broad measures are susceptible to mismeasurement of on-balance-sheet assets and liabilities.

Choice of government perimeter (central, general, public sector) materially affects measured debt and deficit.
Choice of accounting basis (cash, financial, full accrual, comprehensive) materially affects measured debt and deficit.
Interrelationships exist among the four account types and the four nested asset/liability sets; understanding these interrelationships is necessary to interpret measures.
Fiscal rules or numerical targets tied to a single measure create incentives for creative accounting and perimeter shifting.

Governments should publish several measures of the debt and deficit.
Published measures should be presented in a form that clearly reveals their interrelationships.

Subject: Accrual accounting, Financial statements, Fiscal accounting and reporting, Fiscal policy, Fiscal rules, Public debt, Public financial management (PFM)
Keywords include: accounts payable; Accrual accounting; agencies carrying out government policy; cash balance; creative accounting; Debt; debt rule; debt-deficit residual; Deficit; deficit debt; deficit measure; deficit rule; deficits give; Financial statements; Fiscal accounting and reporting; Fiscal rules; full-accrual deficit; Global; Government accounts; Government finance statistics; government Finance Statistics Yearbooks; Maastricht debt criterion; North America; Sub-Saharan Africa; WP

Defining the Government’s Debt and Deficit — Timothy C Irwin, IMF Working Paper No. 2015/238 (November 20, 2015).