Some Algebra of Fiscal Transparency: How Accounting Devices Work and How to Reveal Them

Transcription

1 WP/12/228 Some Algebra of Fiscal Transparency: How Accouning Devices Work and How o Reveal Them Timohy C Irwin

2 2012 Inernaional Moneary Fund WP/ IMF Working Paper Fiscal Affairs Deparmen Some Algebra of Fiscal Transparency: How Accouning Devices Work and How o Reveal Them Prepared by Timohy C Irwin 1 Auhorized for disribuion by Marco Cangiano Sepember 2012 This Working Paper should no be repored as represening he views of he IMF The views expressed in his Working Paper are hose of he auhor(s) and do no necessarily represen hose of he IMF or IMF policy Working Papers describe research in progress by he auhor(s) and are published o elici commens and o furher debae Absrac Accouning devices ha arificially reduce he measured fiscal defici can be analyzed as ransacions involving unrecognized asses and liabiliies Differen accouning sysems recognize differen ses of asses and liabiliies and are hus vulnerable o differen ses of devices Some devices can be revealed by moving progressively from cash accouning o modified accrual accouning o full accrual accouning Revealing all would require he publicaion of exended fiscal accouns in which all fuure cash flows give rise o asses or liabiliies JEL Classificaion Numbers: H83, H60, M41 Keywords: governmen accouning, budge deficis, accouning devices Auhor s Address:TIrwin@imforg 1 Thanks for helpful commens on earlier drafs of his paper are due o Jochen Andrizky, Marco Cangiano, Adrienne Cheasy, Kara Rideou, Eser Perez Ruis, Iva Perova, Mike Sieferling, and Bruno Versailles The paper has also benefied from discussions wih many colleagues, including Richard Allen, Miguel Alves, Guilhem Blondy, Sagé de Clerck, Rob Dippelsman, Phil Gerson, Kris Kaufmann, Abdul Khan, and Paolo Mauro

3 2 Conens Page I Inroducion 3 II One True Defici 4 A Defici Devices 5 B Deb 6 III Muliple Deficis 7 A Accouning Sysems and he Devices They Allow 9 B Exended Fiscal Accouns 10 C Fiscal Susainabiliy 12 IV Diry Deficis 13 A Componens of Clean Surpluses 13 B Devices Revisied 14 V Conclusion 15 Tables 1 Summary Exended Accouns, Clean Surpluses 12 Figures 1 Ses of Asses and Liabiliies Recognized in Differenc Accouning Sysems 8 References 17

4 3 I INTRODUCTION Governmen accouns ypically do no reveal he full fiscal effecs of policy decisions in he year in which he decisions are made This makes hem vulnerable o defici devices, or ransacions ha reduce he defici in he shor erm, only o increase i laer (Easerly, 1999; Koen and van den Noord, 2005; Irwin, 2012) For example, governmens can someimes cu he defici by aking over a privae pension scheme; he akeover may no improve public finances, bu if he obligaion o pay pensions does no coun as a liabiliy, he receip of he pension scheme s asses can be reaed as revenue ha reduces he defici This paper presens an analysis of accouning devices ha aims o clarify heir relaionship o accouning rules I offers a few examples of devices no menioned in he above papers, bu is main aim is o analyze he problem, no o describe is manifesaions Alhough i does no propose any specific changes in accouning or saisical sandards, i aims o clarify he naure of he changes ha would limi or reveal he use of accouning devices I begins by considering a world in which i is clear wha consiues an asse or liabiliy In such a world, defici devices can be analyzed as ransacions involving asses or liabiliies ha because of flaws in he accouning are no recognized on he governmen s balance shee The exisence of such asses and liabiliies means ha a governmen s repored ne worh may differ from is rue ne worh, and is repored defici may differ from is rue defici (where he rue defici is defined, following he clean-surplus assumpion, as he change in he governmen s ne worh) The pension-scheme akeover menioned above is a ransacion in which an unrecognized liabiliy is assumed in reurn for recognized asses The paper hen considers a more complex world, in which asses and liabiliies come in differen kinds In his world, here are many differen accouning sysems such as cash accouning, modified accrual accouning, and full accrual accouning each of hem recognizing a differen se of asses and liabiliies and generaing a differen measure of he defici From he vanage poin of full accrual accouning, each accouning sysem based on a narrower se of asses and liabiliies can be seen o be vulnerable o is own se of accouning devices; hus, he scope for accouning devices can be progressively reduced by moving from cash accouning o modified accrual accouning o full accrual accouning Ye even full accrual accouning is vulnerable o some devices ha reduce he defici in he shor erm, only o increase i laer And, as modern sandards for accrual accouning recognize narrower measures of he defici can be informaive even hough hey are vulnerable o devices The paper herefore suggess he presenaion of a se of inegraed fiscal accouns ha include several measures of he defici, including one ha equals he decline in he ne presen value of all projeced cash flows under curren policies

5 4 The paper ends by noing he value of cerain decomposiions of clean surpluses ino componen pars and by considering he devices o which some nonclean surpluses are vulnerable II ONE TRUE DEFICIT We consider a budgeary world in which here are only wo periods, he ineres rae is zero, and in his secion no doub abou wha is an asse or liabiliy The governmen can run a defici, bu i faces an ineremporal budge consrain ha requires i o end he second period wih ne worh equal o is ne worh a he beginning of he firs period (ha is, a he end of period zero) Leing w denoe he governmen s ne worh and leing subscrips on balance-shee iems refer o he end of a period, we hus have w w 0 2 (1) The governmen s clean surplus, s, is he increase in is ne worh 2 s w w 1 (2) Leing Δ denoe he change in a variable from ime 1 o ime, we can also wrie he surplus as s w If he governmen runs a defici in he firs period, i mus run a surplus of equal size in he second In symbols, repeaed applicaion of equaion (2) implies ha w w s w s s, which, by equaion (1), implies ha s1 s2 Noice, from equaion (2), ha he surplus is no affeced by ransacions in asses and liabiliies ha leave ne worh unchanged, such as he purchase of an asse financed by deb Measuring he surplus as he increase in ne worh is naural and simple In accouning erms, such a surplus is called clean (or comprehensive) 3 There are oher useful surpluses as well, including hose derived from decomposiion of he clean surplus ino pars Some are considered laer Surpluses can also be expressed as revenues less spending, allowing he fourfold classificaion of accouning devices used in Irwin (2012) 2 The erm surplus is used here o refer he change in ne worh, wheher posiive or negaive A defici is hus a negaive surplus 3 See, for example, Nobes (2006, pp 66, 111) When several differen ses of asses and liabiliies and associaed measures of ne worh are considered, a surplus can be said o be clean or comprehensive wih respec o a measure of ne worh

6 5 A Defici Devices Before considering how defici devices can arise in his simple world, i is worh considering why hey migh arise One possibiliy is ha he governmen faces a binding fiscal rule and wans o run a larger defici in he firs period han is allowed by he rule Given he choice, i herefore prefers o employ a defici device in he firs period han o cu spending or raise axes Anoher possibiliy is ha he governmen faces an elecion a he end of he firs period and wans o arac voers by spending more in he firs period han i collecs in axes, while simulaneously persuading hem ha hese levels of spending and axaion can be susained in he second period More specifically, we migh suppose ha voers undersand he ineremporal budge consrain, and herefore recognize ha spending in excess of ax revenue is unsusainable, bu ha hey judge he susainabiliy of spending only by looking a he repored defici In any case, defici devices are feasible in his world because only some of he governmen s asses and liabiliies are recognized in is accouning Ohers are unrecognized or, equivalenly, off balance shee 4 Using superscrip on and off o disinguish beween recognized and unrecognized asses and liabiliies, and inerpreing variables wihou superscrips, including hose above, as oals, we can wrie he governmen s rue ne worh as he sum of is recognized and unrecognized ne worh: w w w on off (3) In he presence of unrecognized ne worh, he rue surplus can differ from he repored surplus, s Bu we assume ha he repored surplus is also clean: s w w (4) on on 1 4 Expressions such as unrecognized asse and off-balance-shee liabiliy are roublesome in he language of any paricular accouning sysem, because anyhing ha is an asse or liabiliy in ha sysem canno legiimaely be kep off he balance shee See, for example, he discussion of coningen liabiliy in Sickney and ohers (2010, p 852) In each sysem, ha is, if a given se of propery righs consiues an asse or liabiliy, i mus be recognized In he language of he sysem, herefore, expressions such as unrecognized asse and off-balanceshee liabiliy are eiher conradicions in erms or refer o misakes in he applicaion of he accouning To avoid his problem, his paper uses he erms asses and liabiliies as hey would be defined in he mos comprehensive accouning sysem under consideraion; in any oher sysem, hese asses and liabiliies may or may no be recognized

7 6 Equaion (4) implies ha he repored surplus is unaffeced by offseing ransacions in recognized asses and liabiliies, such as he purchase of a recognized asse financed by he issuance of a recognized liabiliy of equal value Bu in general he repored surplus is affeced by offseing ransacions involving a mix of recognized and unrecognized asses or liabiliies In paricular, i can be increased by selling an unrecognized asse or issuing an unrecognized liabiliy, in reurn for he receip of a recognized asse or he cancellaion of a recognized liabiliy Equaions (3) and (4) imply ha he repored surplus can be expressed as s w w w w off off ( ) ( 1 1) Rearranging his, we ge s ( w w ) ( w w ), off off 1 1 or, using equaion (2), s s w (5) off Tha is, he difference beween he repored and he rue surplus is he decline in unrecognized ne worh 5 B Deb Devices ha reduce he repored defici ypically reduce repored deb as well To see he relaionship, le us assume ha all he governmen s deb, b, is recognized, bu ha is asses, a, and nondeb liabiliies, l, need no be Then repored ne worh is given by w a b l (6) on on on I follows from equaions (4) and (6) ha b s a l on on 5 Accouning devices are also possible when asses and liabiliies are valued a oher han marke value For example, a governmen can increase is surplus by selling asses whose book values are less han heir marke values In such cases, he difference beween book and marke value can be analyzed as an unrecognized asse or liabiliy

8 7 Tha is, he increase in deb equals he repored defici plus wo erms ha are he sock-flow adjusmen in his se-up: he increase in recognized asses less he increase in recognized nondeb liabiliies If he repored surplus is higher han he rue surplus because of a defici device, deb will fall unless he ransacion also involves a change in he erms of he sockflow adjusmen ha more han offses he increase in he repored surplus When a fiscal rule limis he governmen s permied deb, he governmen may be emped o reduce deb wihou increasing is ne worh I can do so by using a defici device or simply by rearranging is repored balance shee: i can reduce deb by selling recognized asses or incurring recognized nondeb liabiliies If accouns payable are recognized as liabiliies bu no couned as deb, for example, he governmen can build up arrears o employees and suppliers Anoher apparen example is he issuance of off-marke swaps by various European governmens in he 2000s (see Irwin, 2012, and references herein) Enering ino he swaps, he governmens incurred liabiliies ha had o be recognized and hus couned in calculaing he defici, bu derivaives in loss did no coun as deb so he issuance allowed hem o borrow wihou reporing new deb III MULTIPLE DEFICITS So far we have assumed ha righs o receive fuure benefis eiher consiue an asse or no, and likewise ha obligaions o provide fuure benefis eiher consiue a liabiliy or no Bu righs and obligaions come in varying kinds Some righs and obligaions involve iron-clad commimens o make paymens come hell or high waer Ohers depend on cusom and he expecaions ha cusom creaes And hose expecaions and cusoms can hemselves be more or less firmly enrenched Finally, he less clear-cu righs and obligaions can seldom be valued wih precision, which creaes a new opporuniy for accouning devices 6 This creaes doubs abou wheher some righs and obligaions should be considered as asses and liabiliies and a reason for adoping an approach ha disinguishes differen kinds of asses and liabiliies In his secion, we allow for a variey of asses and liabiliies and a variey of accouning sysems In symbols, le J denoe he accouning sysem ha arises from he recogniion of he asses and liabiliies in se J Ne worh in accouning sysem J, w J, is he sum of he values of all he asses in J, less he sum of he values of all he liabiliies in J The clean surplus of J is given by s w w J J J 1 6 When asses and liabiliies are difficul o value, book values can easily diverge from marke values This allows for he kind of devices discussed in foonoe 5

9 8 There are very many possible accouning sysems Wih m kinds of asses and n kinds of m n liabiliies, here are 2, so wih, say, five of each here are more han a housand sysems, each wih is own clean surplus Only a few accouning sysems are ineresing Many of hose sysems form a nesed sequence, being based on nesed ses of asses and liabiliies Figure 1 shows hree ses of asses and liabiliies ha are imporan in he Governmen Finance Saisics Manual (IMF, 2001) The smalles se, C, which conains cash bu nohing else, is associaed wih cash accouning A larger se, F, which also includes cash bu in addiion conains oher financial asses and liabiliies, is associaed wih modified accrual accouning The se R is larger sill I conains all he asses and liabiliies in F and nonfinancial asses as well I is associaed wih full accrual accouning Figure 1 Ses of Asses and Liabiliies Recognized in Differen Accouning Sysems Righs and obligaions associaed wih all fuure cash flows (E) All currenly recognized asses and liabiliies (R) Financial asses and liabiliies (F) Cash (C)

10 9 A Accouning Sysems and he Devices They Allow If we hink of R as being he se of all rue asses and liabiliies, each accouning sysem based on a subse of R is vulnerable o is own se of accouning devices The smalles possible se of recognized asses and liabiliies is no shown in Figure 1: i is he empy se, which generaes pure cash-flow accouning The governmen s ne worh is zero by definiion, and a balanced budge is he only possible oucome Leing denoe he empy se and he associaed sysem of accouning, we have, for all imes, s w (The superscrips imply ha he surplus is a repored surplus, no he rue surplus, so we drop he prime) From equaion (5), we can see ha any ransacion ha reduces rue ne worh works as a defici device in his sysem: s s w In paricular, his sysem of accouning does no disinguish beween meeing coss by running down he bank balance and meeing hem by collecing axes A more useful kind of accouning, cash accouning, recognizes cash as an asse bu no oher asses and no liabiliies Leing superscrip C denoe he se of asses and liabiliies conaining only cash, and leing a c denoe he value of he cash, we have C C c s w a Thus he repored surplus is he increase in he governmen s bank balance, and running down his balance is no longer a defici device Bu, because no oher asses and liabiliies are recognized, many oher defici devices are available Borrowing is one In he Unied Saes, some saes and ciies mus balance heir budges bu can do so by borrowing The Ciy of Chicago explains: In accordance wih he Sae of Illinois Municipal Code, he Ciy produces a balanced budge [bu] []he Ciy s budge classifies as revenue long-erm deb proceeds (Ciy of Chicago, 2009, pp 97, 105) Anoher form of accouning recognizes liabiliies and financial asses (including cash), bu no nonfinancial asses I is someimes called modified accrual accouning Leing F denoe his se of asses and he associaed sysem of accouning, we have

11 10 s F w F Leing a nf denoe he value of nonfinancial asses, and assuming ha nonfinancial asses are he only asses or liabiliies no recognized in his accouning sysem, we have s s a F nf Tha is, he repored surplus is equal o he rue surplus less he increase in nonfinancial asses In his sysem, borrowing is no longer a defici device, bu he sale of nonfinancial asses increases he surplus while he purchase of nonfinancial asses reduces i Full accrual accouning of he kind illusraed by he Governmen Finance Saisics Manual 2001 recognizes nonfinancial as well as financial asses In his kind of accouning, he sale of nonfinancial asses and he cancelling of planned invesmen in such asses no longer reduce he repored defici Bu even full accrual accouning is no necessarily complee in is recogniion of asses and liabiliies, and i is herefore vulnerable o accouning devices For example, finance leases are ypically reaed as creaing asses or liabiliies for he lessee, bu operaing leases, which differ from finance leases only in degree, are reaed differenly (Ineresingly, Icelandic municipaliies are now required o recognize asses and liabiliies when hey ener ino operaing as well as finance leases, afer some municipaliies used operaing leases before he crisis o ake on obligaions wihou reporing liabiliies) Similarly, righs and obligaions ha generae paymens only in cerain circumsances ( coningen asses and coningen liabiliies ) are someimes recognized, bu ofen no When hey are no, accouning devices are possible For insance, governmens can reduce heir repored deficis and debs by issuing guaranees ha creae no liabiliy in reurn for guaranee fees ha herefore coun as revenue (Brixi and Mody, 2002, p 32) B Exended Fiscal Accouns Over ime, he rules for full accrual accouning may require recogniion of more asses and liabiliies (relaing, for example, o guaranees and operaing leases) and hus foil more accouning devices Ye i will never be possible o draw a sharp and saisfacory line beween he righs and obligaions ha are firm enough o consiue asses and liabiliies, under definiions roughly similar o curren ones, and hose ha are no And hus even under full accrual accouning governmens will always be able o reduce his year s defici while simulaneously increasing expeced fuure deficis A simple example of such a device comes from Ialy, where, in he run-up o he adopion of he euro, he governmen levied a one-off euroax o mee he Maasrich defici arge in 1997, bu announced ha 60% of he ax would be refunded in 1999 (Easerly, 1999, p 71)

12 11 Under curren accouning sandards, all asses and liabiliies are associaed wih fuure revenue or spending, bu no all fuure revenue and spending are associaed wih asses and liabiliies (see Sickney and ohers, 2010, eg, p 108) Problems such as he Ialian ax device as well as more general concerns abou fiscal susainabiliy creae a case for recognizing asses and liabiliies associaed wih all projeced fuure spending and revenue The new asses and liabiliies would be associaed wih cash flows whose presen values were no already incorporaed in recognized asses and liabiliies We can denoe he full se of asses and liabiliies by E (Figure 1) and call he associaed accouns exended Exended accouns would generae a measure of exended ne worh equal o he ne presen value of all projeced fuure cash flows under curren policy and a measure of he exended surplus equal o he change in exended ne worh Exended accouns could supplemen bu could no replace exising accouns 7 On he one hand, he presen value of fuure spending on, say, healhcare is differen from deb and can be reduced by changes in policy in a way ha deb canno be Indeed, i is parly for his reason ha such liabiliies are no currenly recognized On he oher hand, he presen values of fuure axes and spending are exremely uncerain and exremely volaile, even holding policies consan They are also an order of magniude greaer han he value of oher asses and liabiliies, and flucuaions in hem would swamp changes in he values of currenly recognized asses and liabiliies Ye, as he idea of a nesed sequence of accouning sysems suggess, exended accouns can be prepared wihou replacing full accrual accouning Fiscal accouns can coninue o repor all exising indicaors, ha is, bu supplemen hem wih a new indicaor of exended ne worh and a new indicaor of he defici equal o he change in exended ne worh This exension of he nesed sequence of accouning sysems is in one respec a naural sep in evoluion of fiscal saisics The Governmen Finance Saisics Manual 2001 currenly generaes indicaors of he surplus and ne worh for hree nesed ses of asses and liabiliies: cash (C), liabiliies and financial asses (F), and all recognized asses and liabiliies (R) Adding a fourh se E ha included asses and liabiliies associaed wih fuure axes and spending would generae indicaors based on ses wih he following relaionships: C F R E (7) And i would allow he presenaion of fiscal resuls in he form shown in Table 1 7 No governmen publishes exended accouns of exacly he kind discussed here, bu he US federal governmen now comes close, publishing, in a noe o is full accrual accouns, esimaes of he presen values of is projeced spending and receips See US Treasury (2011) and FASAB (2009)

13 12 Table 1 Summary Exended Accouns Se of Asses and Liabiliies Opening Balance Clean Surplus Closing Balance C C 1 w + C s = C w F F 1 w + F s = F w R R 1 w + R s = R w E E 1 w + E s = E w Once asses and liabiliies are classified ino several ses, he larges of hem including he presen values of all projeced fuure cash flows, i no longer makes sense o disinguish beween asses and liabiliies ha are on balance shee and hose ha are off Similarly, i is no longer helpful o draw a sharp disincion beween he governmen s rue ne worh or surplus and is repored ne worh or surplus, since here are several measures of ne worh and he surplus each wih is own purpose Ye suppose he governmen uses one of he ses of asses and liabiliies as he basis of a fiscal arge Then i may be emped o increase ha surplus in ways ha do no improve he surpluses derived from broader ses For example, if he argeed surplus is s F, i may be emped o increase s F in ways ha leave s R and s E unchanged For example, i may sell nonfinancial asses, which are in R bu no F, in reurn for cash, which is in F Or i may assume pension liabiliies in E bu no F, in reurn for cash and oher financial asses in F More generally, a defici device in his se-up is a ransacion ha increases a argeed surplus wihou increasing he surpluses derived from all he superses of he se underlying he argeed surplus If he argeed surplus is s J, a defici device is a ransacion ha increases s J bu no (a leas by he same amoun) s K for some K J Leing X\Y denoe he se of objecs ha belong o X bu no Y, we can say ha he device works by selling asses or incurring liabiliies in K\J in reurn for asses, or he cancellaion of liabiliies, in J Exended accouns do no preven he use of defici devices, bu hey do reveal hem C Fiscal Susainabiliy As well as revealing accouning devices, exended accouns would show wheher exising governmen policies were fiscally susainable

14 13 The requiremen for fiscal susainabiliy is ofen wrien in erms of deb and fuure primary surpluses (surpluses excluding ineres) In such a presenaion, fiscal susainabiliy requires ha he presen value of fuure primary surpluses mus be sufficien o repay exising deb This presenaion can be brough ino line wih modern accouning by allowing no jus for deb bu for all asses and liabiliies in R In his presenaion, susainabiliy requires ha he presen value of fuure primary surpluses (surpluses excluding reurns on all asses and liabiliies in R) offse any imbalance in currenly recognized ne worh, w R The presen value of fuure primary surpluses excluding reurns on all recognized asses and liabiliies is he ne value of he proposed new ax asses and spending liabiliies The se conaining hose asses and liabiliies is E\R Thus fiscal susainabiliy implies ha w R w E\ R I follows from (7) ha w w w R E\ R E 0 Thus fiscal susainabiliy a ime implies ha exended ne worh a equals zero: w 0 E IV DIRTY DEFICITS Clean surpluses are simple and useful, bu cerain oher surpluses are also ineresing and are he focus of mos fiscal analysis Indeed, hough he clean surpluses s F and s R are implici in he framework of he Governmen Finance Saisics Manual 2001, hey are neiher repored on any of is four main financial saemens, nor included in a lis of supplemenary measures (he clean cash surplus s C is repored) 8 A Componens of Clean Surpluses Nonclean surpluses can arise from decomposiions of a clean surplus ino componen pars Because he clean surpluses of Table 1 arise from a nesed sequence of accouning sysems, each surplus excep he firs can be spli ino pars relaed o he preceding sysems For example, he increase in ne financial worh is equal o he increase in cash plus he increase in he ne value of financial asses and liabiliies oher han cash We can herefore wrie he clean exended surplus as he sum of four oher clean surpluses: 8 See IMF (2001, Figure 41, Table 42, and Box 41)

15 14 s s s s s E C F \ C R \ F E \ R This kind of decomposiion, hough i appears useful, is no common Oher decomposiions are In cash accouning, he clean surplus is convenionally divided ino pars above and below he line Tradiional borrowing is classified below he line and he surplus ha is mos closely wached considers only iems above he line This sops borrowing being couned as revenue ha increases he surplus See, for example, he 1986 version of he IMF s manual on fiscal saisics (IMF, 1986) Modern cash-flow saemens furher divide above-he-line cash flows ino hose for operaions and hose for invesmens 9 In fiscal saisics, he change in ne financial worh is divided ino he pars relaed o ransacions (ne lending/borrowing) and oher changes, while he change in ne worh is divided ino he ne operaing balance and oher changes, along similar lines Change in exended ne worh could be similarly decomposed B Devices Revisied As in he case of borrowing under cash accouning, nonclean surpluses can someimes foil accouning devices Bu, when more asses and liabiliies are recognized, nonclean surpluses can allow he use of cerain devices ha increase he repored surplus wihou increasing repored ne worh Ne lending/borrowing and he ne operaing balance are no usually vulnerable o such defici devices because hey are inended o capure all ransacions in he relevan se of asses and liabiliies, and devices involve ransacions Changes in ne worh ha occur ouside ransacions are made up of changes in he marke prices of he governmen s asses and liabiliies and changes in he volumes of hose asses and liabiliies no relaed o ransacions (such as he growh of rees in a fores) Such changes are usually unpredicable or ou of he governmen s conrol, and hus canno be he basis of accouning devices Bu here are sill opporuniies o employ devices in some implemenaions of ne lending/borrowing and he ne operaing balance Zero-coupon and inflaion-indexed bonds offer an example These bonds generally appreciae over heir lifeimes, he paymen of ineres coupons being wholly or parially replaced by ha appreciaion Bu governmens 9 In he Governmen Finance Saisics Manual 2001, he saemen of sources and uses of cash shows ne cash inflow from operaing aciviies, ne cash ouflow from invesmens in nonfinancial asses, and ne cash inflow from financing aciviies (IMF, 2001, Table 42) For he decomposiion o be complee, anoher componen increase in cash from changes in marke prices mus be included The mos imporan sources of such changes are movemens in exchange raes ha affec he domesic-currency value of he governmen s holdings of foreign currency

16 15 someimes repor only he coupon paymens as ineres and can hus use such bonds o defer or avoid he reporing of ineres In Iceland, for example, when he governmen has issued inflaion-indexed deb, is balance shees have recorded increases in he ousanding value of deb caused by inflaion, bu repored ineres expense has no (The governmen is planning o improve his aspec of is accouning) In modern fiscal saisics, his problem is generally avoided by having ineres expense deermined no by he cash flows ha are labeled as ineres paymens bu by a calculaion ha spreads ineres coss smoohly over he erm of he borrowing More specifically, ineres expense is normally calculaed by assuming ha he ineres rae is he discoun rae ha, a he ime of borrowing, makes he presen value of forecas deb-service paymens equal o he amoun borrowed 10 Ye he Irish governmen was able o defer he reporing of ineres in 2011 and 2012 by inroducing a grace period in a deb o Anglo Irish Bank, even hough he rules for European fiscal saisics normally require ineres expense o be spread smoohly over he life of he deb, irrespecive of he iming of cash paymens, and even hough o compensae for ineres foregone in hese wo years a higher rae of ineres will be paid in 2013 and subsequen years (Eurosa, 2010a, p 1) Eurosa agreed wih he Irish saisical agency s view ha no ineres expense should be recorded during he grace period and referred o a paragraph in is manual on he measuremen of governmen deb and deficis ha said For insrumens bearing a zero rae of ineres during he grace period: no ineres is o be accrued, as he cos of borrowing really is zero This saemen applies even if he rae of ineres applied in he following ime period is adjused so ha he final yield is roughly similar o normal condiions over he oal life of he insrumen (Eurosa 2010b, p 57) The 2012 ediion of he manual says insead ha ineres expense mus generally be recognized during a grace period An excepion is allowed only if he governmen can redeem he loan during he grace period a face value and ineres paymens afer he grace period are no increased o compensae he lender for heir absence during he grace period (Eurosa, 2012, p 58) V CONCLUSION In he simple budgeary world considered a he beginning of his paper, ensuring fiscal ransparency is sraighforward If accouning rules require he governmen o recognize all 10 See IMF (2001, paragraphs ) The use of a single discoun rae does permi defici devices when he yield curve is no fla

17 16 is asses and liabiliies, and he surplus is clean, here is no room for defici devices The repored defici will equal he rue defici, fiscal rules will work as planned, and voers will no be misled Alernaively, he governmen can be required before he elecion a he end of he firs period o publish a forecas of he fiscal accouns for he second period As long as he accouns and he forecass follow a single se of inernally consisen accouning rules, his, oo, will reveal when he level of spending is unsusainable even if hose rules leave some asses and liabiliies unrecognized In realiy, of course, ensuring fiscal ransparency is no so simple Alhough he range of possible defici devices can be progressively narrowed as he focus of aenion shifs from he cash defici o he modified accrual defici o he full accrual defici and finally o he exended defici, each sep in his progression adds o he balance shee new righs and obligaions ha differ in characer from hose already presen here, and creaes new opporuniies for measuremen error Thus here is no measure of he defici ha is perfecly saisfacory; selecing a single indicaor as he basis of a defici arge requires a rade-off o be made Bu whaever choice is made fiscal ransparency can be enhanced by publishing exended accouns ha include a sequence of ne balance-shee indicaors (cash, ne financial worh, ne worh, and exended ne worh) along wih he corresponding sequence of clean surpluses and heir various decomposiions Alhough he publicaion of such exended accouns could no sop he use of devices designed o improve a argeed defici, i would reveal hose devices by showing wheher or no oher indicaors had also improved The preparaion of exended accouns would, however, raise many quesions no considered here Some, such as how o define curren policy, are already answered in some way by governmens ha prepare he long-erm fiscal projecions ha would be necessary for preparing exended accouns Ohers are new For example, how can he double-couning of fuure cash flows be avoided in pracice? Wha discoun rae or raes should be used o accoun for he ime value of money, and perhaps he cos of risk-bearing as well? And wha implicaions would exended fiscal accouns have for accouns and saisics prepared for he governmen s counerparies?

18 17 References Brixi, Hana Polackova, and Ashoka Mody, Dealing wih Governmen Fiscal Risk: An Overview, in Brixi and Allen Schick, (ediors) Governmen a Risk: Coningen Liabiliies and Fiscal Risk (Washingon and New York: World Bank and Oxford Universiy Press) Ciy of Chicago, 2009, 2010 Budge: Overview and Revenue Esimaes Easerly, William, 1999, When Is Fiscal Adjusmen an Illusion? Economic Policy, Vol 14, No 28, pp Eurosa, 2010a, Preliminary View on he ESA95 Accouning Treamen of Time of Recording of Ineres Paymen on Promissory Noes Payable o he Anglo Irish Bank Leer o Mr Aidan Punch, Cenral Saisical Office of Ireland (November 4) Eurosa, 2010b, Manual on Governmen Defici and Deb: Implemenaion of ESA95, (Luxembourg: European Union, hird ediion) Eurosa, 2012, Manual on Governmen Defici and Deb: Implemenaion of ESA95, (Luxembourg: European Union, fourh ediion) FASAB (US Federal Accouning Sandards Advisory Board), 2009, Reporing Exended Long-Term Fiscal Projecions for he US Governmen: Saemen of Federal Financial Accouning Sandards 36, (Sepember 28) Inernaional Moneary Fund, 1986, A Manual on Governmen Finance Saisics (Washingon) Inernaional Moneary Fund, 2001, Governmen Finance Saisics Manual 2001 (Washingon) Irwin, Timohy C, 2012, Accouning Devices and Fiscal Illusions, IMF Saff Discussion Noe 12/02, (March 28) Koen, V, and P van den Noord, 2005, Fiscal Gimmickry in Europe: One-Off Measures and Creaive Accouning, OECD Economics Deparmen Working Papers 417 (Paris: Organisaion for Economic Cooperaion and Developmen) Nobes, Chrisopher, 2006, Penguin Dicionary of Accouning, (London: Penguin, second ediion)

19 18 Sickney, Clyde P, Roman L Weil, Kaherine Schipper, and Jennifer Francis, 2010, Financial Accouning: An Inroducion o Conceps, Mehods, and Uses, (Mason, OH: Souh-Wesern, hireenh ediion) US Treasury, 2011, 2011 Financial Repor of he Unied Saes Governmen