Tricks of the Trade Chiara Goretti Senato della Repubblica - Italy Bucharest, 10th April 2008

1. Tricks of the Trade Chiara Goretti Senato della Repubblica - Italy Bucharest, 10th April 2008

2. Outline • Fiscal rules: incentive to creative accounting • Forecasts: optimism bias • Stock-flow adjustment: • Infrastructures: the ISPA case • Railway transfers • Securitisation and lease back • Tax collectors • Conclusions

3. Fiscal rules: incentive to creative accounting • From restricted to non restricted activities • The EMU case: • optimistic growth forecasts • deficit vs debt bias: the stock-flow adjustment • fiscal surveillance: an evolving statistic and accounting model • Coherence of definitions and quality of data

4. Forecasts: optimismbias • There is evidence of a significant degree of optimism in a number of euro area countries: boosting projected revenues and containing some types of spending; • In 2000, the prevailing buoyant economic conditions were taken to be average or normal: medium-term growth prospects were erroneously assessed to be very bright; • Afterwards, budgetary developments dramatically worsened.

5. Forecasts

6. Forecasts: Italy

7. Forecasts: lessons • In a rules-based fiscal framework that sets limits on the budget balance, negative growth surprises will necessarily require a downward adjustment of expenditure plans; • Budgetary plans should be built on economic growth projections which possibly err on the side of caution.

8. The stock-flow adjustment (SFA) • Deficit vs debt bias: from restricted to unrestricted activities; • Reconciliation between: • cash and accrual data; • stock and flow indicators; • Consistency across the data; Debtt – Debtt-1 = Deficitt + SFA

9. ISPA • ISPA (created in 2002): joint-stock company (outside GG); • Entire financing of high speed railway, raising money and providing proceed to RFI and TAV (both outside GG) to finance infrastructures; • In 2005, Eurostat decided all debt issued by ISPA is to be recorded as gvt debt, with a counterpart as financial transaction in the form of a loan from gvt to RFI-TAV; • In 2006, gvt consolidated the ISPA debt, for transparency reasons, with an increase in deficit of about 13 billions.

10. Railway transfers • Capital injections into the state-owned companies are treated as financial transactions; • From 2004 on, capital transfers are treated as economic item after Eurostat decision 98/03 (if the company presents losses); • Revisions to deficit figures in March 2005 due to railway capital injections: 3.6 billion/euro for 2001; 4.1 b/e for 2002; 4.0 b/e for 2003;

11. Real estate: securitisation and lease-back • 2001 and 2002: securitisation operations concerning a portfolio of buildings owned by the Social Security Fund (SCIP); • In 2002, Eurostat decided that – if the initial payment is < 85% of the market price - securitisation are to be recorded as financial items until the full payment is made; • Revisions of deficit figures for 2001 and 2002; • Lease-back (FIP) of central and local building used as offices, then rented back to gvt; • Revenues for 3 bn euro in 2004 e 0.6 bn in 2005.

12. Tax collectors • From 1997, tax collectors have to advance the payment of indirect taxes due in the following year; budgetary impact only in the first year; • In 2003, gvt introduced another type of pre-payments; • In 2005, Eurostat decided that pre-payments have to be recorded as financial transactions, without improving, in 2003 and 2004, the deficit; • December 29th, 2007, pre-payments by tax collectors abolished, in order to worsen the balance.

13. Securitisation

14. Data: statistical deficit revisions 2001: securitisation operations (0.6%), capital injections in FS (0.4%), re-calculations of current expenditures (0.6%), transactions with the EU budget (0.2%); 2002: capital injections in FS (0.4%). 2003: capital injections in FS, reduction in the accrual estimate of social contributions, tax collectors. 2004: tax collectors.

15. Conclusions 1 Experience demonstrates that gvts: • aim to exclude expenditures and includes revenues in constrained balance; • exploit absence of accounting regulations or opacity in recording methodology; • abandon “tricks” when are forced to identify economic substance of transactions (accrual).

16. Conclusions 2 • Avoid temptations on forecasts: independent checks; • Investments on quality of data and statistics; • Cash and accrual, stock and flows: consistency and coherence of indicators