Using GFSM 2001 for Fiscal Analysis

1. Using GFSM 2001 forFiscal Analysis Anne Y. Kester Fiscal Affairs Department International Monetary Fund Presented at the World Bank DDG Workshop November 23, 2004

2. Topics • Limitations of the traditional framework. • Advantages of using the GFSM2001 for fiscal analysis. • Prerequisites for producing timely and reliable GFSM 2001 data to facilitate fiscal analysis. • Countries’ experiences in implementing the accrual accounting system called for in the GFSM 2001.

3. The traditional framework • Focuses on cash receipts (revenues) and cash payments (expenditures) and how they evolve over time. • “Overall fiscal balance” and “gross public debt” are the two main indicators. • Other indicators used include: • adjusted overall balance • non-oil balance • operational balance • primary balance • cyclically adjusted or structural balances [

4. Limitations of the traditional approach • Fails to reflect when the transactions actually take place, providing inadequate information on the timing of policy actions and their impact on the economy (e.g., arrears). • Can present a distorted picture of the operating costs of government activities (e.g., purchases of fixed long-term or capital assets are charged as expenditure in the current period). • Does not distinguish sufficiently types of government receipts and payments, at times providing misleading information on the impact of government operations on the economy (e.g., privatization).

5. Limitations of the traditional approach (cont’d) • Relies predominantly on “income-based” concepts to determine fiscal deficits/surpluses and government debt; does not take account explicitly of asset-based “net worth” sustainability. • Takes a partial approach to fiscal reporting and lacks a fully specified analytical framework. • Requires ad hoc adjustments.

6. Advantages of using the GFSM 2001 framework • The accrual-based data lend themselves more readily for economic analysis and require fewer ad hoc adjustments as would be needed when one uses cash-based data.

7. Advantages (cont’d) • The integrated framework is useful in disclosing complex government operations (including privatization, bank restructuring, and public investment). • It discloses proceeds/financing of such activities in the operational statement and related acquisitions/disposals of assets/liabilities in the balance sheet. • This approach, along with its fiscal indicators (net operating balance, net lending/borrowing, and net worth), allows a comprehensive review of the impact of such government operations on aggregate demand and on a country’s indebtedness. It facilitates the formulation of appropriate fiscal adjustments to restore a country’s debt sustainability.

8. Advantages (cont’d) • Classifications of government activities by • type of transaction (financial and nonfinancial), • function (for example, health, defense, and education), • economic characteristics (including taxes, grants, wages and salaries, interest, and subsidies). • Such classifications are useful in assessing the effectiveness of government programs and policies.

9. Advantages (cont’d) • Facilitates the compilation of information on the public sector, since both government operations and activities of public enterprises would be shown under compatible accounting concepts, on the accrual basis. • Public-sector data shed light on quasi-fiscal activities (QFAs) undertaken by public enterprises. They also reveal public-sector borrowing that can be a source of contingent liabilities of the government.

10. Some practical considerations • The usefulness of the GFSM 2001 framework for fiscal analysis depends on the availability of such data on a timely, accurate, and comprehensive basis to allow the derivation of meaningful indicators to assess the impact of fiscal policies on the financial conditions of the economy. • To date, the availability of GFSM 2001 data varies among countries. The production of useful accrual-based GFSM 2001 data requires reliable government financial reporting. This, in turn, calls for effective institutional frameworks, including sound government accounting policies and practices, professional expertise, and governance.

11. Prerequisites for countries’ implementation of GFSM 2001 • Make political commitment (must be convinced that GFSM2001 better supports policymaking and that accrual data provide a superior method for accounting of government operations and flows of resources). • Weigh benefits and costs of implementation. • Get consensus among relevant government agencies. • Change laws and regulations on accounting and statistical reporting. • Develop action plan for implementation, which is likely to take a few years. • Form committees and working groups to follow up on various tasks. Note • A number of countries are still reviewing the usefulness of the framework and the costs and benefits of implementation. (A major factor behind the progress to date.)

12. Developments in Accrual Accounting • Accrual accounting does not mean that recording cashflows is not important. In fact, accounting for cashflows is part of the accrual accounting framework. • As with cash-based accounting, measures need to be put in place to safeguard the proper application of the accrual concepts to prevent abuses and misuses (witness the Enron and Worldcom cases). • How far countries should and can move toward accrual accounting depends on the costs and benefits of adopting such accounting system, which may vary from country to country. • Australia, Canada, New Zealand, and the UK have made the most progress in moving toward accrual accounting for government financial reporting. Among other economies, the government of South Africa is making steadfast efforts in implementing such an accounting system.

13. Approach to maintaining continuity on data • To maintain the quality of fiscal policy analysis in Fund reports, there should be a smooth transition from the current cash-based presentation to the GFSM 2001 presentation of fiscal statistics, with both presentations retained in tandem in the near term. • Program fiscal targets and performance criteria should continue to be specified on a cash or commitment/adjusted cash basis, as countries progressively implement the GFSM 2001. • Changes in the fiscal tables and indicators used for program purposes should only be considered for new programs.