Using GFSM 2001 for Fiscal Analysis

1
Using GFSM 2001 for Fiscal 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 (contd)

• 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 (contd)

• 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 countrys indebtedness.
  It facilitates the formulation of appropriate
  fiscal adjustments to restore a countrys debt
  sustainability.

8
Advantages (contd)

• 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 (contd)

• 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.