Tuesday, September 3
Mr. Vitor Gaspar, Director, Fiscal Affairs Department, International Monetary Fund
Mr. Thomas Richardson, Director, Joint Vienna Institute
A major argument against double-entry accounting in the public sector is its technical complexity. Yet as early as the 14th century Italian city-states used double-entry bookkeeping for their finances. Their rulers relied on this comprehensive way of producing financial statements to stop frauds and give a more accurate view of the fiscal position.
Why was this positive practice of fiscal transparency discontinued? Drawing on a wealth of historical and contemporary examples, Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department, had little difficulty convincing the audience that fiscal policy is intrinsically political.
Transparency and Public Sector Balance Sheets
Giving the JVI Annual Lecture on September 3, 2019, Mr. Gaspar singled out transparency in public finances as central to ensuring that public finances are responsive to citizens and deliver full accountability. That is why the IMF has begun advocating the use of Public Sector Balance Sheets (PSBS). Looking beyond financial flows, like fiscal deficits, to fully account for what the state owns and owes makes possible informed citizen-state dialogue. It also improves the quality of information in such areas as the intertemporal effects of policy choices and vulnerability to fiscal risks, which enhances the quality of government actions. Finally, fiscal transparency typically improves the sovereign rating and helps lower the costs of public financing because creditors find the state’s assertions more credible (Figure 1).
Figure 1. Sovereign Credit Ratings and Fiscal Transparency.
Source: Bloomberg and IMF data.
Note: the dots represent averages of fiscal transparency for countries with the same credit ratings. Sovereign credit ratings are for long-term, foreign-currency debt assigned by S&P and Fitch.
The Analytical Power of Public Sector Balance Sheets
Public Sector Balance Sheets have been prepared for 38 countries across all levels of economic development, including Sub-Saharan African countries, large emerging economies, and G7 countries. Their combined assets amount to US$ 103 trillion or 216 percent of their aggregate GDP.
About two-thirds of the 38 countries have a positive net worth—more assets than liabilities. Although in part this is related to natural resource endowments, over time good policies can compensate for initially less advantageous resource endowments, as an intertemporal comparison between Norway and Finland shows: looking 50 years ahead, future demographic pressures will reduce Norway’s net worth while Finland’s net worth will improve to nearly the same level as Norway’s because of its pension reforms and fiscal consolidation efforts.
Stress-testing a country’s balance sheet can assist in assessing resilience to macroeconomic shocks. For example, for the US, it is possible to track the effects of a severe economic contraction scenario, following the assumptions of the Federal Reserve System for the banking sector stress testing. Under such scenario, the Public wealth would be reduced by about 26 percent of baseline GDP. But, more importantly, PSBS stress testing allows the identification of the various channels of net worth erosion (Figure 2).
Figure 2. United States: Public Sector Net Worth Three Years into a Severely Adverse Shock Scenario
(percent of baseline GDP)
Source: IMF staff estimates. See also Fabien Gonguet and Klaus-Peter Hellwig, 2019, “Public Wealth in the United States”, IMF Working Paper 19/139.
Drawing on Lorenzetti’s Wisdom
In the early days of modern societies, the painter Ambrogio Lorenzetti famously depicted the ruler of the city of Siena, Italy, as bound by a cord originating from the scales of justice and held by the citizens. Unfortunately, political rulers often reject and avoid such constraints. The consequences written and painted by Lorenzetti are wasted lands, idle shops, empty roads, violence, destruction and fear. Institutions matter. This highlights the crucial importance of methods of enhancing fiscal transparency to bind governments via accountability. As Mr. Gaspar highlighted in conclusion, Public Sector Balance Sheets are one of those methods.
Ms. Barbara Dutzler, Senior Economist, JVI