Posted by Min Zhu, Deputy Managing Director, IMF
The first public event of this year’s IMF-World Bank Spring Meetings was a seminar organized by the IMF’s Fiscal Affairs Department on the morning of Monday April 15th which brought together experts from governments, academia, civil society, and international organizations to discuss how to work together to revitalize the fiscal transparency agenda in the wake of the recent crisis.
The timing of last Monday’s Fiscal Transparency Seminar at the start of a week of seminars, panels, roundtables, and other events underscores the importance that the IMF attaches to the issue of fiscal transparency. The number of people who turned up to listen to and participate in the discussion highlighted the breadth and depth of public interest in this topic. The need to improve government financial disclosure was a recurring theme in many of the discussions which I attended during the past very busy week.
For those of you who could not join us at last week’s seminar, I would like to use this article to share with you the IMF’s latest thinking on fiscal transparency and present our work program in this critical area. In particular, I want to focus on three issues:
- first, I want to highlight the progress that has been made in promoting greater fiscal transparency over the past decade, thanks to the collective efforts of governments, civil society, academics, think tanks, international organizations, and others;
- second, I want to review some of the lessons that the recent crisis has taught us about the adequacy of existing fiscal transparency standards and practices; and
- finally, I’d like to outline the key elements of a revitalized fiscal transparency agenda, and how the Fund plans to support that agenda.
Progress to Date
Fiscal transparency is of course not a new topic. At the IMF, our concerns go back at least to the late 1990s, when we developed the Fiscal Transparency Code and started preparing Fiscal Reports on Observance of Standards and Codes (ROSCs) that assessed country compliance with those good practices. A number of other fiscal transparency standards and evaluation tools have also been developed over the last two decades, including:
- Europe’s ESA95 and the IMF’s GFSM 2001 standards in the area of fiscal statistics;
- IFAC’s International Public Sector Accounting Standards in the area of accounting;
- the International Budget Partnership’s Open Budget Index;
- the multilateral Public Expenditure and Financial Accountability (or PEFA) assessments;
- and, most recently, the Global Initiative for Fiscal Transparency’s High-Level Principles.
And there is no doubt that the last decade has witnessed real improvements in country compliance with these standards. Two brief examples:
- Until the early 1990s, most countries’ fiscal data covered only the central government budget. Now, over 40 percent report fiscal statistics for the whole of the general government (that is, both central and subnational governments).
- A decade ago, the vast majority of countries provided information only about the government’s cash inflows and outflows. Now, over 60 governments provide some accrual-based information and over 40 provide balance sheets of their financial assets and liabilities.
Lessons of the Economic Crisis
But the economic crisis that erupted in 2008 has reminded us that the work of demystifying the finances of the state remains unfinished, even in advanced economies.
Last year, we published a policy paper entitled Fiscal Transparency, Accountability, and Risk, which triggered a lively debate at the IMF’s Executive Board and in which we reviewed the state of fiscal transparency in the wake of the economic crisis.
The paper found that, despite the significant gains made since the late 1990s, the transparency of information about the state of public finances remains inadequate, including as a basis for taking policy decisions. Three examples:
- First, past fiscal information is often still unreliable. In Greece most notably, but also elsewhere, reported debts and deficits before the crisis turned out to be poor indicators of the underlying health of the public finances. One of many problems highlighted was the tendency for governments to shift spending and borrowing to government-controlled companies that weren’t consolidated in the governments’ accounts.
- Second, budgets and fiscal forecasts often fail to provide credible information about future fiscal developments. Sometimes they aren’t even presented on the same basis as the accounts or statistics that will be used to judge the government’s performance at the end of the year. In Europe, in particular, accrual-based statistics for combined central and local government are used to determine whether EU debt and deficit targets have been met. But central governments’ budgets usually forecast revenue and spending on a cash basis and contain little or no information on the likely fiscal performance of local governments. That has hindered both national and regional efforts to monitor countries’ performance against EU-wide fiscal rules.
- Third, few governments publish information on the fiscal risks they face. In countries with large banking sectors, such as Iceland, Ireland, and the UK, the biggest shock to the public finances came from the realization of large, mainly implicit, contingent liabilities to the financial sector—a risk that had not previously been discussed in any fiscal reports and had not been actively debated in public.
Addressing these issues requires both revisions to existing fiscal transparency standards and a more concerted effort to promote adoption of those standards:
- Standards for retrospective fiscal reporting should encourage governments to produce fiscal data that consolidate the entire public sector, including government-controlled companies, so that there is less temptation to artificially reduce reported deficits and debts by shifting economic activity into public enterprises.
- Budgets and forecasts need to be made more credible and to be presented on the same basis as the accounts or statistics that will be used to assess whether the government has met its fiscal targets. Part of the solution here is to develop international standards for the presentation of budgets and forecasts—something that doesn’t currently exist.
- Governments should prepare and publish annual statements of fiscal risk to help ensure that those risks are identified and well managed. And reporting standards should require governments to recognize contingent liabilities on their balance sheets where they can be reliably measured.
The economic crisis has also highlighted shortcomings in the IMF’s own surveillance, and in this context, our own fiscal transparency standards and evaluation tools. In the 2012 policy paper, staff looked back at the fiscal ROSCs we had prepared for some of the countries hit hardest by the crisis. Many of them identified some of the gaps or weaknesses in reporting that contributed to problems during the crisis. However, the reports weren’t as helpful as we might have hoped in highlighting the size of reporting problems and in spurring countries to address them. For example, the 2003 ROSC on Portugal mentioned that the government’s accounts did not capture the obligations created by public-private partnerships, but it didn’t estimate how much greater the government’s debt would have been if it had included those obligations.
A Revitalized Fiscal Transparency Agenda
So what can the international community do to revitalize the effort to improve fiscal transparency in the wake of the economic crisis and prevent a resurgence of fiscal opacity? At the IMF, we are in the process of revising the fiscal transparency code and rethinking the reports that assess country practices against that Code. We will be releasing a revised draft of the code in May, and we will be seeking comments from the public on the code before we finalize it October. But the IMF is but one actor on a broad stage, and progress in fiscal transparency will depend on efforts made by many others.
Governments, and ministries of finance in particular, need to do more to reap the benefits of greater transparency both in terms of the quality of information available for policymakers and in terms of the credibility it lends those policies in the eyes of their electorate and their creditors.
But in addition to policymakers, many others have a crucial role to play, including:
- our sister organization, the World Bank, with whom we are working to revise the PEFA framework, which has an important transparency component;
- standard-setters such as the International Public Sector Accounting Standards Board, which helps to define and promote good accounting practice in government;
- think tanks and civil society organizations like the International Budget Partnership and the GIFT, which help to raise awareness and build consensus for improvements in fiscal transparency;
- and academics and other experts who provide rigorous analysis of the consequences of fiscal transparency (and opacity) and what prompts governments to open up.
Conclusion
A revitalized fiscal transparency effort is essential to address the problems revealed by the economic crisis, inform government’s policy response to the crisis, and guard against a resurgence of fiscal opacity in its wake. I hope that we can work together to build a more effective global architecture of transparency standards and evaluation tools, and I can promise that the IMF will play its full part in that effort and reflect it in its surveillance activities.
If you want to know more, you can find links to the video of Monday’s seminar and more information on the IMF’s work on fiscal transparency via the links below.
Links to video of Fiscal Transparency Seminar: Part 1 and Part 2
Powerpoint on new draft Fiscal Transparency Code and Assessment
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