Posted by Tim Irwin[1]
Government finances are affected by many kinds of changes. Most obviously, there are cash inflows and cash outflows. But even in the absence of such flows, government finances are rarely static: the government may be accumulating unpaid bills, for instance, or it may hold shares and bonds whose value is surging or plummeting.
Even if there are no changes in the value of the government’s financial assets and liabilities, the government may be developing or running down its physical assets. It may be building new roads, for instance, or allowing them to deteriorate through lack of maintenance.
Less directly still, changes in tax rates or the government’s policies toward pensions or health care may be radically changing the long-term fiscal outlook even if they have no immediate impact on the government’s cash flows or assets and liabilities.
Good fiscal analysis would take account of all these factors, giving each its proper weight. But good fiscal analysis is difficult, partly because the requisite information is seldom available in a convenient form.
In some countries, there may be no information on the value of the government’s assets or on the projected effects of its tax and spending policies in the long run. In others, the information may exist, but be hard to use because each piece is reported in a different document, with little indication of how the pieces fit together. The budget may show spending and revenue on a cash basis; separate statistical releases may reveal the government’s assets and liabilities; and reports on fiscal sustainability may periodically estimate the long-run fiscal effects of government policies. The different sources of information may be published by different agencies on different cycles; they may be prepared for different definitions of “government”; and they may use a variety of inconsistent classifications that make them hard to reconcile.
“The Whole Elephant”, a paper recently published in the OECD Journal on Budgeting and also available as an IMF Working Paper, considers how this problem might be remedied. It shows how all the above-mentioned fiscal factors could be summarized in a kind of fiscal dashboard. One line of the dashboard would show the government’s opening and closing cash balances and its cash deficit. Another would show opening and closing financial worth, and the “net lending / net borrowing” measure of the deficit—the one that is used in the European Union’s fiscal rules and much IMF fiscal analysis. A third would summarize the “full accrual” accounts (the ones that include physical assets on the balance sheet), while the last would summarize the government’s long-term fiscal projections.
Such a dashboard could be prepared only by governments that had a lot of fiscal information, and its last line would include numbers that can be measured only very approximately. Yet it would offer a broad perspective on public finances, and one that helped fiscal analysts avoid the fallacy illustrated by the parable of the elephant and the blind men, each of whom mistakes the whole for the part he is closest to. It would, in short, reveal the whole of the fiscal elephant.
[1] Tim Irwin is a consultant and former staff member of the World Bank and the IMF’s Fiscal Affairs Department.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
