Accrual Accounting and the Government’s Intertemporal Budget Constraint

Posted by Tim Irwin[1]

One of the possible benefits of a government’s adopting accrual accounting is to improve the analysis of fiscal sustainability. For example, it provides better information on the government’s assets, unpaid bills, pension liabilities, and other things that typically don’t get reported in cash-only accounts (see, for example, the Fiscal Monitor of October 2018). Yet when governments have adopted accrual accounting the new information has not always been used for the analysis of fiscal sustainability.

The conclusions of the French Court of Account’s review of the first ten years of experience with the accrual accounts in France probably apply to many countries: “In comparison with central government’s budget accounts and national accounts, the general [accrual-based] accounts are underused. The picture of central government’s financial position provided by the general accounts is not systematically used by Government, sufficiently analysed by Parliament, or fully taken on-board by central government’s creditors and credit rating agencies.”

One reason accrual accounts may not be used to analyze fiscal sustainability is uncertainty about how the main measures of accrual accounts relate to the economic theory of fiscal sustainability. That theory is built around the “intertemporal budget constraint,” which essentially states that in the long run, and in present values, the government cannot spend more than its revenue. When the theory was developed, all governments measured their surpluses and deficits on a cash basis, and they tended to record their debt but no other balance-sheet items. So it was natural that the intertemporal budget constraint was expressed as a relation between debt and cash surpluses: future cash surpluses, not including interest on the government’s debt, need to be big enough to eventually pay off the debt. This formulation seems to leave no room for use of accrual surpluses and deficits or the government’s full balance sheet.

A recently published paper aims to remedy this problem by showing how the constraint can be expressed in terms of accrual surpluses and net worth as shown on the balance sheet. The paper explains the details. In a nutshell, it shows that the present value of the government’s future accrual deficits, not including the return on the government’s assets and liabilities that are recognized on the corresponding balance sheet, cannot be more than the government’s net worth as measured on that balance sheet.


[1] Tim Irwin is a consultant and former staff member of the IMF’s Fiscal Affairs Department.

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