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July 05, 2010

Full Disclosure of Government Debt, and How it Can Go Wrong

Posted by Yang-Hyun Jin 

The more the issue of fiscal adjustment comes to the attention of the public, the more important is the full disclosure of the government or public debt. Just in follow up to the previous post, government or public debt should not be confused with public sector debt which includes the debt of publicly-owned corporations. Government or public debt to GDP ratios are often used as targets of government fiscal policy or even part of fiscal rules that are  enshrined in law, Constitution or International Treaty. The Maastricht Treaty of course famously limits in principle government debt to GDP of eurozone members to a maximum of 60 percent. 

To have sufficient information on the exact amount of government or public debt is not only a starting point for fiscal adjustment but also a criterion for measuring the success of consolidation efforts. In some countries, the authorities adhere to the accepted standards of disclosure as fully as possible. In other countries, however, the authorities’ attitude toward full disclosure of public debt information is more evasive. This is especially the case when full disclosure has political or market consequences.

This blog argues that it is important to respect the criteria and definitions of government/public debt, and not evade full disclosure, but that evasion can and does take place. It examines the definition of public debt and how that information should be reported.

According to the IMF’s Government Finance Statistics manual of 1986 (GFS 1986), government debt is defined as “the outstanding stock of recognized, direct liabilities of the government to the rest of economy and the world ….” This definition raises two important issues:

1.  What is the coverage of “government”?
2.  What is the meaning of recognized, direct liabilities?

This blog focuses on the coverage of “government” issues, which was clarified significantly in the Government Finance Statics Manual 2001 (GFSM 2001). The second issue, related to topics like contingent and implicit liabilities will be discussed in a separate blog.

GFSM 2001 states that the “general government” sector consists of all government units, including central, state, and local governments and all the nonmarket, nonprofit institutions (NPIs) except those serving households. All social security funds are treated as particular kinds of government units. This GFSM 2001 definition is aligned with that of the System of National Accounts 1993 (SNA 93) of the United Nations.

Government debt, in relation to the definition of the general government, can be discussed with respect to the following three areas: (i) the nonmarket NPIs’ debt, (ii) social security funds’ debt, and (iii) public corporation debt.

Public debt can be hidden in nonmarket NPIs

Some government authorities may not include the debt of nonmarket NPIs in their consolidated public debt statistics, even though nonmarket NPIs that are controlled and mainly financed by government units are considered to be part of “general government”. For example, research and development institutions that set and maintain the standards in fields such as health, environment, and education are considered to be government units and therefore their debt should be reported as general government debt. Some countries have hundreds if not thousands of NPIs and public debt can be hidden there.

Drawing a line between public corporation debt and government debt is sometime difficult

There is a gray area between public corporations and nonmarket NPIs. The former are not part of general government, the latter are (and both are part of the larger public sector). To differentiate public corporations from government, the concept of “economically significant price”1 was defined in GFSM 2001. If a government-owned and –controlled unit sells most or all of its output at an economically significant price, then the unit is classified as public corporation. Otherwise it is identified as part of general government. This notion of economically significant price was elaborated in the European System of Accounts of 1995 (ESA 95). ESA 95 stipulates a 50 percent rule, which means if the total volume of sales of a public corporation covers at least 50 percent of the production cost, then it is classified as a public corporation. However, there might be a temptation for countries who may not want to fully disclose the amount of public debt to interpret the ESA 95 definition in a flexible way that would result in somewhat underestimating government debt.

Not all debt of social security funds is always reported

Despite GFSM 2001 guidelines, there still exists a risk that the debt of social security funds is excluded from general government debt. In reality, the governance structure and operation of each social security fund are different, depending on countries’ circumstances. If social security funds are classified by the governance structure, the line between a government-run fund and a private-run fund becomes important. For example, in the case of a country that would classify social security entities whose head is designated by the government as part of the government, if a head of the operational unit in charge of a national pension fund is not designated by government agencies, the fund’s debt would not be reported as government debt. Thus, there exists a risk that the debt of social security funds is not reported in the general government category.
Debt of public corporations sponsored by central government is not reported

Central government authorities may be tempted to bypass rigid fiscal constraints by using public corporations. Public corporations are often legally entitled to issue corporate bonds and borrow money. If these resources are then spent on government programs or investment projects directly through the public corporation (so-called quasi fiscal expenditure), the debts funding these activities are not legally recognized as debt of general government. However, if the issuing of public corporate bonds is initiated by a central government to implement government-designated projects, and the interest on the bonds is paid by central government budget, how should this debt be classified? Governments clearly can evade fiscal restrictions by adopting this kind of method.

1.    Economically significant prices are prices that have a significant influence on the amounts the producers are willing to supply and on the amounts purchasers are wish to buy (see paragraph 2.32 of GFSM 2001on page 10).

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.


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You seemed to base your points assuming that IMF definition of general government debt is credibly applied to all the countries. I just wondered how it was created and on what basis. Since IMF made a lot of mistakes in the past such as Asian financial crisis, I simply doubt its credibility of definition without any significant evidence of its credibility. Please first be critical on something before you simply accepted something as a norm....

Deficit, or Debt to GDP is an illusion of safety.
An employees debt is not related to the income of the company they work for, neither should government debt.
A government deficit-debt should be related to the government income, a government could have 1% deficit to GDP and 200% of its income.
As Warren Buffet once said 'We will know who is swimming naked when the tide goes out', the economy has shrunk leaving the debts exposed i.e. a global nudist colony created by using an incorrect criteria.

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