2. Fiscal Responsibility and Accountability

Marco Cangiano

Rome, February 6-8, 2017

Outline

• Preview• Definingresponsibilityandtransparency• Whyresponsibility/accountabilitynow

PartII• Roleofinformation

Ø CoverageØ Timeliness,frequency,quality,andintegrityØ Theartofconsolidation

• Concludingremarks

<<CourseAcronym>>

Preview

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014(f)

GGGrossdebtreportedinDec2009

GeneralGovernmentdebtexcludingreclassifiedSOEs,PPPsorfinancialsector*

SOE&PPPreclassificationspostDec2009

Financialsectorbailouts

GeneralGovernmentGrossDebtArrears

FinSector

SOE&

PPPreclassificati

on

60%debt

SOE&PPPdebtoutsidetheGeneralGovernmentsector

Deficit

Debtdynam

ics

3%deficit

Anything that could go wrong did go wrong

Definition(s)

Fiscal ResponsibilityFiscalresponsibilityisdefinedas:

anagreedsetofpolicies,processes,orarrangementsintendedtoimprovefiscaloutcomes,discipline,transparency,andaccountabilitybyrequiringgovernmentstocommittomonitorable fiscalpolicyobjectivesandstrategies.

• Oftenstatedonlegislation(FRL)• Constraindiscretion• Reputationalinvestmentandcosts• AdequatePFMsystems

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Government, public interest, governance, accountability

• Togettheconversationgoing,whatisagovernment?– Isitallinprovidingpublicgoods?Butwhatarethese?Isitallrelative?

• Howdowedefinepublicinterest?– Acontextualtermthatrequiresmorespecificdefinitionthattheonestypically

foundinnationalconstitutionalmandatesorreligiousprescriptions.– Inotherwords,thequestforanobjectivedefinitionofpublicinteresthas

provensomewhatillusory,asitrequires,forinstance,anexplicitvaluejudgmentonincomeredistributionwithinagivensocietyaswellasontherole,function,andsizeofgovernment.

• Whatisgovernance?– Normative(valuebased)vs.positive(fact-based)approach

• Howcangovernmentsbeaccountable?– Information– Independentevaluation– Increasingpublicparticipation 7

Governance

• Thegeneralexerciseofauthority• Thearrangementswherebyintendedoutcomesforstakeholdersare

definedandachieved.• Government’sabilitytomakeandenforcerules,andtodeliver

services(Fukuyama(2013).

– Problemintryingtomaketheconceptoperational.

– Verylittleagreementonwhatconstituteshigh-qualitygovernment,”Fukuyama,2013.

– Confusionbetweengoodgovernance—ameanstoanend—andwhatisgovernment—whichraisestheissueofitspoliticalarrangementsandpursueofsocialobjectives.

– Defineandpossiblycontextualizetheconceptinasmuchoperationaltermsaspossible

Budgeting

• Governanceandbudgetingoftenusedinterchangeablyinagendaaimedatreformingpublicmanagement—functionaldefinition.

• Budgeting—”attemptstoallocatefinancialresourcesthroughpoliticalprocessestoservedifferenthumanpurposes,”Wildavski 1975.

• Publicfinancialmanagement—broadercontext(publicsector);analysisoffiscalrisks;transparency.

• Legitimatetocompareacrossdifferentcontexts?

Types of FRLs• Fiscalresponsibilityprinciples (transparency,accountability,andsustainability),butdoesnotidentifyindetailedtermshowtheseprinciplesaretobemet.

• Proceduralrules,bothforfiscaltransparencyandthefiscalprocess.

• Rulesforthestanceoffiscalpolicyorplaceslimitationsonkeyfiscalpolicyaggregates.

Allofthemrelyontransparencyandgoodqualityinformation

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KeyPFMRequirements

• Well-structuredcabinetdecision-makingoverthemediumterm• Fiscalpolicyanalysisandabilitytosetfiscaltargets• Crediblebudgetformulationandpreparation• Reasonablyreliablemacroandfiscalforecasting• Effectiveanddisciplinedbudgetexecution• Accurate,timelyandreliablefiscalmonitoringandreporting• Independentreviewoffiscalpolicyoutcomes• Acrediblemedium-termfiscalframework(MTFF/MTBF)andamonitorable

fiscalstrategy• Costingofnewandexistingpolicymeasuresoverthemediumterm,i.e.,

definitionofbaseline• Settingandexecutingfiscalpolicyinlinewithtightlydefinednumerical

limits

Transparency: IMF 2012• Fiscaltransparency:theclarity,reliability,frequency,timelinessandrelevanceofpublicfiscalreportingandtheopennesstothepublicofthegovernment’sfiscalpolicy-makingprocess.

• Publicfiscalreporting:thepublicationanddisseminationofsummaryinformation aboutthepast,present,andfuturestateofthepublicfinancestocitizensintheformof:– fiscalforecastsandbudgets;– governmentfinancestatistics;and– governmentfinancialstatementsoraccounts

• Fiscalrisks:factorsthatleadtodifferencesbetweenagovernment’sforecastandactualfiscalposition

Whyearlierattemptsdidnotdeliver?

Italy—2002ROSC

https://www.imf.org/external/pubs/ft/scr/2002/cr02231.pdf

Empirical evidence not overwhelming• Onaverage,moretransparentcountrieshavebetterfiscal

outcomes,butdoestransparencycausetheimprovementinfiscaloutcomes?

• Orarecountrieswithbetterfiscaloutcomesmoreinclinedtopublishinformationonpublicfinances?

• Ordoother,underlyingdifferencesamongcountriesleadtodifferencesinbothfiscaloutcomesandtransparency?

• Somestudiesfindevidencethatfiscaltransparencyleadstobetteroutcomes,butcausalityremainsanissue:– AltandLassen(2006):transparencyleadstolowerdebt,controllingfor

otherinfluences– Arbatli andEscolano (2012):transparencyimprovescreditratings,

directlyandindirectly• Butitispossibletodevelopmodelsinwhichtransparencyis

actuallyharmful(seeJustinFox,2006)

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Did we get the right incentives?• Transparency(apositivemessage)confusedwithant-corruption/goodgovernancecampaign(lesspositive).

• Amoralcategoryinsteadofameanstoanend—fiscalresponsibilityandaccountability.

• Anotherrich/westerncountries’imposition.• Goodyearsarenotconducivetochange.• ROSCs runoutofsteamasveryrarelybecamesubjectofsurveillance/conditionality…

• …althoughtheydidflagtherightissues,perhapsinasomewhatcrypticway.

• Other(toomany?)diagnostictoolsemphasizedmoretheformoverthesubstance—betspracticesbias.

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Is it always a good idea?

• “Sunlightisthemostpowerfulofalldisinfectants”(Brandeis)• “Theremaybetrade-offsbetweenthevalueofsunlightandthe

dangerofover-exposure”(Heald)• Dumpingextremelydetailedandlargeamountofdatamaycreatea

veilthatfogsratherthanshedslightonfiscalevents.• Informationhastobevetted—withsomedegreeofautonomyand

independence—tomakeitcomprehensive,reliable,timely,andmostofallreliable.

• Riskofcomplianceorformvs.substance:OBI,RevenueWatch,andPublishWhatYouPaymayprovideaneasywayoutforgovernmenttoperformwellontheirindexeswithoutmakingadentonfiscaltransparencyandaccountability.

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The illusion of transparency

• Publishingonlypartialinformation– Netbutnotgrossspending– Noinformationonoff-budgetgovernmententities– Revenuesandspending,butnotassetsandliabilities

• Publishinginformationthatisdifficulttounderstand– Withoutsummarytablesorexplanatorytext– NotonInternet,noteasytobuyorborrow

• Exploitingweaknessesinaccountingrules– Sellingassetsandtreatingtheproceedsasrevenue– Borrowingbyissuingoff-marketderivativeswhenderivatives

don’tcountasdebt

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Layers of transparency?

• Onecanlookattwolevelsoftransparency:

– Themostimportantoneisfordecisionmakerstorealizetheirtrue(andfair)fiscal(financial)position.

– Thefactthatsuchinformationshouldbepubliclyavailablegoeswithoutsayingbutbelongtoadifferent—equallyimportant—level.

• Transparencyisalsoaprerequisite(necessarybutnotsufficient)for:

– Accountability,whichrequiresclearobjectivesandresponsibility– Participation,withincabinet,betweenexecutiveandlegislature,civilsociety,butcausalitynotobvious 19

Whynow?

Why Transparency now?

• 2008financialcrisis…butithappenedbefore…• Fiscaladjustmentmaybecomeanillusion• Governmentstendtodisappearbecauseof:

– hiddenborrowing:pensionschemes– disinvestment:privatization,securitization– deferredspending:cash/accruals,leases,PPPs– foregonedepreciation/investment

• Financialmarketsalsoseemtocare—whichwillprovidefurtherincentivesforsoundfiscalpolicies

Lessons from the Recent Crisis

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SourcesofUnexpectedIncreaseinGeneralGovernmentDebt(percentofGDP,2007-2010)

FRA DEU NLD ESP PRT GBR USA GRC IRL ISL AVE*

Underlyingfiscalposition 1.7 3.2 -2.4 1.8 11.3 3.7 8.1 16.3 1.3 10.9 6.0

Revisionsto2007deficit&debt 1.7 1.8 -0.9 -0.1 0.1 1.5 7.1 2.5 1.6 4.0 4.7

Changestogovernmentboundary -0.7 1.4 -0.2 0.6 9.4 1.9 0.9 11.2 -0.1 2.5 1.1

Cash-accrualadjustments 0.7 0.0 -1.3 1.3 1.7 0.3 0.0 2.6 -0.2 4.5 0.2

Exogenousshocks 8.4 12.8 14.2 15.4 8.1 17.0 6.3 40.0 60.2 39.5 9.8

Macroeconomicshocks 8.3 4.7 5.2 13.0 4.4 8.9 3.8 38.4 35.7 -3.3 6.0

Financialsectorinterventions 0.0 8.1 9.0 2.5 3.6 8.1 2.5 1.6 24.5 42.8 3.8

Policychanges 2.3 3.8 1.9 4.9 4.7 1.1 6.4 -8.0 -9.9 -4.3 4.7

Otherfactors 2.1 -0.3 6.5 1.9 3.7 6.2 8.3 -6.7 7.5 21.6 5.9

TotalUnforecast IncreaseinDebt 14.4 19.5 20.2 24.0 27.8 28.0 29.1 41.7 59.1 67.7 26.4

*GDP-weighted average

UnreportedDeficits

SoEs & PPPs

Arrears

Macroeconomic Risks

Contingent Liabilities

Stimulus / Consolidation

IssuesRevealedbytheCrisis

Main lessons

• Countriesdidnotknowtheirtruefiscalposition.

• Fiscaladjustmentturnedouttobeanillusionasliabilitieswentundetectedandaccumulatedoutsidethetraditionalperimeterofcentralgovernments’budgets.

• Inotherwords,therewaspoorqualityinformationonfiscaldevelopments.

• Butfinancialmarketsstartedtocare—whichcould providefurtherincentivesforsoundfiscalpolicies.

Markets seem to care ……FiscalTransparency&FiscalPerformance FiscalTransparency&FiscalCredibility

R²=0.00575

R²=0.20281

R²=0.25164

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AverageDe

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DPRatio,1997-2007

IMFIndexofFiscalTransparency

HighIncome

MiddleIncome

LowIncome

Linear(HighIncome)

Linear(MiddleIncome)

Linear(LowIncome)

R²=0.25032

R²=0.04893

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AverageCD

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IMFIndexofFiscalTransparency

HighIncome

MiddleIncome

Linear(HighIncome)

Linear(MiddleIncome)

……and do not seem to forget

AverageAnnualImpactof“FiscalGimmicksandOne-offMeasures”inEurope(1993–2003;PercentofGDP),andrelationshiptoCDSSpreadsinJanuary2011

Source:Koen andvandenNoord (2005,AnnexTableA1),Bloomberg,Irwin.

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0.030.03

0.080.140.140.16

0.220.230.25

0.330.350.36

0.650.69

2.36

0.0 0.5 1.0 1.5 2.0 2.5

DenmarkGermany

United KingdomFranceAustria

LuxembourgSwedenFinlandIreland

NetherlandsSpain

BelgiumPortugal

ItalyGreece

Ireland

Spain

Belgium

Portugal

Italy

Greece

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asis

poi

nts)

Accurate macro-forecasts

PortugalArrears≈3%ofGDP

95%fromoutsidetheCGbudget

GreeceArrears≈4.3%ofGDP

91%fromoutsidetheCGbudget

Arrears: execution and reporting failures

Inbothcountries,arrearsemergedfromoutsidethebudgetperimeter

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LocalGovt

Others

Hospitals

SocialSecurity

BudgetaryCentralGovt

LocalGovt

RegionalGovt

Hospitals

BudgetaryCentralGovt

Others

Quasi-fiscalActivitybySoEs

RevisionstoDeficits

MacroeconomicShocks

UnreportedFlows

Exposure to Financial Sector

Exclusive focus on general government

Infrequentfiscalreporting

Biasinmacroeconomicforecasting

Lossesonasset&liabilityholdingsnotrecognized

Norecognitionofcontingentliabilities

Problem WeaknessinCurrentStandards

How to improve fiscal transparency?

Publication of fiscal data for public sector

Monthlyoperationalfiscalreports

Alternativemacro-fiscalscenarioanalysis

Recognitionofdoubtfuldebtsinsummary

aggregates

Recognitionofquantifiablecontingent

liabilities

Recommendation

Concludingremarks

Were problems addressed?

• Afterinitialsuccess,1998transparencyinitiativediedout…..• Astringof“good”yearsdidnothelp,but….• ….insufficientemphasiswasputinsurveillanceandconditionality

work.• Newemphasisafterthe2008financialcrisis,particularlyinEU:

– Firstchangesin2005toallowadjustmentinstructuralterms(FranceandGermany).ThenFiscalCompact,SixPack,andthentwoPack…

– Recognizemoreemphasisonexantesurveillance—preventivearm—andcertaintyonadjustmentpath—correctivearm.

– Alignstabilityplanswithnationalbudgetcalendars– Morerulesandbenchmarksondebtreductionandtotalspending– Minimumstandardsonaccounting,MTBFs,rules,etc.– A stricterandexpostsanctioningmechanism– Centralizedscrutinyonnationalbudgetsandindependentfiscalagenciesor

councilsinallmemberstates. 30

Why problems persist

• Lackoffocusonpropersetofincentives….• ….. onecanleadahorsetowater,butcan'tmakeitdrink…..• Asinmostchangeprocesses,underestimatedcostdisruptionandstrengthof

incumbents….thetyrannyofstatusquo….• Publicgoodsvs.private/localizedproblems• Remediesnotadaptedquicklyenough—infact,keyaspectsremaintobeaddressed

(e.g.,basicaccountingstandardsorEPSAS)…..• …..butrelyheavilyonbestpractices—MTBFs,independentagencies,rulesand

moreruleswithexpostsanctionsratherthanexanteresponsibility—andaregulatoryapproach,thatisnoculturalchangeyet

• Asresult,reformsare largelycompliance-orientedexercises,drivenbyannouncementsratherthanaddressingmemberstates’realproblems

• Dejurevs.defactogapsrapidlywidenedasvirtuallyallnationallegislations(startingwithconstitutionallaws)amendedtotransposeEUprovisions

• Verylittlerealimprovements—letalonereforms—innationalsystemsalthoughmanyproblems(e.g.,expenditurearrears)persist….

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Selected references

• InternationalMonetaryFund,NewTransparencyCodeandEvaluation,2014,availableatwww.blog-pfm.imf.org/files/ft-code.pdf

• International Monetary Fund, Fiscal Transparency, Accountability and Risk, Policy Paper, Fiscal Affairs Department, August 2012, available at: www.imf.org/external/np/pp/eng/2012/080712.pdf

• Irwin,Timothy,2012,“AccountingDevicesandFiscalIllusions,“IMFStaffDiscussionNoteSDN/12/02(Washington:InternationalMonetaryFund).

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