Asset-based Reallocations

Andy and Beet

Taiwan 1998

-300000

-200000

-100000

0

100000

200000

300000

0 20 40 60 80 100

Thailand 1996

-5000

0

5000

10000

15000

20000

25000

30000

0 20 40 60 80 100

South Korea 2000

-2000

-1000

0

1000

2000

3000

4000

0 20 40 60 80 100

Many Issues

• Asset-based reallocations is the balancing item; do we have good estimates of LCD? Public and private transfers?

• Values presented here include public and private asset based reallocations. What should public look like?

• Multi-generational households adds complexity– Are adult children accumulating assets within

extended households and establishing independent households only when asset threshold is reached?

– Lifecycle for extended households is very different than for nuclear households.

Many Issues

• Estimates of asset income accurately estimated?

• Asset transfers to the young not being captured?

• Others?

Public Asset-based Reallocations

Andrew MasonFifth NTA Workshop

Sungkyunkwan University November 5-6, 2007

Outline

• Public debt– Stylized facts– Illustration of public asset-based reallocations

• General principles for public asset-based reallocations.

• Public debt: who pays?

Source: IMF, World Economic Outlook (2003).

Source: IMF, World Economic Outlook (2003).

Data set 1: 1990–2002: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, Côte d’Ivoire, Croatia, Ecuador, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Lebanon, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Panama, Peru, the Philippines, Poland, Russia, South Africa, Thailand, Turkey, Ukraine, Uruguay, and Venezuela.

Data set 2: 1970–2002: Algeria, Argentina, Bangladesh, Benin, Bolivia, Botswana, Brazil, Burkina Faso, Burundi, Cameroon, Chile, China, Colombia, Costa Rica, Côte d’Ivoire, Czech Republic, Dominican Republic, Ecuador,Egypt, El Salvador, Gabon, Ghana, Guatemala, Haiti, Honduras, Hungary, India, Indonesia, Israel, Jamaica, Jordan, Korea, Malaysia, Mauritius, Mexico, Morocco, Niger, Nigeria, Pakistan, Papua New Guinea, Panama, Paraguay, Peru, the Philippines, Poland, Russia, Singapore, South Africa, Sri Lanka, Syrian Arab Republic, Tanzania, Togo, Thailand, Tunisia, Turkey, Ukraine, Uruguay, Venezuela, and Zimbabwe.

The industrial economies common to both data sets are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom, and the United States.

Summary of Stylized Facts

• Public debt in emerging economies was approximately 70% of GDP

• If interest rates were 10% of GDP then public asset income was -7% of GDP.

• Between 1997 and 2002 public debt was increasing by about 2% of GDP per year.

• If GDP growth was 5%, then public saving was approximately 2% + 0.7 X 5% = 5.5%

Public Asset-based Reallocations(as a percent of GDP)

Total Domestic ROW

Total reallocations -1.5 -1.5 0

Asset income -7 -7 0

Less: Public saving

-5.5 -5.5 0

• Net outflow because taxpayers borrowed less than they paid in interest income.

• ROW is zero if ROW is bearing none of the cost of financing public debt, i.e., paying no public interest expense.

Private Asset-based Reallocations, Public Debt Counterparts

Total Domestic ROW

Total reallocations 1.5 1 0.5

Asset income 7 4 3

Less: Public saving

5.5 3 2.5

Flows to and from domestic and foreign investors (including foreign governments).

Public Asset Balance Sheet

Total Domestic ROW

Beginning of year -70 -70 0

Saving -2 -2 0

End of year -72 -72 0

End of year balance may differ from beginning year balance plus saving. Value of public debt may change, for example, because of currency fluctuations (if some debt is denominated in foreign currency).

Age Profiles

• Asset income – age profile of taxes• Assets beginning of year – age profile of

taxes during the year• Assets end of the year – age profile of

taxes during the next year• Saving – change in assets after netting out

other flows. Includes both the accumulation of aggregate debt and asset transfers across age groups or “bequests”.

Public Asset Transfers (Bequests)

• As the relative tax burden on older adults decline they transfer public debt to the next generation of tax payers.

• As the relative tax burden on children and younger adults increases they “inherit” public debt from older generations.

• Important: Public asset transfers generate age-specific saving and equal transfers. Cancel out, i.e., other flows are unaffected. Not included in the public transfers spreadsheet on the website.

Public Asset Transfers, Per Capita, South Korea, 2000

-1500000

-1000000

-500000

0

500000

1000000

1500000

2000000

2500000

0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90+

Public Credit

Public Capital

Public Asset-based reallocations, Aggregates, South Korea, 2000

-2000

-1500

-1000

-500

0

500

1000

1500

2000

0 7 14 21 28 35 42 49 56 63 70 77 84

Public asset-basedreallocations

Income on publicassets

Less: Public saving

Public Assets and Liabilities

• Non-Financial Assets– Fixed capital– Inventories– Valuables and non-produced assets

• Financial assets and liabilities– Currency and deposits– Securities– Loans– Other

• For more detailed information and definitions see IMF (2001) Government Financial Statistics Manual. [NTA website links]

Public Asset-based Flows

• Asset income and expense– Income from public fixed assets is zero in

SNA. – Non-produced assets yield income– Financial assets yield income– Public asset income may be negative

• Saving and dis-saving– Saving (dis-saving) in any form of public asset

is an outflow (inflow)

Issues and Assumptions

• Public or general government?

Public is a broader concept that includes state owned enterprise.

• Program-specific or consolidated account?

Consolidated is standard, but countries may want to construct program-specific accounts in some instances, e.g., public pension funds.

Public Debt: Basic Principles

• Assets and liabilities generate a stream of income or interest expense.

• If the rate of return on the asset (or liability) is r, then YA(t)=rA(t)

• The value of the asset must equal the present value of the stream of asset income. A(t) = PV(YA)

Public Debt: Principles

• In NTA (and GA) public debt is important because it is one component of the debt (or wealth) that current generations are shifting to future generations.

• Public discourse often treats public debt as though it is entirely the responsibility of future generations.

• Some of the costs of public debt fall on the current population.

• Flow accounts tells us the cost in a single year. A complete accounting is contingent on the debt policy in subsequent years.

Public Debt: Principles

• Let the current public debt be assigned to age groups in proportion to interest payments by taxpayers, i.e.

YA(a,t)=rA(a,t).• Current taxpayers do not have a

continuing responsibility to pay interest on public debt, because of asset transfers.

( ) (Asset transfers)xt xt xtPV YA A PV

Public Debt Flows and Stocks over the Lifecycle:

A Simple Illustration

Age AssetsAsset

transfersAsset

income

PV of asset

income

PV of asset

transfers

0 0 -100 0 -20.2 -20.2

1 -100 -100 -6 -21.4 +78.6

2 -200 100 -12 -16.7 +183.3

3 -100 100 -6 -5.7 +94.3

Public WealthA More Realistic Example

• Age Profile of Interest Payments: Thailand 2004 public outflows

• Mortality – Japan females 2000-2005

• Experiment– Aggregate public debt is constant– Estimate lifecycle of public wealth (debt) for a

synthetic cohort given interest payments profile and mortality rates.

Public Debt Measures

-400000

-300000

-200000

-100000

0

100000

200000

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Wea

lth

Current debt

PV of interestpayments

PV of debttransfers

Public Debt: Who Pays?

-400000

-350000

-300000

-250000

-200000

-150000

-100000

-50000

0

-60 -40 -20 0 20 40 60 80 100

Current debt

PV of interestpayments

Share of unborn:

9.4%

Share of children:

20.7%

Balance Sheet

Assets Liabilities and net worth

Non-financial Liabilities

Financial Net Worth

TotalTotal liabilities and net worth

Source: IMF Government Financial Statistics Manual 2001.

Financial Assets and LiabilitiesAssets Liabilities

Domestic Foreign Domestic Foreign

Currency and deposits

Securities other than shares

Loans

Share and other equity

Insurance reserves

Financial derivatives

Other

Monetary gold and SDRs

Source: IMF (2001) Government Financial Statistics Manual.