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Without good fiscal information, governments can’t understand the fiscal risks they face or make good budget decisions. And unless that information is made public, citizens and their legislatures can’t hold governments accountable for those decisions.
Fiscal transparency—the public availability of timely, reliable, and relevant data on the past, present, and future state of the public finances—is thus crucial to the foundation of effective fiscal management.
A new paper from the IMF on fiscal transparency, accountability, and risk considers the progress we have made in opening up the “black box” of fiscal policymaking over the past decade, the lessons of the recent crisis for current fiscal reporting standards and practices, and the steps we need to take to revitalize the global fiscal transparency effort.
Revealing governments’ fiscal mysteries—how much progress have we made?
The last ten years have seen the development of improved standards for fiscal reporting, such as the International Federation of Accountants’ International Public Sector Accounting Standards and the IMF’s Code of Good Practices on Fiscal Transparency and Government Finance Statistics Manual. We have also witnessed steady progress in countries’ adoption of those standards.
For example, the paper finds that out of 188 IMF member countries, the number able to report fiscal data covering the whole of the general government has risen from 48 to 78 over the past six years. Countries have also improved the timeliness of fiscal reporting, with just over 80 countries now reporting some fiscal information on a monthly basis.
At the same time, there remain serious shortcomings in governments’ adherence to fiscal reporting standards, the standards themselves, and the monitoring of governments’ compliance with those standards.
Let me give some examples.
For over a decade, reporting standards for fiscal statistics and accounts have called on governments to adopt accrual-based reporting of revenues and expenditure and to publish balance sheets showing their assets and liabilities. Today, however, only 12 countries are able to report on a full accrual basis and only 14 report a full balance sheet including both fixed and financial assets and liabilities.
At least international standards for these kinds of retrospective fiscal reports exist—there are no such standards for budget forecasts. It can be hard therefore to know how to interpret these forecasts or judge their credibility. Yet the budget is probably the single most important fiscal report, and certainly the one that attracts the most legislative and public attention.
Lastly, multilateral monitoring of governments’ compliance with those standards needs to improve. For example, the number of fiscal transparency reviews conducted by the IMF has fallen from over twenty in 2002 to just one last year. And, the track record of these reviews in identifying the fiscal transparency problems that contributed to the recent crisis was decidedly mixed.
Fiscal transparency and the crisis—what have we learned?
These latent gaps in fiscal transparency standards and practices were not the main cause of the economic and financial crisis that began in 2008, but they exacerbated it in many countries.
The paper looks at the ten countries that experienced the largest unanticipated increase in reported general government debt in the wake of the crisis and finds that just under one-quarter of that increase was caused by shortcomings in government’s understanding of their current fiscal position.
These failures in retrospective fiscal reporting were most evident in Greece where yields shot up once it became clear that the government had substantially underreported its debt and deficit.
A lack of credible information about future fiscal developments and risks has also hindered countries’ response to the crisis. Whether a government is trying to reduce its deficit or stimulate the economy, it needs reliable estimates of how its finances will evolve under current policies, the fiscal impact of any policy changes, and the risks around any central scenario.
However, the paper found that only one-third of countries systematically distinguish the fiscal impact of current and new policies in their forecasts. Moreover, even among advanced countries, less than half produce the kind of fiscal risk statements required to give citizens and markets the confidence that the government’s fiscal policy settings are robust to a plausible range of shocks.
Finally, the fiscal adjustment process requires, in many cases, governments to set ambitious targets for reducing deficits and debt. We know from experience that governments in these circumstances are often tempted to resort to creative accounting as a way of avoiding, albeit temporarily, the tough fiscal choices implied by those targets.
By way of illustration, the last four years has seen a more than ten-fold increase in the stock of government-guaranteed bonds issued by private and public financial institutions. In the vast majority of countries, the value of these guarantees is not reflected in headline measures of the government deficit or debt.
A revitalized fiscal transparency effort is therefore essential to address the gaps in reporting standards and practices revealed by the crisis, inform governments’ response to the crisis, and guard against a resurgence of fiscal opacity in the wake of the crisis.
Rising to the challenge—where next on fiscal transparency?
The new IMF paper considers how existing standards themselves can be improved by requiring consolidation of a broader range of public entities; recognition of a wider range of assets, liabilities, and flows; and more frequent publication of summary fiscal data. These improvements in retrospective fiscal reporting need to be matched by improvements in prospective fiscal reporting. The paper therefore calls for the development of a new standard on fiscal forecasting and risk disclosure.
The paper also discusses how governments can be encouraged to adopt these enhanced reporting standards. At the national level, this requires institutional reforms to promote strong domestic constituencies for fiscal transparency such as legislatures, state audit institutions, and fiscal councils.
At the regional level, this requires improvements in fiscal surveillance of the kind being incorporated into the budget framework directives of the European Union, West African Economic and Monetary Union, and Central African Economic and Monetary Community.
At the international level, the IMF and other technical assistance providers need to provide countries with more practical guidance in areas such as the transition from cash to accrual accounting and fiscal oversight of public corporations.
Finally, the paper looks at how the IMF can do a better job of identifying problems in fiscal reporting and of helping governments solve them. We are now working to revise our own Code of Good Practices on Fiscal Transparency and we’ll soon be seeking public comment on our ideas. At the same time, we’re planning to revitalize the fiscal transparency evaluations that we produce on countries’ compliance with the Code.
We want to make sure these reports are tailored to the particular needs of each country and look not only at the quality of government’s processes and procedures but also assess the extent to which reported debt and deficit numbers reflect underlying fiscal reality.
There’s a lot of work to be done, and it’s important we get it right.
Filed under: Advanced Economies, Employment, Europe, Finance, Fiscal policy, growth, IMF, Inequality, International Monetary Fund, Politics, Public debt Tagged: | balance sheets, budget, Central African Economic and Monetary Community, compliance, economic crisis, European Union, financial crisis, fiscal data, fiscal policy, fiscal reporting, fiscal transparency, government, Government Finance Statistics Manual, Greece, IMF, iMFdirect blog, International Monetary Fund, International Public Sector Accounting Standards, standards, transparency, West African Economic and Monetary Union