L-6: Fiscal Sector Analysis PDF

L-6: Fiscal Sector Analysis Open Economy Macroeconomics and Finance: A Financial Programming Approach October 21-November 2, 2024  Vietnam Fiscal Situation Decline in fiscal deficits (except COVID) Decline in revenue-to-GDP ratio Source: IMF Vietnam...

L-6: Fiscal Sector Analysis Open Economy Macroeconomics and Finance: A Financial Programming Approach October 21-November 2, 2024  Vietnam Fiscal Situation Decline in fiscal deficits (except COVID) Decline in revenue-to-GDP ratio Source: IMF Vietnam 2024 Article IV Consultation Report. 2  Vietnam: Budget Financing Source: IMF Vietnam 2024 Article IV Consultation Report. 3  Lecture Outline I. Fiscal Accounts II. Fiscal Indicators III. Summary 4  I. Fiscal Accounts Systematic summary of revenues, expenditures and financing of the public sector, during a specific time period IMF Government Finance Statistics Manuals (GFSM 1986, 2001, 2014) provide an internationally accepted framework. Fiscal accounts are designed to support fiscal analysis Data are often presented in percent of GDP 5  Fiscal Accounts: Coverage PUBLIC SECTOR CONSOLIDATED FINANCIAL PUBLIC CORPORATIONS, NON-FINANCIAL PUBLIC SECTOR INCLUDING THE CENTRAL BANK GENERAL NONFINANCIAL PUBLIC QUASI-FISCAL GOVERNMENT ENTERPRISES OPERATIONS CENTRAL LOCAL,REGIONAL GOVERNMENT GOVERNMENT CENTRAL SOCIAL DECENTRALIZED ADMINISTRATION SECURITY AGENCIES Budgets for these agencies can be consolidated! 6  Public Sector Definitions Central government (CG): Activities of the country’s central authority, including extra-budgetary funds or autonomous agencies relevant to CG policies, or under CG control. Sub-national government (SG): Activities of decentralized governments (regional, state, and local governments). Financial public corporations (FPCs): Publicly owned financial corporations, including the Monetary Authority (MA). Non-financial public corporations (NFPCs): Non-financial corporations of public property. Quasi-fiscal operations (QFs): Activities of MA or other agencies that affect the fiscal balance, e.g., exch. rate guarantees General government (GG): CG + SG Public corporations: FPCs + NFPCs. Non-financial public sector: GG + NFPCs Consolidated public sector: GG + NFPCs + FPCs 7  Accounting Rules Cash basis: transactions recorded when payment is made Accrual basis: transactions recorded when claim/liability is incurred, regardless of when payment is made – Differences occur when there are arrears Fiscal accounts traditionally recorded on a cash basis (GFSM 1986); newer (GFSM 2001 & 2014) approaches use accrual basis Gross vs. net: Revenue and outlays are shown on a gross basis (e.g., school fees not netted against education outlays; net lending is an exception); financing is net 8  Summary of Fiscal Operations The fiscal accounts are a systematic summary of: Revenues Public Sector activities New in Expense During a specific time GFSM Expenditures 2001/14 period (flows concept) Net acquisition of nonfinancial assets NOTE: Basic principles of Net acquisition of financial assets fiscal accounting are in Financing Net incurrence of IMF’s: GFSM 1986, 2001, liabilities 2014 Note: GFSM 2001 and 2014 exclude Net Lending from Expenditure; Have Different Balances 9 Vietnam: Government Operations Source: IMF Vietnam 2024 Article IV Consultation Report. 10 Vietnam: Government Operations Source: IMF Vietnam 2024 Article IV Consultation Report. 11  Revenue and Grants Revenue: all receipts, including grants. - Tax revenue: compulsory receipts collected by the government for public purposes. - Non-tax revenue: operating surpluses of public enterprises; administrative fees; property income. Grants: receipts from other governments or international institutions. 12  Expenditure Current/Expense: wages and salaries; goods and services; transfers; subsidies; interest payments; other. The first two comprise public consumption. Capital/Net acquisition of non-financial assets: acquisition of land, buildings, and physical capital equipment to be used for more than one year. Net lending/borrowing: overall fiscal balance. It indicates when the government sector reduces (repays) outstanding debt or increases its net assets. The budget shows net lending if the government is reducing its debt or increasing its financial balances and net borrowing if debt is rising or the government’s balances are decreasing. 13 Effects of Different Types of Budget Financing Central Bank Monetization: Inflation or balance of payments pressure Commercial banks Refinanced by central bank? Yes → Monetization (likely higher inflation) No → Crowding out; higher interest rates Non-bank domestic Crowding out; higher interest rates (incl. privatiz.) External External debt service; likely exchange rate risk; external sustainability issues Foreign Exch. Could lead to exchange rate crisis if reserves fall to very low Reserves level Arrears Loss of credibility; could raise costs from contractors 14  II. Fiscal Analysis: Indicators Assessing the fiscal position involves examining both flow and stock indicators Commonly used flow (balance) indicators: – Overall balance – Primary balance – Current balance – Public sector borrowing requirement – Cyclically adjusted balance – Structural balance Commonly used stock indicators (e.g., GFSM 2001): government net worth and net indebtedness (assets less liabilities) 15  Overall Balance (“OB”) OB = [Total revenue plus grants] – [Total expenditure plus net lending] Closely linked to the current account balance (CAB) of the balance of payments (BOP) o OB = SG – IG o CAB = S – I = (SG – IG) + (SP – IP) = OB + (SP – IP) Closely linked to govt. financing requirement o Financing = - OB o Gross financing needs = - OB + amortization + any item that needs financing 16  Primary Balance (“PB”) Primary balance (PB) = Total revenue plus grants (R) – (Total expenditure, excluding interest) Measures impact of new fiscal activities on the budget balance, since interest payments are set to zero (similar to assuming no outstanding debt) Is important for public debt sustainability analysis 17  Other Useful Balances Current balance (CB): Total revenue plus grants – Current expenditure – Measures government savings – Targeting CB can preserve capital outlays during fiscal consolidation Cyclically adjusted budget balance – Measures impact of budget after removing effects of business cycle Public sector borrowing requirement – Shows total borrowing required by public sector, including state enterprises (SOEs) – Can be useful if many money-losing SOEs – Used to assess fiscal stance 18  Revenue Analysis Structure of tax and revenue system – What are the main taxes and other revenue sources? General performance: – Revenue/GDP and tax/GDP ratios – Does revenue “keep up” with the economy: buoyancy of total revenue to GDP (or GNI) Buoyancy = (Pct. Chg. in Revenue)/(Pct. Chg. in GDP) Effectiveness of tax administration – Watch for nuisance taxes, erosion from exemptions/special treatment, multiple rates, collection lags, poor enforcement 19  Expenditure Analysis Expenditure structure and composition (current vs. capital, mandatory outlays) Expenditure/GDP ratios: Total, current, capital, interest payments 20  Summary Fiscal accounts are used to assess and forecast activity in the fiscal sector Remember: coverage of sector; elements of fiscal accounts; fiscal balances and other indicators; effects of different types of budget financing Techniques for fiscal forecasting: – Effective tax rate and elasticity/buoyancy approaches for revenue – Different approaches for discretionary expenditure and interest payments – Ways to forecast financing 21