Tricks of the Trade
Chiara Goretti
Senato della Repubblica - Italy
Bucharest, 10th April 2008
1
Outline



Fiscal rules: incentive to creative
accounting
Forecasts: optimism bias
Stock-flow adjustment:
Infrastructures: the ISPA case
 Railway transfers
 Securitisation and lease back
 Tax collectors


Conclusions
2
Fiscal rules: incentive to creative accounting


From restricted to non restricted activities
The EMU case:




optimistic growth forecasts
deficit vs debt bias: the stock-flow adjustment
fiscal surveillance: an evolving statistic and
accounting model
Coherence of definitions and quality of data
3
Forecasts: optimism bias



There is evidence of a significant degree of optimism in
a number of euro area countries: boosting projected
revenues and containing some types of spending;
In 2000, the prevailing buoyant economic conditions
were taken to be average or normal: medium-term
growth prospects were erroneously assessed to be very
bright;
Afterwards, budgetary developments dramatically
worsened.
4
Forecasts
Contemporaneous growth conditions and macroeconomic forecasts
(simple average of EU-15 countries)
4%
Revisions of the output gap estimate for 2000 in
successive Commission Services' forecasts
10,0%
2,5
Real GDP growth in the year of
preparation of the SCP (lhs)
2
9,5%
SCP projections: average
planned cumulated increase in
real GDP over three years (rhs)
9,0%
2%
8,5%
cumulative change
y-o-y change
3%
1,5
1
0,5
0
1%
2000
8,0%
2001
2002
2003
2004
2005
2006
-0,5
0%
7,5%
1998
1999
Source: Commission services
2000
2001
2002
2003
2004
2005
-1
2006
Germany
Italy
France
UK
5
Forecasts: Italy
Italy - Economic forecasts in Stability Programmes
Budgetary effect of growth surprise
2002
2003
2004
Potential growth
ΔCAB
2.4
Planned
2.2
1.8
0
.
6
0
.
5
Δ
C
0
.
2
0
.
6
P
o
1
.
6
1
.
7
Δ
C
A
B
0
.
9
0
.
1
Δ
C
A
P
0
.
1
1
.
3
3,5
3
2,5
A
P
B
2
0
.
2
1
.
9
0
.
3
1
.
4
0
Outcome
1,5
t
e
n
t
i
a
l
g
r
o
w
t
h
B
-
0
.
3
0
1
O
n
e
o
f
f
m
e
a
s
u
r
e
s
1
.
9
0,5
0
Δ
C
A
B
Δ
C
A
P
e
x
B
c
e
l
x
o
c
l
n
e
o
n
o
e
f
f
o
s
f
0
f
s
-
.
0
2
.
5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
actual data
SP1999
SP2000
SP2001
SP2002
SP2003
SP2004
SP2005
SP2006
SP2007
-
0
.
5
0
.
8
-
0
.
9
0
.
5
0
.
1
Effect of growth surprise
o
n
Δ
C
A
B
-
0
.
4
-
0
.
2
ΔCAB - fiscal effort as measured by the annual change in cyclically adjusted balance
ΔCAPB - fiscal effort as measured by the annual change in cyclically adjusted primary balance
Source: EU Commission
6
Forecasts: lessons


In a rules-based fiscal framework that sets limits
on the budget balance, negative growth
surprises will necessarily require a downward
adjustment of expenditure plans;
Budgetary plans should be built on economic
growth projections which possibly err on the
side of caution.
7
The stock-flow adjustment (SFA)


Deficit vs debt bias: from restricted to
unrestricted activities;
Reconciliation between:



cash and accrual data;
stock and flow indicators;
Consistency across the data;
Debtt – Debtt-1 = Deficitt + SFA
8
ISPA




ISPA (created in 2002): joint-stock company
(outside GG);
Entire financing of high speed railway, raising
money and providing proceed to RFI and TAV (both
outside GG) to finance infrastructures;
In 2005, Eurostat decided all debt issued by ISPA is
to be recorded as gvt debt, with a counterpart as
financial transaction in the form of a loan from gvt
to RFI-TAV;
In 2006, gvt consolidated the ISPA debt, for
transparency reasons, with an increase in deficit of
about 13 billions.
9
Railway transfers



Capital injections into the state-owned companies are
treated as financial transactions;
From 2004 on, capital transfers are treated as economic
item after Eurostat decision 98/03 (if the company
presents losses);
Revisions to deficit figures in March 2005 due to railway
capital injections: 3.6 billion/euro for 2001; 4.1 b/e for
2002; 4.0 b/e for 2003;
10
Real estate: securitisation and lease-back


2001 and 2002: securitisation operations concerning a
portfolio of buildings owned by the Social Security Fund
(SCIP);
In 2002, Eurostat decided that – if the initial payment is
< 85% of the market price - securitisation are to be
recorded as financial items until the full payment is
made;

Revisions of deficit figures for 2001 and 2002;

Lease-back (FIP) of central and local building used as
offices, then rented back to gvt;

Revenues for 3 bn euro in 2004 e 0.6 bn in 2005.
11
Tax collectors




From 1997, tax collectors have to advance the
payment of indirect taxes due in the following
year; budgetary impact only in the first year;
In 2003, gvt introduced another type of prepayments;
In 2005, Eurostat decided that pre-payments
have to be recorded as financial transactions,
without improving, in 2003 and 2004, the deficit;
December 29th, 2007, pre-payments by tax
collectors abolished, in order to worsen the
balance.
12
Securitisation
Treasury Single Account -cash flows 2004
120.000
100.000
80.000
60.000
40.000
20.000
0
Jan.
Feb.
Mar.
Apr.
May
June
Revenue
July
Aug. Sept.
Oct.
Nov.
Dec.
Expenditure
Treasury Single Account - cash flows December 2004
18.000
16.000
14.000
12.000
10.000
8.000
6.000
4.000
2.000
0
1
2
3
6
7
9 10 13 14 15 16 17 20 21 22 23 24 27 28 29 30 31
Revenue
Expenditure
13
Data: statistical deficit revisions
first release
June 02
Sep 02
Mar 03
Sep 03
Mar 04
Sep 04
Mar 05
May 05
2001
1.4
1.6
2.2
2.6
2.6
2.6
2.6
3
3.2
2002
2003
2004
2.3
2.3
2.3
2.3
2.6
2.7
2.4
2.4
2.9
3.2
3
3.2
2001: securitisation operations (0.6%), capital injections in FS (0.4%), re-
calculations of current expenditures (0.6%), transactions with the EU budget
(0.2%);
2002: capital injections in FS (0.4%).
2003: capital injections in FS, reduction in the accrual estimate of social
contributions, tax collectors.
2004: tax collectors.
14
Conclusions 1
Experience demonstrates that gvts:
 aim to exclude expenditures and includes
revenues in constrained balance;


exploit absence of accounting regulations or
opacity in recording methodology;
abandon “tricks” when are forced to identify
economic substance of transactions (accrual).
15
Conclusions 2



Avoid temptations on forecasts:
independent checks;
Investments on quality of data and
statistics;
Cash and accrual, stock and flows:
consistency and coherence of indicators
16