Blejer, Cheasy. The Measurement of Fiscal Deficits. Analytical and Methodological Issues - FMI - 1112 PDF

American Economic Association
The Measurement of Fiscal Deficits: Analytical and Methodological Issues

Author(s): Mario I. Blejer and Adrienne Cheasty
Reviewed work(s):
Source: Journal of Economic Literature, Vol. 29, No. 4 (Dec., 1991), pp. 1644-1678
Published by: American Economic Association
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Journal of Economic Literature
Vol. XXIX (December 1991), pp. 1644-1678
The Measurement of Fiscal Deficits:

Analytical and Methodological Issues
By MARIO I. BLEJER
and
ADRIENNE CHEASTY
International Monetary Fund
The authors are indebted to Jonathan Levin, Vito Tanzi, and col-
leagues at the International Monetary Fund for their valuable com-
ments. The views expressedare the sole responsibilityof the authors.
A budget deficit is like sin. To most of the This paper surveys the many alternative
public it is morallywrong, very difficultto deficit measures that have been used to
avoid, but always easy to identify, and
susceptible to considerablebias in measure-
assess budgetary policy, together with
ment. (Robert Eisner 1984) their analytical and policy-motivated un-
derpinnings. The differences in these al-
I. Introduction ternative measures, all of which purport
to measure "the fiscal deficit," have to
IN PRACTICE, fiscal policies may be ap- be made explicit before meaningful
plied inappropriately because conven- cross-country comparisons can be made
tional measures of the fiscal deficit mis- and useful general conclusions drawn
calculate the public sector's true budget about fiscal policy.
constraint and give a misleading picture Although the measurement of fiscal
of the economy's fiscal stance. For diag- policy may be important mainly because
nosing economic problems and finding of its macroeconomic consequences, this
appropriate fiscal policies to address survey does not focus on the impact of
them, the correct measurement of the the fiscal balance on the rest of the econ-
public sector's net requirements is a vital omy (i.e., on the deficit as a fiscal indica-
prerequisite. But, to understand a coun- tor), but rather on the methodological
try's fiscal stance, it may be necessary aspects of measuring it. Fiscal deficit
to view the budget from several angles. measures must be specified over three
And, from one country to the next, the dimensions: (1) the deficit has to be de-
considerations that need recognition in fined for a public sector of a given cover-
budgetary analysis (for instance, level of age; (2) the coverage, or size, of the pub-
development and openness) may vary lic sector, and its composition must be
widely. Hence, the search for the single delineated; and (3) the time-horizon rele-
perfect deficit measure may be futile. vant for assessing the magnitude of the
1644
Blejer and Cheasty: The Measurement of Fiscal Deficits 1645
deficit must be identified.' Issues falling fines itself to calculable measures of the
into these three measurement categories deficit, although, for some cases cited,
have generated a substantial literature, calculation might prove quite cumber-
which, taken as a whole, represents a some.
methodology for assessing the true scope
of budgetary policy. II. The ConventionalPublic Sector Deficit
Basic definitional issues-often forgot-
The impact of fiscal policy can be as-
ten when using a conventional budget
sessed with respect to any time frame.
deficit measure-are addressed in Sec-
Nevertheless, the deficit has tended to
tion II. Section III discusses different
be viewed as a summary of government
measures of the deficit that have been
transactions during a single budget pe-
considered operationally applicable as
riod-usually one year-without atten-
policy tools in various circumstances.
tion to their longer run implications.
Section IV deals with the scope and cov-
These short-run measures of the deficit
erage of the public sector that is relevant
are discussed first.
for economic analysis.2 Section V is con-
Such measures fall into two categories:
cerned with the intertemporal dimen-
variants of the "accounting," or conven-
sions of public sector activities, and their
tional, deficits that country authorities
reflection in the government "net worth"
refer to in their budgets (discussed in
concept. Even within the confines of
this section); and some refinements of
measurement issues, the survey has to
these conventional deficits (covered in
be selective and, sometimes, draw arbi-
the next section). The latter are special
trary lines. Thus, because they have al-
purpose measures that attempt to isolate
ready been the subject of exhaustive
in the annual deficit the magnitudes rele-
surveys (or because they merit such
vant for assessment of the deficit's effects
treatment), some subjects have pur-
on specific endogenous macro-variables,
posely been excluded from detailed
such as domestic demand, inflation, or
coverage.3 In particular, the survey con-
the balance of payments.
The conventional deficit is more re-
l Although most of the issues discussed here apply
to positive as well as negative imbalancesin the pub-
strictive than the budget balance envis-
lic sector, this paper refers mainly to "deficits,"in aged in the balanced budget laws in
line with the terminology widely used in the litera- many countries' Constitutions.4 Typi-
ture. See, for example, Michael Boskin (1982, p. cally, such laws require only a very
296).
2 Coverage of the public sector, however, is de- broadly defined balancing-that financ-
fined somewhatnarrowlyhere. It is evident that con- ing for all budgeted expenditures be
trol by the public sector can extend far beyond its identified prior to enactment of the Bud-
direct use of resources, not only through its transfer
policies but also throughits regulatorypowers. While get. The tighter concept of budgetary
transfersare discussed briefly (in Section III), cover- balance embodied in the conventional
age of the impact of government regulation on the deficit requires financing to come from
allocationof resourcesis largelyomitted, forpurposes
of conciseness rather than because of a conceptual the government's "ordinary income"
disparity. rather than from borrowing, if the budget
3 Most importantly, measurement of the impact
of social security on the deficit is discussed only as
part of the general issue of the appropriatetime hori-
zon over which the deficit should be measured (Sec- Bernheim (1987), Leonardo Leiderman and Mario
tion V), and the substitutabilitybetween tax and debt Blejer (1988), and Robert Barro(1989).
financing(Ricardianequivalence)is omitted. Surveys 4 See, for instance, the discussion of the Italian
of social security include Anthony Atkinson (1987) Constitution in Antonio Martino (1989, p. 708 ff),
and Lawrence Thompson (1983; United States only) and the description of Indonesian "balancedbudget
and Ricardianequivalence is discussed in Douglas policy" in AnwarNasution (1989, p. 3).
1646 Journal of Economic Literature, Vol. XXIX (December 1991)
is to be considered balanced. Most coun- 1. The Line

tries record (sometimes only for internal
use) some variant of this deficit. Perhaps There are two criteria for distinguish-
the variant most widely used is the public ing between revenue/expenditure on the
sector borrowing requirement (PSBR), one hand, and financing on the other:
which measures government's use of new the "government debt criterion" and the
financial resources, net of repayment of public policy criterion."
"U
previously incurred debt.5 a. The Government Debt Criterion.
In the absence of standardized ac- Transactions are thought to affect the def-
counting rules for government, the con- icit, and are therefore classified above
ventional deficit is not well defined, and the line (i.e., as revenue or expenditure)
the deficits of different countries are not if they do not create or extinguish a liabil-
directly comparable. Two main areas of ity for the government; if they do, then
variance are: these transactions are considered posi-
tive or negative financing. Thus, for in-
1. the distinction between the items
stance, interest payments on government
that determine the deficit-income
debt (an unrequited factor payment) are
and outlays, and the items that fi-
part of government expenditure, while
nance it (drawing "the line"); and
the repayment of principal is recorded
2. specification of the time at which
below the line.
the resource use is measured (the
The economic underpinning of this dis-
cash versus the accrual deficit).
tinction is that, while a shift in the level
of net public expenditure affects aggre-
'Vito Tanzi et al. (1988, p. 5) use a definition of gate demand, the repayment of outstand-
the deficit as follows:"Fiscal deficits, as convention- ing debt does not represent new income
ally defined on a cash basis, measure the difference
between total governmentcash outlays, includingin- to asset-holders and therefore leaves de-
terest outlays but excluding amortizationpayments mand pressures unchanged.
on the outstanding stock of public debt, and total When the public debt criterion is used
cash receipts, including tax and nontax revenue and
grants but excluding borrowing proceeds. In other to determine the fiscal deficit, the deficit
words, not all outlays related to public debt servicing equals the difference between total pub-
are included in the measure of the deficit: interest lic debt outstanding at the beginning and
payments are added to non-debt-related expendi-
tures but amortizationpayments are excluded. On the end of the year. A central problem
the other hand, current revenues are recorded as is that the criterion has always been ap-
government income while proceeds from borrowing plied narrowly, defined only over direct
are not. In this manner, fiscal deficits reflect the
gap to be covered by net government borrowing, government debt and ignoring, inter alia,
including direct borrowing from the central bank." liabilities incurred by the receipt of social
Accordingto the World Bank(1988, p. 56), deficit- security taxes and other revenues tied
determiningcomponents are: "Expenditureincludes
wages of public employees, spending on goods and to contingent claims (Section V. b.(3) be-
fixed capital formation, interest on debt, transfers low) and the liabilities being repaid via
and subsidies. Revenue includes taxes, user charges, the inflation component of interest pay-
interest on public assets, transfers, operating sur-
pluses of public companies, and sales of public as- ments on government debt (Section 111.6
sets." It may be noted here that the U.S. unified below).
budget balance is, in this sense, a conventionaldefi- b. The Public Policy Criterion. Alter-
cit. Expenditure included in the measure includes
capital formation as well as current transactions, natively, transactions are deficit-deter-
though no distinction is made between them. Thus mining and classified as revenue or ex-
the unified budget deficit, like conventional deficits penditure instead of financing, when
elsewhere, is not a measure of government saving,
but of government saving less governrnent invest- they further the goals of policy makers
ment. rather than simply forming part of public
sector liquidity management. Unlike li- "lending" is composed of direct capital

quidity management, public policy moti- infusion and of government credit pro-
vated transactions change the prices fac- grams undertaken for policy purposes:
ing the rest of the economy compared namely, to supply funds to preferred sec-
to what they would be if markets were tors who would otherwise not have access
left undisturbed. to financial markets or who would have
This criterion is also imperfect be- to pay steeper rates. Given its implicit
cause, in practice, government does not subsidy element, and the higher than
approach financial markets on the same market probability that some of the loans
terms as other borrowers. Typically, gov- will never be repaid, net lending cannot
ernment can borrow on more favorable be defined as pure financial intermedia-
terms, for instance, by imposing restric- tion, and the public policy criterion,
tions on the placement of public institu- then, would classify net lending as part
tions' funds-such as the requirement of government expenditure-above the
that the social security system hold a cer- line.6 As illustrated in Table 1 by the
tain portion of its reserves in the form case of Venezuela (where the govern-
of government bonds. Moreover, gov- ment allocates its petroleum revenues
ernments often have a policy agenda un- through domestic and external lending
derlying their ranking of financing programs), the difference in classification
sources (the central bank, commercial can turn a deficit into a large surplus.7
banks, different private sector groups, From an analytical viewpoint, neither
foreign sources), which may make them treatment is completely correct. Unless
depart from least-cost borrowing/pure li- budgetary loans are uncollectable from
quidity management. In other words, the start (which would imply an outright
even through its financial intermedia- transfer), they contain both pure loan and
tion, government may tax, subsidize, or pure grant components; only the latter
effectively regulate parts of the economy should be considered as a public policy
and, therefore, the public policy crite- element and included as part of the
rion provides only a blurred analytical deficit.8 Moreover, the subsidy (grant)
distinction between what belongs above component is usually spread over the en-
or below the line. tire lifetime of the loan, going beyond
The two criteria for drawing the line
6 The two main international sources of budget sta-
generate the same classification of most
transactions; however, they diverge for tistics-the International Monetary Fund and the
United Nations-differ in their treatment of net lend-
three types of transactions and this diver- ing, the former showing it above the line, for policy
gence has led, in practice, to important reasons, and the latter classifying it as financing. See
discrepancies in the size of the conven- World Bank (1988, p. 45) for a description of the
United Nations' System of National Accounts (SNA;
tional deficit as estimated by policy mak- 1968) and IMF's Government Finance Statistics
ers in different countries. These are: (i) (GFS; 1986) systems of budgetary data.
' The scale of government's direct lending is ex-
budgetary "net lending"; (ii) external
tremely large, even in highly developed, market-ori-
grants; and (iii) debt service. ented economies. For example, the United States
(i) "Net lending". Unlike other Federal Government's outstanding stock of direct
budgetary outlays, government lending loans at the end of 1987 was $234 billion, equivalent
to 5 percent of GDP (United States 1988).
operations to the private sector involve 8 As discussed in the context of central bank activi-
liability management (overt and contrac- ties (Section IV.3), the economic cost of preferential
tual), and hence, by the government debt credit is the amount that would have to be paid to
a private bank to induce it to undertake the lending,
criterion, should go below the line. How- i.e., the expected discounted future loss arising from
ever, a significant portion of budgetary the loan adjusted for risk.
TABLE 1 TABLE 2
VENEZUELA: CONSOLIDATED CENTRAL GOV'ERNMENT1 TIlE GAMBIA: CONSOLIDATED CENTRAL GOVERNMENT
(IN BILLIONS OF BOLIVARES) (IN PERCENT OF GDP)
1985 1986 1981 1982
Balance excl. net lending 32 4 Deficit incl. grants -12 -7

Balance incl. net lending 24 -9 Deficit excl. grants -17 -17
Source: IMF. Government Finance Statistics Yearbook, Source: IMF. Government Finance Statistics Yearbook,
1988. 1988.
1 In this and following tables a minus sign indicates a
deficit.
any time. Particularly in developing
countries where domestic incomes are
the budgetary year in which the loan is
extended. 9 very low, the classification of grants be-
low the line can widen the deficit by
(ii) External grants. Since grant aid
more than 5 percentage points of GDP
from abroad represents financing without
(Table 2).
liability, the government debt criterion
would include it with other government (iii) Debt service. In some coun-
revenues. However, by the public policy tries, it may be argued that present levels
of public debt are not sustainable, and
criterion, grants are added to other for-
eign financing-below the line-on the that amortized debt may not be volun-
tarily reinvested in new government
argument that no government policy de-
bonds. In such cases, replacement fi-
cision can elicit these grants, and, there-
nancing for amortization could require a
fore, that the current expenditure that
policy effort on the part of government
they finance could not take place if the
akin to that of generating extra tax reve-
grants are not forthcoming (RajaChelliah
nue. Under this scenario, the public pol-
1973, p. 749).10 Grants are discretionary
financing by donors and can vary signifi- icy criterion would suggest the inclusion
of amortization above the line, and the
cantly from year to year. Their inclusion
as regular revenue has been said to give resulting deficit would correspond to the
an inappropriate confidence in their per- government's gross borrowing require-
manence, though they may have to be ment, rather than to its net increase in
liabilities.
replaced by government borrowing at
Such differences in classification as de-
scribed above can substantially affect the
9 Michael Wattleworth (1988) examines in detail measured deficit. Typically, classifica-
the role of credit subsidies in government lending tions have evolved apolitically, and coun-
and presents a technique to measure the financial tries have maintained one consistent
cost to the government of these subsidies under cer- treatment of government transactions
tainty. See also BarryBosworthet al. (1987)for exten-
sive references on the budgetary dimension of U. S. over time. However, it is clear that much
Federal credit activity and United States, Congres- scope exists for distorting the picture
sional Budget Office (1989, 1990) for credit budget through judicious reclassification. Lau-
reformproposals.
10Indeed, grantsare often explicitlyearmarkedfor rence Kotlikoff (1988, 1989) makes this
certainexpenditures. Anothercase for treatingexter- point, showing how the government, by
nal grants as financing is that, unlike tax revenues, relabeling its transactions (as taxes/bor-
they represent no reduction in aggregate demand
but add net resources to the economy, and widen rowing, in various combinations with ex-
the "domesticdeficit" (Section 111.3). penditure/amortization), can shift opera-
tions from above to below the line (and because tax liabilities may be disputed
vice versa) but, essentially, carry out the and some percentage will never be col-
same policy while choosing to report ei- lected. Finally, the accounting treatment
ther a balanced budget, a deficit, or a of expenditures can make a significant dif-
surplus. If governments do not maintain ference to the measured deficit. The ad-
what might be termed "ethics in account- ministrative procedures for executing
ing standards," the fiscal deficit ceases government expenditures are complex,
to convey useful information. and take place in several stages from the
time the government decides to under-
2. The Cash and Accrual Deficits
take the outlay to the time the supplier
The other main conceptual variation considers himself paid. The size of the
among conventional deficit measures is deficit can depend on the particular step
the choice between cash and accrual ac- at which expenditure is recorded as hav-
counting. At one end of the spectrum is ing taken place (International Monetary
the completely cash deficit, where only Fund 1986, p. 87). 12 Comparison of defi-
government outlays for which cash has cits across countries with different re-
been disbursed during the 365-day pe- cording practices, particularlyduring any
riod, and only actual cash revenues re- fiscal year, can be misleading, as most
ceived, are included in the budget bal- expenditure commitments are made to-
ance. At the other end is the completely wards the beginning of the year, and
accrual deficit, which attempts to cap- most payments are made towards the
ture the actual net resource preemption end.
of government-the consequences of its The economic analysis of accrual basis
policy decisions-during the fiscal year, deficits is complicated by the institu-
regardless of whether or not transactions tional tendency to apply accrual account-
have actually been paid for. Thus-an ing to the budget document rather than
important example-depreciation of to the fiscal year. In other words, coun-
fixed capital is included as an outlay in tries often prolong beyond 365 days the
the accrual deficit, but does not show period over which transactions autho-
up in the cash deficit. A deficit calculated rized in a given budget document may
on the basis of the system of national be carried out. (The extension is known
accounts (SNA) would be an accrual mea- as a "complementary period. ") Thus, in
sure; the public sector borrowing re- any fiscal year, transactions that change
quirement (PSBR) is measured on a cash the measured deficit of the previous year
basis. 11 can continue to take place alongside
In practice, countries' deficit measures transactions determining the current
lie somewhere in between the complete year's deficit. In such cases, the temporal
cash and complete accrual measures. common denominator for analyzing the
Even in countries which use a PSBR
(cash) deficit concept, interest payments
2The sequence of expenditure execution differs
are usually measured as they accrue, according to the budgetary tradition of the country
rather than when actually paid. On the (British, French, United States, Hispano-American,
other hand, revenues are almost always etc.). The U.S. budget records expenditure at the
measured on a cash or quasi-cash basis "checksissued" stage (InternationalMonetaryFund
1986, p. 89)-considered a quasi-cashmeasure; the
French budget measuresexpenditureat the time the
government decides to undertake it ("engage-
11See MarkWasserman(1976, p. 39) for a detailed, ment")-a quasi-accrualmeasure. JackDiamond and
albeit dated, comparisonof SNA and cash budgetary Christian Schiller (1988) discuss the British and
accountingin several OECD countries. French systems.
TABLE 3
existence of arrears that cannot be mea-
BURKINA FASO: CONSOLIDATED CENTRAL GOVERNMENT'
sured reduces the validity of the deficit
(IN BILLIONS OF CFA FRANCS)
as a measure of the government's budget
constraint or of its impact on the econ-
1982 1983 1984 omy.
Worse, countries with chronic liquid-
Reported cash balance
less: -6.2 0.5 -3.3
ity crunches have developed formal pro-
Deferred payment vouchers cedures for turning arrears into longer
equals: 1.7 -1.3 1.1 term debt instruments, which boost ac-
True cash balance -4.5 -0.8 -2.2 tual holdings of government debt above
its long-run sustainable rate, inasmuch
Source: IMF. Government Finance Statistics Yearbook, as they are usually held involuntarily by
1988.
1 Burkina Faso is also a good example of a country where suppliers. The issue of chits or bonds in
measured expenditures can be greatly affected by the recognition of government's debt to sup-
existence of a complementary period. Expenditure from pliers is recorded as a cash payment, and
the 1985 budget during calendar year 1985 was CFAF thus inflates the recorded cash measure
49 billion; total expenditure carried out in calendar year of the deficit compared with actual cash
1985 (including from past budgets) was CFAF 55 billion;
and total expenditure from the 1985 budget (some of
disbursements by government (Table
3).13
which took place in 1986) was CFAF 61 billion.
In the rest of this survey, it will be
assumed that the conventional deficit is
budget balance together with other ma- well specified (following footnote 5), and
cro-variables is lost. the discussion of refinements to the con-
A difficult problem in the measure- ventional deficit will ignore the basic
ment of the conventional deficit arises problem just discussed-that every bud-
with attempts to reconcile the cash and get speech refers to a different kind of
accrual concepts. As noted by Diamond deficit.
and Schiller (1988, pp. 32, 42-44), if de-
lays in payment are unanticipated, they III. Special-PurposeDeficit Measures
represent forced borrowing from suppli- Though the conventional deficit mea-
ers, with the result that the cash measure sure exists in competing versions, all ver-
of the borrowing requirement misrepre- sions have at least one characteristic in
sents the sources of credits to govern- common: in calculating the budget bal-
ment. If the delays are anticipated, sup- ance, they include, with the same
pliers will inflate their prices to weight, all government transactions.
compensate, and the government will However, policy makers have, from time
pay a premium for its purchases. to time, calculated alternative measures
The total reconciliation item between of the deficit, with the aim of highlighting
the cash and accrual deficits is often de- the differential impact of various budget-
fined as arrears, but, because of justifi- ary transactions (such as investment, im-
able lags in the expenditure process, be- port purchases, or debt service) on im-
cause arrears may be run up through portant macroeconomic variables (such as
extrabudgetary expenditures, and be- savings, the balance of payments, and in-
cause the emergence of arrears is often flation).
hidden by offsetting tax reliefs to suppli-
13 These procedures are particularly prevalent in
ers, the definition of arrearsis more com- francophone African countries which have externally-
plicated than a resolution of timing differ- imposed ceilings on bank credit, and thus customarily
ences in expenditure recording. The run up arrears as residual financing.
The main types of special-purpose defi- several shortcomings. First, the measure
cit that have been fairly widely calculated is useful primarily when comparing the
are: 1. the current deficit; 2. the deficit government with the other components
measuring the contribution of different of the national accounts, or assessing gov-
transactions to aggregate demand; 3. the ernment's accounts according to the ac-
domestic deficit, a variant of (2) impor- counting norms of the private sector.
tant in open economies; 4. structural and However, detailed public sector accounts
cyclically adjusted deficits; 5. the pri- are usually first available on a financial
mary deficit; and 6. the operational defi- basis, rather than on the accrual basis
cit. compatible with other sectoral and/or en-
terprise accounts."4 Second, accounting
1. The Current Deficit: Government concepts of investment are much nar-
Saving and the Capital Budget rower than the economist would like. For
The conventional deficit measures the instance, most investment in human cap-
difference between public investment ital is considered a current outlay, de-
and public saving. In order to isolate spite its importance in explaining growth
public (dis)saving, the current deficit cal- (Chelliah 1973, p. 749; Richard Goode
culation omits investment outlays and 1984, p. 240). Third, the current/capital
capital revenues such as asset sales; i. e., mix of any "investment" project can be
the current deficit is the difference be- dissected (or, indeed, politically manipu-
tween noncapital revenues and expendi- lated) in an almost infinite number of
tures. The current deficit is of particular ways, to give many different measures
interest to economists because the lack of government saving.
of public sector capital budgeting appears Despite these operational problems,
to be a shortcoming compared with ac- interest in the current deficit concept as
counting procedures of private firms: applied to developing countries has in-
creased, as externally financed programs
If we maintained a separate and conceptually of structural adjustment have become
correct current and capitalaccount system, the
more prevalent. This is so because struc-
deficit on current account would be the true
deficit, [. . . because] for capital items, any tural adjustment programs tend to dis-
excess of expenditures over receipts on capital equilibrate the conventional balance,
account does not change the net asset position through temporarily large injections of
of the government, since the new debt is subsidized lending for capital expendi-
matched by a new government asset. (Boskin
ture, and large one-time budget reve-
1982, p. 298).
nues from privatization. There is, there-
Moreover, in the 1960s, it was commonly fore, pressure on the conventional deficit
held that current expenditures should be to widen, with the paradoxical implica-
fully financed by taxes, whereas, like a tion that the structural adjustment has
private firm, the government could legit- left the country even further from sus-
imately finance its socially profitable in- tainable medium-term growth. To pro-
vestment by debt (David Conklin and vide a more appropriate benchmark for
Adil Sayeed 1983, p. 28). According to judging these programs, it is argued that
this view, the deficit on current account a deficit that excludes their temporary
provided a measure of the extent the gov-
ernment strayed from "prudent manage- "Oof the adjustments that must then be made,
ment." the treatment of depreciationis perhapsparticularly
important. See, for example, Boskin (1988, p. 79)
Though the current deficit is intui- and Boskin, MarcS. Robinson,and John M. Roberts
tively simple, its calculations have had (1985).
influences on the capital account will give benefits merely redistribute purchasing
a better measure of permanent adjust- power from one part of the private sector
ment efforts. The change in government to another. In terms of their impact on
saving, though clearly a rough proxy, has aggregate demand they are akin to nega-
thus resurfaced as a summary gauge of tive taxes rather than to government's
the gains from structural adjustment expenditure on goods and services (Bos-
(World Bank 1988). kin 1982, pp. 296-97; Willem Buiter
When using the current deficit as this 1985, p. 14; Charles Bean and Buiter
kind of measure, however, further prob- 1987, pp. 5-6). 15
lems arise. First, structuralpolicies (such Policy makers have also recognized
as tax reform) often involve J-curve ef- that the inclusion of transfers in govern-
fects (such as short-run revenue losses ment spending may further overestimate
during the shift to the new tax system) government's contribution to aggregate
which reduce government saving at the demand because there are lags in how
time of the adjustment program, though quickly transfers can be spent. This prob-
with the expectation of improving it in lem has been most apparent in econo-
the medium term. Conversely, many mies with several layers of government:
structural reforms involve investments a transfer from central to local govern-
which imply heavy recurrent costs fol- ment may not increase aggregate de-
lowing completion, so that government mand until the year after it was recorded
saving may fall in the medium term. Fi- in the budget of the central administra-
nally, it may be difficult, if not illegiti- tion.
mate, to separate the disequilibria It should be noted that this type of
caused by a structural adjustment pro- analysis is peculiarly Keynesian. A more
gram from the "disequilibria"caused by monetarist approach would argue that
other exogenous shocks or the business any impact of government on aggregate
cycle. If so, a core deficit or a cyclically demand comes through the monetary fi-
adjusted deficit (discussed in 4. below) nancing of the deficit. 16
might be a more precise measure of the
3. The Domestic Deficit
extent of permanent adjustment.
Since trade and capital flows between
2. The Impact of Government on
the public sector and the external sector
Aggregate Demand
vary enormously from country to coun-
Since different elements of govern- try, a given conventional deficit can en-
ment expenditure and revenue gener- compass a large spectrum of contribu-
ate different net increases to, and with- tions to the domestic economy. For
drawals from, demand, policy makers instance, expenditure on domestic goods
have sometimes ambitiously attempted that is fully financed by foreign grants
to isolate in the deficit measure the increases aggregate demand with no off-
government's contribution to aggregate setting withdrawal. Government imports
demand. The most widely applied ag- financed by domestic taxes reduce aggre-
gregate demand-based measures have gate demand by the full extent of the
focused on the separation of exhaustive
expenditures (on goods and services) and "This point can be generalized to the revenue
side, where different taxes may represent different
transfers. If private and public propensi- net withdrawals from private sector aggregate de-
ties to consume differ, it becomes impor- mand, depending on the base of the tax.
16 However, see Buiter (1985, p. 76) for a hybrid
tant to identify the ultimate user of bud-
measure of the impact of the deficit on aggregate
getary resources. Tax-financed transfers demand, where the impact of financingis included
such as pensions and unemployment through its potential for crowding out.
import bill-a case where government when foreign grants are large. Oil export-
expenditure may have contractionary ing country studies include David Mor-
rather than expansionary effects. The gan (1979: 12 major oil exporters); Rich-
overall deficit could well be zero in each ard Stillson (1979: Indonesia, Jordan, and
of the two examples, though they each Oman); George Mackenzie (1981: Ku-
imply an opposite domestic impact. To wait, Nigeria, and Saudi Arabia); Nasu-
isolate the effect of government on aggre- tion (1989: Indonesia); Jose Gil-Diaz
gate demand in an open economy, "do- (1988: Bolivia); and Reza Vaez-Zadeh
mestic" and "foreign"deficits have been, (1989: Venezuela).19
in many cases, separately calculated.
The domestic deficit is measured by 4. Removing the Effects of Fluctuations
including in the calculation only those in Economic Activity on the Budget
budgetary elements that directly affect
the domestic economy. The foreign defi- While the budget deficit affects aggre-
cit-the impact of the budget on the bal- gate demand, aggregate demand also af-
ance of payments-can be measured by fects the budget deficit. Inter alia, in-
including only budget transactions di- come tax revenues will usually be lower
rectly connected to the external sector. and benefit transfers higher when unem-
(See, for instance, Jitendra Borpujariand plyment is high. In other words, the bud-
Teresa Ter-Minassian 1973, p. 815; Chel- get deficit is affected by the business cy-
liah 1973, p. 770.)17 cle, and the impact of discretionary
When the public sector has sizeable policy changes may differ depending on
trade or capital flows to and from the at which stage of the business cycle they
rest of the world, the overall deficit mea- are implemented. Since the 1940s, but
sure can be particularly misleading: for mainly in the 1970s, deficits abstracting
instance, devaluation may cause the bud- from the impact of the business cycle
get deficit to widen if government im- have been calculated. These measures
ports or foreign debt service are large, have, in their heyday, been surveyed
suggesting an expansionary fiscal pol- comprehensively (Alan Blinder and Rob-
icy-though resources injected into the ert Solow 1974, and Peter Heller et al.
economy by government remain un- 1986).
changed or may even fall. There are two main classes of "perma-
Most calculations of the domestic defi- nent" or long-run deficits. The full-em-
cit measure have been carried out for ployment deficit (or structural balance)
oil exporting countries with a national- was derived in the belief that "a small
ized petroleum industry. Unless the surplus in that budget would ensure a
monetary impact of oil receipts is steri- high level of national saving while per-
lized, their use to finance expenditure mitting built-in fiscal stabilizers to damp
will be expansionary but the conven- 19Although Morganshows that the domestic bud-
tional measure of the budget deficit get balance determines the direct effect of the gov-
would not predict the expansion. 18 Simi- ernment budget on money creation, strictly speak-
lar unremarked expansions can occur ing, the relevant deficit measure, from the monetary
point of view, is the liquidity budget balance that
share of government requirements that has to be
1 Since there are usually second-order effects of financed by domestic credit. Hence, the liquidity
domestic transactionson the foreign deficit and vice balance differs from the domestic balance because
versa, the measures are approximationsof the con- it excludes domestic nonbankborrowingby govern-
cept. ment (which amounts merely to a rearrangementof
18 Inflationcaused by unsterilized government oil private sector portfoliosand not to money creation),
revenues in the presence of conventionallymeasured while including central bank profits transferredto
budget equilibrium, or even surpluses, has been one government and government interest payments to
channel of transmissionof Dutch disease. domestic banks.
cyclical fluctuations" (Frank de Leeuw impulse have led to several intermediate

and Thomas Holloway 1983, p. 27). 20 estimates of budgetary stance that use
Notwithstanding its virtues, following a potential output as a benchmark for mea-
rule of full-employment budget balance suring revenue or (usually) expenditure
could still imply the expansion of the (Thomas Dernburg 1975, p. 829; Hel-
public debt-since, on average, econo- ler et al. 1986; and Muller and Price
mies operate below full employment, so 1984).
that, on average, expenditure would ex- The cyclically adjusted or trend deficit,
ceed revenue. Therefore, the cyclically in which "neutral"expenditures and rev-
adjusted or trend budget balance was de- enues are not estimated as functions of
veloped to provide a budget balance rule potential output but instead as functions
that would maintain a constant level of of "average output," has been estimated
public liabilities. The methods of calcula- by Muller and Price (for the OECD), de
tion of the two approaches have differed Leeuw and Holloway, and Heller et al.
little: (for the IMF). Trend deficit measures,
however, factor in the effects of transitory
To constructa cyclicallyadjustedbudget, the shocks and hence are subject to the dis-
essential steps are (1)choosinga referencetrend advantage that they may not be equiva-
for GNP free from short-run fluctuations, (2)
determining the responsiveness of each cate- lent to the "underlying" or "permanent"
gory of receipts and expenditures to short-run deficit in the economy. Particularly in
movements in GNP (e.g., cyclical tax elastici- countries undertaking structuralreforms,
ties), (3) applying these responses to gaps be- one-time disturbances could be equiva-
tween trend GNP and actualGNP, and (4) add- lent to several percentage points of GDP.
ing the expenditures and receipts "gross-ups"
from step 3 to the actual budget to obtain a Tanzi (1982) has recognized this problem
cyclically adjusted budget. The first step, se- in his description of a variant of the trend
lecting a GNP reference trend, is the most im- deficit, the core deficit, which removes
portant and controversial. Other things being from the actual deficit not only cyclical
equal, the higher the level of the reference influences but also one-time or transitory
trend, the smaller the cyclically adjusted defi-
cit. (de Leeuw and Holloway 1985, p. 232). shocks ("such as temporary taxes, post-
ponement of inevitable wage increases,
The full employment deficit can then building up of arrears, and so on"; p.
be defined as the cyclically adjusted bal- 6). However, no systematic series of core
ance when the GNP reference trend se- deficit estimates exists.
lected is potential output (Patrice Muller Olivier Blanchard (1990) goes further,
and Robert Price 1984, p. 1). The change making the point that deficit measures
in full employment balance from year to far simpler than trend deficits exist that
year measures the fiscal impulse, i. e., distinguish between induced and discre-
the effect of fiscal policy (as opposed to tionary fiscal policies, and that index sus-
all budget items) in total aggregate tainability. Trend deficits require need-
demand.2' Attempts to measure the fiscal less assumptions about "whether there
are cycles around a stable trend, (. .)
20
Moreover, RobertEisner and Paul Pieper (1988,
whether the economy will return to
p. 33 ff) found that high-employment deficits (ad- lower unemployment and so on" (p. 6).
justed for changes in the real value of net debt) were Instead, "[i]nduced changes in fiscal pol-
appropriateinstruments of Keynesian expansionary icy can be defined as those changes which
policy, in the sense that they "werepositively associ-
ated with subsequent increases in real GNP and re- come from changes in inflation, interest
ductions in unemployment." rates and output growth over the previ-
21 In order'to avoid price level effects, the full-
employment balance is usually calculated as a ratio ous year-or over the previous ten year
to income. average-values. How to choose the
benchmark is still a relevant question, A comparison of the primary and con-

but not one which requires taking a stand ventional deficits in Table 4 illustrates
on where the economy will or should re- the heavy burden of interest payments
turn." Moreover, "[w]hat matters in even in relatively stable economies, such
terms of sustainability is where the coun- as Spain, that have accumulated large
try expects to be over the next three to public debts. Despite positive prim-
ten years, not necessarily some mid-cycle ary balances, conventional deficits re-
point" (p. 7). Blanchard derives alterna- main.
tive easy-to-calculate measures, the sim-
plest of which do not require forecasts. 6. The Operational Deficit: Removing
5. The Primary Deficit: Removing the the Effects of Inflation from Interest
Effects of Previous Deficits on the Payments
Budget
The interest bill is beyond the control
Although the structurally adjusted of current fiscal policy, not only because
deficit is sometimes presented as mea- it represents the cost of previous deficits,
suring the impact of discretionary gov- but also because monetary policy can af-
ernment policy, it includes an important fect interest rates and hence budgetary
nondiscretionary variable, namely, inter- interest payments. In addition, fluctua-
est payments on the stock of public tions in inflation can significantly change
debt-which is usually predetermined the size of government nominal debt ser-
by the size of previous deficits. The pri- vice.
mary deficit (or "noninterest deficit") at- Inflation affects the budget in many
tempts to measure the discretionary bud- ways. Besides its distortionary effects on
getary stance by excluding net interest real revenues (Tanzi 1977),24 and its ef-
payments from the budget (James Barth fects on the real value of government as-
et al. 1989).22 The primary deficit could sets and liabilities (dealt with in Section
also reflect the success of policies in mov- V), inflation, while reducing the real va-
ing the economy towards a sustainable lue of the outstanding stock of unindexed
growth path: public debt, may compensate creditors
The primarydeficit measureshow current for such erosion in their real assets
actionsimproveor worsenthe publicsector's through higher nominal interest rates. In
net indebtedness,andit is importantforevalu- other words, some of the government's
of governmentdeficits.
atingthe sustainability interest payments on its debt are in real-
Althoughfiscaldeficitscanbe runindefinitely, ity part of the amortization of that debt.
the primarybalancemust eventuallybecome
positiveto cover at least partof the interest
If the inflationary component of interest
on currentdebt. If public revenue and the rates is not removed from the interest
economyas a whole growfasterthanthe real bill, the deficit will be overstated by the
interestrate, then even the primarybalance size of the amortization element included
canremainin deficit.However,it is generally
not possiblein the long run to alwaysgrow
fasterthanthe interestrate.(WorldBank1988, meaningfulbalancedbudget rule might require that
P. 56) 23 interest payments, debt, and GNP grow continuously
at similar rates, therefore remainingconstant in re-
lative terms (Eisner and Pieper 1985, and Eisner
1990).
22 24 Different revenue and expenditure components
The primarydeficit has usually been calculated
by subtractingtotal interest payments from govern- can have very different inflation elasticities. This
ment expenditure. However, conceptually, only the raises significantproblems which have hindered the
net interest paid by governmentshould be removed. development of budgets-in-real-terms.A satisfactory
23It should be pointed out, however, that in a method for arrivingat a fully inflation-adjusteddeficit
growing economy, debt generally grows. Thus, a remains to be derived.
TABLE 4
debt outstanding and with its terms and
MEASURES OF TIlE FISCAL BALANCE UNDER ALTERNATIVE
denomination.25 Solely because of the
TREATMENTS OF INTEREST PAYMENTS1 composition of their debt, countries with
(IN PERCENTAGE OF GDP) identical inflation, debt/GDP ratios, and
ratios of tax revenues and noninterest ex-
Conventional Operational Primary penditures to GDP may show very differ-
Argentina
ent conventional fiscal deficits. These
1983 -10.2 -10.2 -4.2 shortcomings of the conventional deficit
1985 -4.1 -4.1 -1.7 under inflation have been analyzed by,
1987 -6.3 -5.6 -1.6 among others, Thanos Catsambas (1988),
Brazil Alex Cukierman and Jorgen Mortensen
1981 -13.0 -6.2 -4.8 (1983), Eisner (1984), Eisner and Pieper
1985 -27.9 -4.3 -0.6 (198.4),Francisco Gil Diaz (1986), Marcus
1988 -45.3 -4.0 1.6 Miller (1982), and Tanzi, Blejer, and Ma-
Chile rio Teijeiro (1988).
1983 -2.8 n.a. 1.0 The most popular alternative sug-
1986 -1.9 -1.2 2.8
1988 3.6 3.8 8.0
gested to alleviate the problem is the
operational deficit, which omits the
Ghana inflation-induced portion of interest
1981 -6.4 5.5 -4.3
1985 -2.7 -0.4 -1.2 payments from the deficit calculation;
1987 -0.3 -0.4 1.2 i.e., it is defined as the primary deficit
Israel
plus the real component of interest pay-
1985 -5.4 -1.6 10.0 ments. In some countries which had high
1988 -4.9 -3.6 4.2 inflation, such as Brazil and Mexico (Ta-
Kenya
ble 4), immense differences arise be-
1982 -6.5 -3.2 -2.9 tween conventional and operational defi-
1986 -5.4 -0.8 -0.5 cits. Moreover, trends in the two
1987 -7.6 -6.3 -2.9 alternative measures can diverge mark-
Mexico edly. In both Brazil and Mexico, the con-
1981 -13.8 -10.8 -9.1 ventional deficit indicates rapidly grow-
1985 -9.5 -1.0 3.3 ing imbalances during the 1980s,
1987 -15.9 2.0 5.0
whereas the operational deficit signals
Spain some improvement in Brazil and a re-
1982 -5.6 . . . -4.6 markable adjustment in Mexico.
1985 -6.7 . . . -3.2
1987 -3.6 . . . 0.1 In order to compare the merits of the
operational deficit with the conventional
Sources: Argentina, Brazil, Chile, and Mexico: Tanzi measure, it is necessary to review its eco-
(1989); Israel: Bank of Israel; Ghana and Kenya: Thanos nomic rationale. The operational deficit
Catsambas and Miria Pigato (1989); Spain: IMF staffesti- excludes inflation-induced interest pay-
mates.
1 Since data are obtained from different sources and
ments on the assumption that they are
country definitions may vary, the magnitudes are not
similar to amortization payments in their
comparable across countries.
25
It is simple to show that, with floating-interest
debt, the deficit/GDP ratio is a positive function of
as interest payments above the line, inflationand of the initial debt/GDP ratio. The oppo-
rather than below. site is true with long-termfixed interest bonds. Tanzi
et al. (1988, Apendix 1), includes a formaldiscussion
The magnitude of the deficit overstate- of the effects of inflationon the conventionaldeficit
ment varies with the size of domestic in the presence of differenttypes of debt instruments.
effects on the economy-namely, that mation to policy makers when the infla-
they do not represent new income to re- tion rate is very high. In principle, it is
cipients, and are willingly reinvested in a lower-bound estimate for the public
government bonds, at existing market sector deficit, relevant when full rollover
conditions, and therefore they do not af- of broadly defined amortization is realis-
fect the level of aggregate demand in real tic.
terms. Real interest payments, on the
other hand, can be consumed without IV. The Compositionof the Public Sector
reducing a bondholder's net wealth, and
The discussion so far has taken as un-
thus have an expansionary impact similar
derstood the identity of government,
to any other type of expenditure. The
which, indeed, is subject to a fairly
relative usefulness of the two deficit mea-
broad, if imprecise, consensus:
sures reduces, thus, to the question of
how inflation-induced interest payments The government of a country consists of the
are spent: are they used to buy new public authorities and their instrumentalities,
established through political processes, exercis-
bonds or to finance consumption? In ing a monopoly of compulsory powers within
other words, does rising inflation erode a territorial area . . . and engaged primarily
the real demand for government bonds, in the provision of public services differing in
or is the sustainability of the public debt character, cost elements, and source of finance
invariant to inflation? from the activities of other sectors. (Interna-
tional Monetary Fund 1986, p. 7).
If inflation were to reduce the real de-
mand for bonds, then, in an economy However, at the operational level, diffi-
with accelerating inflation, inflation-in- culties arise in defining the scope of gov-
duced interest payments would not be ernment for purposes of measuring the
fully refinanceable under existing market fiscal deficit. Increasingly, governments
conditions but would require either perform operations usually associated
higher real interest rates or higher bond with other sectors: there are public en-
liquidity, thus increasing demand pres- terprises, public financial institutions,
sures. The operational deficit measure and public administrative/nonprofit
excluding the inflation component of in- agencies. Conversely, other sectors have
terest payments would then underesti- taken on quasi-governmental functions.26
mate the degree of fiscal imbalance. Moreover, these divergences from tradi-
There are also technical problems in tional roles usually arise from country-
the calculation of the operational deficit. specific circumstances, which render
For instance, the choice of the price in- cross-country comparisons of the govern-
dex is not straightforwardand there are ment deficit painful.
presentational difficulties when interest An associated difficulty arises in defin-
rates are negative in real terms, in which ing and quantifying "transactions,"when
case the conventional deficit measure government has the option not only of
would have to be adjusted downwards purchases and sales and income trans-
by a magnitude greater than actual inter- fers, but also of regulation and price-set-
est payments. Furthermore, the operating, whose financial magnitudes may be
tional deficit has a macroeconomic defi- impossible to measure.
ciency: by correcting the deficit for the This section discusses the fiscal content
impact of inflation on it, the ability to 26
assess the impact of the deficit on infla- For instance, there may be a difference only of
degree between the compulsory pension system of
tion is lost. Despite these difficulties, the a government and a firm's pension scheme which is
operational deficit provides useful infor- mandatory for all employees.
of the components of the broader public emerging policy problems and availabil-
sector, which includes public enter- ity of information. Hence, the fiscal defi-
prises, the central bank, and public finan- cit for short run policy purposes must
cial institutions. often be calculated for a reduced subset
of government levels, or, alternatively,
1. The Traditional Scope of Government
for a reduced array of government activi-
It is tempting to think of traditional ties. Moreover, as discussed below,
government as a pyramid, from.the apex there are many agencies that fit only par-
of the central decision maker(s), through tially into a meaningful definition of gov-
the central administration, down through ernment. In these cases, a correct mea-
the numerous regional, municipal, and sure of the impact of government should
local governments. However, the differ- include only the fiscal activities of such
ent parts of traditional government are agencies; when this is impossible, the in-
distinguished through more dimensions clusion or exclusion of the agency be-
than can be represented in a pyramid. comes a matter of discretion.
Governments, even at the central level, A further aspect is the complicated
include a plethora of public agencies that web of financial interrelationships be-
cannot easily be ranked "above" or "between agencies and levels of govern-
low" one another, such as investment ment. An accurate calculation of the defi-
boards, industrial development authori- cit would net out all intragovernmental
ties, utility regulating bodies, space re- transactions, although the size of the defi-
search laboratories, social security funds, cit will be invariant to such netting out.
etc. Only rarely are their powers neatly However, if intragovernmental flows are
subordinated to an overseeing ministry. (incorrectly) included, the size of govern-
The difficulty of constructing a gener- ment could be grossly overstated. More-
ally applicable organizational structure over, despite the resilience of the deficit
for government is such that it may be measure to the completeness in con-
impossible to derive an exhaustive list solidation, problems arise through the
of entities that should be taken into ac- omission of a flow in one direction
count in arriving at an undisputable fig- but not in the other, affecting the deficit's
ure for the fiscal deficit. Nonetheless, size.
there are some guidelines-complete- b. Recognition of Nonfinancial Gov-
ness of coverage and of consolidation, and ernment Activity. There is another di-
the recognition of nonfinancial govern- mension in the distinction between the
mental activities-that are important for public and the private sector: govern-
determining the scope of government. ment may affect the allocation of re-
a. Completeness of Coverage and the sources by changing the prices facing the
Consolidation. Ideally, the more com- private sector and by regulation of pri-
prehensive the picture of the public sec- vate activity (Boskin, M. Robinson and
tor-not defined by the names of so- Alan Huber 1987, p. 2). An example of
called government institutions, but by regulation is the pollution control devices
the nature of the transactions they carry required on new cars, which raise car
out-the easier the interpretation of fis- prices and are counted as part of the auto-
cal actions, and the more evenly the gov- mobile industry's activity "although they
ernment will be able to spread out the are close substitutes for the government
impact of policy measures it deems nec- levying a tax and paying the automobile
essary. However, there may be a trade- companies to install them" (Boskin, M.
off between prompt fiscal responses to Robinson, and Huber 1987). The military
draft also allows the government to pro- balance.28 First, the enterprises that
vide services at below market rates.27An comprise the public sector must be se-
ideal measure of government impact on lected, and, second, that portion of their
resource use would place monetary val- operations which has a fiscal impact must
ues on all of these nonfinancial actions be identified.
and include them in the calculation of The choice of entities for inclusion in
the deficit. However, although much the public sector depends on the distinc-
work has been done on assessing the eco- tions between government and enter-
nomic impact of regulation, tax expendi- prises and between "public" and "pri-
tures, and market intervention, the vate." In International Monetary Fund
broad discussion of the valuation of these (1986), the criterion used to distinguish
government actions goes beyond the between general government and nonfi-
scope of this survey. nancial public enterprises is not legal or
institutional, but rather the nature of the
2. Public Production and Trade activities they perform. The distinction
comes both from the nature of the goods
A strict definition of government pre- and services they supply and the differing
supposes a restricted array of public sector character of their revenues: taxes are
economic activities, merely the provision compulsory levies while income from
of nonmarket goods and services and the market sales is essentially voluntary. In
redistribution of income. However, the general, when the unregulated market
concepts of public sector and govern- cannot be expected to generate the opti-
ment increasingly diverge the more in- mal provision of the good or service but
volved in production and commerce pub- some price mechanism could still be set
licly owned entities become. While the in motion, public enterprises rather than
activities of public enterprises, market- government may be called upon to exec-
ing boards, and other publicly owned en- ute a desired intervention.
tities that produce or trade are to some The operational distinction between
extent motivated by profit, they have "public" and "private," which deter-
special characteristics, in many cases mines the extent to which transactions
monopolistic, with prices and, some- by entities outside general government
times, quantities being primarily the re- should be incorporated in measures of
sult of government policy. Clearly, the fiscal activity, is more difficult to pin
effects of these activities should be fac- down.29 A common criterion is the sim-
tored into a meaningful measure of the ple ownership principle: any enterprise
public sector balance. However, this is considered "public," if direct and indi-
poses a number of conceptual and metho- rect government participation in its
dological problems including the appro- equity exceeds 50 percent. This legal
priate measurement of the fiscal compo- concept is not really satisfactory because
nent of public enterprises' activities. it does not assess the degree of govern-
There are two aspects specific to the ment's actual control over the enter-
assessment of the fiscal impact of public
28 We do not focus here on the roles, structure,
enterprises that have a bearing on
the proper measurement of budgetary and performanceof public enterprises which have
been the subject of extensive studies (for example,
Robert Floyd et al. 1984).
29 A more common question in the literaturedeals
27 Price controls, quantitative trade restrictions, with the analyticalunderpinningof the existence of
and other forms of direct marketintervention would publicly owned enterprises (for example, William
also fall into this category. Baumol 1984).
prises' decisions, nor does it evaluate the 3). A second approach, perhaps more
weight of public policy objectives in enti- valid, is to consolidate the relevant part
ties' operations. A different approach is of public enterprises' operations with the
taken by Peter Stella (1989) who looks rest of the government budget. Consoli-
at the overall impact of enterprises on dation, however, raises a number of im-
the public finances and on net worth portant methodological measurement is-
transfers. The operations of many enter- sues (Stella 1989). The central question
prises, privately as well as publicly is how to define and measure enterprise
owned, are supported by a variety of revenue and expenditure in a way that
state guarantees, tax benefits, or other is compatible with government's con-
types of financial assistance. If these in- cepts. Clearly, enterprises' gross sales
terplays of government financing and en- revenue is not comparable to tax reve-
terprise operations are such as to raise nue, nor should the purchase of inputs
private sector net worth, these results be added to current budgetary expendi-
are akin to government deficits in their ture. It could be argued, however, that
effect on private perception of wealth and public enterprise prices contain implicit
hence on consumption. In this sense, subsidies and taxes that will be reflected
their operations could therefore be con- in profits and losses and that these profits
sidered part of the public sector. and losses are the financial flows that
A unifying, though not very opera- should be consolidated since they closely
tional, criterion for classification comes correspond to budgetary inflows or
from the "soft budget constraint"concept outlays.3' A problem with this approach
developed by Janos Kornai (1986). It de- arises when profits are not explicitly
fines "public" firms as being immune transferred to the Treasury or they are
from bankruptcy and therefore uncon- lower than potential competitive profits
cerned with covering costs.30 Soft budget owing to hidden subsidies. If the enter-
constraints, with their contingent claim prise is making losses, the subsidy ele-
on budgetary resources, are the proxi- ment may remain obscured through the
mate reason for linking some of the oper- enterprise's ability to borrow from do-
ations of public enterprises with those mestic and foreign sources other than the
of the government for an accurate assess- government.
ment of global fiscal impact. Practically, consolidation is difficult
One approach for analyzing the macro- because of the problem that the structure
economic dimension of public firms is to of government and enterprise budgets
evaluate the budgetary impact of their are very different:
operations-through the flows between The governmentbudgetis usuallysubdivided
public enterprises and the government intoreceipts,expenditure,andborrowing.The
(ArigapudiPremchand 1983) and through budgetsof enterprisesare mostlyorganized,
the effects of public enterprises on the like commercialbudgets,on a dualbasis,viz.,
overall volume of government revenue, revenueandcapital.(Premchand 1983)
expenditure, and public investment In addition, enterprise accounts are al-
(e.g., Venkata Ramanadham 1984, ch. most always on an accrual basis while
cash accounts are the usual budgetary
30
Hard budget constraints are defined not only
by the threat of bankruptcybut also by the possibility 31Indeed, the InternationalMonetaryFund (1986,
of replacing management. In a private market, less p. 102) methodology postulates that "Taxesalso in-
than optimal performancecould lead to a corporate clude the profitstransferredto governmentfrom fis-
takeover or a management change. This insecurity cal monopolies . . . which reflect use of the govern-
of tenure is usually lackingin public firms. ment's taxing power to collect excise-like revenue."
standard.32Stella (1989) claims that this included in a comprehensive measure of

difference cannot be resolved simply by the public sector balance. Particularly
converting enterprise flows into cash ac- important, analytically, is the central
counts because, in assessing the impact bank's implicit levy of taxes, either
of the public sector on the economy, it through the exchange rate system,34 or
is indeed more correct to measure enter- through the imposition of unremuner-
prise activities, like any other business ated reserve requirements.
activities, on an accrual basis since this There are many difficulties in separat-
gives a truer reflection of performance. ing the central bank's monetary from its
When capital expenditure is important, quasi-fiscal activities.35 Moreover, differ-
the divergences between cash and ac- ences in accounting practices (e.g., cash
crual accounting can be significant.33 versus accrual) raise consolidation prob-
In sum, the issue of how to measure lems akin to those of nonfinancial public
the gross flow of government-like activi- enterprises. David Robinson and Stella
ties of public entities remains unre- (1988) start from a benchmark case: they
solved. In the case of a marketing board, claim that central banks that have operat-
for example, one would not want to amal- ing profits and transfer them fully to the
gamate the gross value of purchases with Treasury36do not distort the convention-
treasury outlays, nor would one want to ally measured deficit even if they per-
combine the gross value of sales receipts form quasi-fiscal activities, provided that
with tax revenue. The policy element is these activities only affect the central
only the subsidy or tax implicit, if any, bank's profit-and-loss accounts during
and the quantitative measure of the sub- the budget year in question. Deviations
sidy is the difference between buying and from this benchmark would require an
selling prices as reflected in the operating adjustment.
position of the enterprise. The two most important deviations
arise: (i) from quasi-fiscal activities that
3. The Quasi-fiscal Operations of
change the composition of the central
Central Banks
bank's balance sheet (rather than the
In many countries, the distinction be-
tween the responsibilities of the Treasury
34 Implicit exchange taxes are levied when export-
and the central bank has become blurred, ers must surrenderforeign proceeds at prices lower
with the latter performing "quasi-fiscal" than some importerscan buy it fromthe centralbank.
activities not specifically connected with The opposite is also prevalent: central banks may
monetary policy. These activities are di- subsidize certain sectors by selling foreign exchange
at rates below the rate it pays to exporters.
verse: they include the management of 3 Michiel de Kock (1974) lists "monetary"activi-
explicit subsidies, debt service and trans- ties, which include currency issue, banking regula-
fers, the provision of preferential credit, tion and supervision, the aggregatecontrol of credit,
the clearanceof balancesbetween banks,and custody
the bailout of ailing industries, etc. It of the government'sreserves. However, clear distinc-
has frequently been argued that these tions may be difficult.For example, bond rediscount-
quasi-fiscal operations are similar to ing, generally considered a monetary activity, will
take on a quasi-fiscaldimensionif performedat subsi-
other budgetary activities and should be dized rates.
36 "Full" transfer of profits refers to the surplus
remaining after reasonable reserves provisions. No-
32 For a review of the standardaccountingpractices tice that the implicit taxes mentioned above (such
of public enterprises, see Arthur Gitajn (1984, as the unremuneratedreserve requirements)would
ch. 4). generally be picked up in the central bank's profits
33 On the treatment of depreciation, valuationad- and thus, when transferred,in the consolidated ac-
justments, and the purchase and sales of assets, see counts. However, they would understatethe magni-
Section V. tude of compulsorylevies imposed by the state.
profit-and-loss account); and (ii) when the Central banks' balance sheets can also
central bank makes a loss which is cov- be affected by capital gains and losses
ered by an equivalent reduction in its from valuation changes-for instance,
net worth.37 when the central bank is forced to take
(i) A prominent quasi-fiscal activity over private (or public enterprise) debt
which entails a change in the composition or to rescue troubled financial institu-
of the central bank's balance sheet is its tions. Another common source of valua-
lending to the private sector for public tion changes is the change in the value
policy purposes. An important example of the central bank's net foreign exchange
is preferential sectoral lending, financed holdings, which could arise from external
by high-powered money. Because these parity fluctuations or from a devaluation
loans could be very similar to budgetary that changes the domestic currency
loans, there is an argument for their in- counterpart of net foreign assets, result-
clusion as a deficit-determining item ing in an accounting capital profit or
analogous to government's net lending loss. 39
(Section II, above). However, the gross There is no clear view on how these
incorporation of all central bank lending valuation changes should be treated in
to the private sector into the fiscal deficit relation to the fiscal stance.40 Robinson
would clearly be misleading because and Stella distinguish between unreal-
much of it (for instance, rediscounting, ized and realized gains. They claim that
open-market operations, and steriliza- unrealized gains should be excluded from
tion) is done for pure monetary-and not central bank profits because they attract
fiscal-reasons, and should not increase no new resources-i. e., they are not rev-
the consolidated fiscal deficit. To pre- enue-enhancing-while the expenditure
serve distinctions among types of central "financed"by them is a deficit-determin-
bank lending, the ideal solution would ing item similar to other expenditure fi-
be to transfer quasi-fiscal lending from nanced by central bank credit. Should
the central bank to government's ac- the gains become realized, Robinson and
counts, with a counterbalancing change Stella (1988, p. 27) claim that:
in net credit to government from the cen- compared with the situation that would have
tral bank.38 obtained with no revaluationgain, purchasing
power in the private economy is reduced by
37 Net worth will fall, for instance, when the deficit the amount of the valuationgain, and thus ex-
is "financed"by a reductionin reserves or by printing penditure "financed"by realizedgains is similar
money. There is, however, considerable doubt to expenditure financed from revenue. If the
whether the collection of seigniorageby money cre- centralbank'saccountantstook note of the capi-
ation (and through other sources of "inflationtax") tal gain . . . transfersto the governmentwould
should be considered a quasi-fiscalactivity. These increase, reducing the fiscal deficit.
sources of revenue are, in some cases, the essence
of the existence of the central bank (Roy Meyers
1985) and, in any event, it is difficult to quantify
them in an operationaldefinition of the fiscal deficit. 3 On the issue of gains and losses on foreignassets,
38The full incorporationof central bank lending see Eisner and Pieper (1990).
to the fiscal deficit may be inappropriatefor a reason 40 Robert Mundell (1971, p. 92) discusses the mon-
that also applies to budgetarynet lending. In theory, etary consequences of treating devaluationgains as
the economic cost of preferential lending should be a regular source of revenue. Recently, Germanand
equal to the expected discounted future loss arising Swiss authors discussed the practicalproceduresfor
from the loan, adjusted for risk. Lending should, covering their central bank losses arising from the
therefore, increase the fiscal deficit only by this depreciation of the U.S. dollar (for example, Peter
amount, that is, by the implicit "cost" of lending Goerres 1985). Britishauthorsalso analyzedthe sub-
and not by the full volume of the loan. In any event, ject in connection with the losses of central banks
there should be consistency between budgetaryand which held pounds sterling following devaluationof
central bank lending. the pound (Peter Praet 1982).
TABLE 5
deficit, current losses do not elicit a
CENTRAL BANK DEFICITS
transfer from the government to the cen-
(IN PERCENTAGE OF GDP) tral bank, so the measured deficit does
not rise. To prevent measurement bi-
1984 1986 ases, central bank losses should be in-
cluded in the public sector balance by
Argentina -2.5 -1.6
Costa Rica -4.3 -3.8
recording, for example, a budgetary
Ghana -2.1 -0.6 transfer or a subsidy from the govern-
Kenya -3.8 -5.4 ment, thus properly increasing the re-
Philippines -5.2 -2.8 corded fiscal deficit.
Uruguay -4.2 -4.0 To summarize, ideally, government ac-
counts should incorporate quasi-fiscal
Sources: Argentina, Julio Piekarz (1987); Costa Rica, Ana
Rodriguez Aguilera (1987); Ghana and Kenya, Catsambas
revenues and expenditures, leaving cen-
and Pigato (1989); Philippines, IMF staff estimates; Uru- tral bank accounts covering only mone-
guay, Dionisio Onandi and Luis Viana (1987). tary activities. A second-best solution
1 Since the indicators are taken from different sources, would be, first, that central bank opera-
they are based on various definitions of the concept of tional losses be consolidated into the fis-
central bank losses and thus are not strictly comparable.
cal deficit by the addition of a transfer
from government to the central bank fi-
(ii) The second deviation from the ini- nanced by credit from the central bank.
tial benchmark arises when central banks Second, an estimate of the size of central
make losses. Significant central bank def- bank quasi-fiscal activities falling outside
icits are frequent in developing coun- the profit-and-loss account should be
tries, sometimes exceeding conventional made, and then amalgamated into the
fiscal deficits (Table 5). Reasons for these adjusted fiscal deficit. Such a hybrid defi-
losses vary. Their most common causes cit would mix net worth with cash
are quasi-fiscal, such as the requirement concepts, but would have value as a
on central banks to lend without interest supplementary indicator showing the
or at very low interest rates for policy approximate impact of central bank
purposes. Operational losses also arise quasi-fiscal activities on the overall pub-
from the administration of a multiple ex- lic sector balance.
change rate system (which may include 4. The Budgetary Dimension of the
an implicit subsidy to preferred buyers) Public Financial Sector
and from currency devaluations when the
central bank has net foreign exchange lia- Typically, public financial institutions
bilities vis-a-vis the domestic sector.41 are excluded from the coverage of the
Whether or not central bank losses ar- public sector and are consolidated with
ise from quasi-fiscal activities, there is a the private banking system. However,
case, based on symmetry of treatment, these institutions often engage in a multi-
for their explicit inclusion in the public tude of activities (such as preferential
sector deficit. Although it is common credit allocations, subsidized interest
practice to transfer central bank profits rates, etc.) with a clear fiscal content.
to government, thus reducing the fiscal To the extent that such activities go be-
yond pure liquidity management which
could have been carried out by private
41 For a discussionof sources and treatmentof cen-
financial intermediaries, it is possible
tral bank loans, see MarioTeijeiro (1989). The case that the exclusion of resources provided
of losses connected to foreign exchange liabilities is
analyzed by Neven Mates (1989). by the public financial system from the
measured public sector balance creates institutions clearly operate in the capital
a misleading impression of the fiscal pol- market under special conditions. They
icy stance. were created to provide services that, for
As in the case of nonfinancial enter- whatever reason, other institutions had
prises, in order to differentiate between found not worthwhile or too risky to pro-
public and private financial institutions, vide. Thus, public institutions are likely
it would be appropriate to consider the to be less profitable, and be more ex-
implications of their operations on the posed to risk, than other financial institu-
distribution of income and wealth. Using tions, and at a disadvantage in mobilizing
this approach, pure commercial banks in voluntary resources from the financial
which the government owns a large, or markets. Their survival hence often de-
even a majority stake, should not be con- pends on government guarantees (giving
sidered "public" if their activities have them an edge in the market) or on ex-
nothing to do with public policy and if plicit government subsidies, monopoly
they fully finance their operations at pre- power over market segments, preferen-
vailing market conditions. The relevant tial access to government-mobilized re-
public sector would therefore include sources or other forms of preference or
only those public institutions such as de- protection, including exclusive access to
velopment banks, sectoral credit institu- external loans. This being the case, the
tions, mortgage banks, building and loan operations of these institutions would ex-
associations, finance and investment ert crowding-out pressures on financial
companies, as well as insurance compa- markets similar to those arising from the
nies and pension funds, which mobilize financing of other government activities,
all or part of their resources through the and therefore should not be neglected
receipt of contractual premia but only in- when assessing the overall economic im-
vest in assets frequently selected on pub- pact of the consolidated public sector.42
lic policy considerations.
Why should some or all of the activities
of these institutions be considered quasi- V. The IntertemporalBudget Constraint
fiscal? The answer appears to be related of the Public Sector
to the nature of their operations on both Recent developments in the analysis
sides of the capital market. Public finan- of net public resource use have changed
cial institutions are, in many countries, the way the deficit is viewed, and the
perhaps the most common means of di- uses to which the deficit measure is being
recting credit for policy purposes (World put. This change in perspective has gen-
Bank 1989). Therefore, the same consid- erated awareness of a further set of defi-
erations that apply to direct budgetary ciencies in traditional measures of the
net lending by the government and to deficit, refocused attention toward bal-
quasi-fiscal lending by the central bank ance-sheet-based deficit measures, and
seem to apply here.
There is, however, an important differ- 42 A discussion of the fiscal role and the rationale
ence. Unlike the government and the for the public sector financialinstitutionsis provided
monetary authority, but like typical pri- by Oded Liviatan(1990). He also raises some metho-
dologicalissues regardingconsolidation.Since a large
vate financial institutions, many public part of the financingfor public financialintermediar-
ones act as intermediaries financing at ies is provided by other parts of the public sector,
least part of their long-term financial in order to prevent double counting only the portion
of their lending which is directly financed through
claims by selling long-term financial as- the domestic capital market or from abroad should
sets to the public. Nevertheless, public be taken into account.
opened up a long menu of methodologi- ited by the fall in value of their debt.43
cal issues of government balance sheet Some deficiencies in traditional mea-
measurement. These are the topics of sures of the deficit become particularly
this section. evident when government behavior is re-
cast in an intertemporal rather than an-
1. Intertemporal Shortcomings of the
nual framework-and when attention is
Conventional Deficit
shifted from short-run demand manage-
Developments in private sector con- ment to the sustainability of the deficit.
sumer theory have been paralleled (al- Deficiencies include the omission of val-
beit with a lag) by changes in our under- uation adjustments, the treatment of as-
standing of public sector behavior. It was set sales, and of the financial implications
always clear that the public sector (being of entitlement programs and government
less liquidity-constrained than any pri- guarantees. Specifically, the problems
vate individual) did not finance its expen- are as follows:
diture completely out of current income. a. The conventional deficit includes no
However, several recent world develop- provision for valuation changes in gov-
ments have highlighted the fact that the ernment assets or liabilities, though
government, even if infinitely-lived, is these could conceivably change the sign
constrained-like private consumers- of the budget balance in any fiscal year.
by the size of its permanent income. One facet of this issue has already been
The debt crisis has shown that there discussed: adjustments to the deficit that
are perceived limits on governments' separate amortization from interest pay-
ability to repay borrowing from future ments on public debt in inflationary re-
generations to finance present consump- gimes are a partial recognition of the im-
tion and the U.S. social security debate pact that prices can have on the nominal
has generated awareness of the implica- deficit. However, government's ability to
tions for today of government commit- pay can also be affected, in real terms,
ments to spend or repay tomorrow. The by inflation, devaluation, changes in the
conclusion that governments face an in- terms of trade or in relative prices, and
tertemporal budget constraint not unlike capital gains or losses on the purchasing
that of private agents cannot be avoided. power implicit in government assets and
It has also become clear that govern- liabilities, though none of these effects
ments' consumption paths are deter- is captured by a summary of govern-
mined by wealth as well as by income: ment transactions during a given fiscal
privatization programs that seemed to period.44
improve the financial position of public b. Conventional deficit measures usu-
sectors have shown that governments can ally include receipts from privatization
dissave to finance consumption in any pe-
riod. Finally, it is now recognized that
governments' consumption paths can be 43Comparisons with developments in consumer
theory cannot be taken too far. Few attempts have
importantly affected by price and valua- been made to situate governmentbehaviorin an op-
tion changes. This has been amply illus- timizingframework.Buiter (1983, p. 337, text discus-
trated by the effect on governments' fi- sion, and especially footnote 3), however, presages
such an advance in his illustrationof a case where a
nancial position of swings in the value rule of government consumptionto maintaina con-
of the dollar over the 1980s, the various stant net worth would not be optimal.
44 Since the governmenthas little control over val-
Latin American hyperinflations, and the
uation changes, there are arguments for omitting
development of debt buyback schemes them from deficit measures to be used for policy
through which governments have prof- design.
TABLE 6
public capital is fully expensed in the fis-
ARGENTINA: TIlE SALE OF TIIE TOKYO EMBASSY1
cal year it is purchased.45 This merging
(IN PERCENTAGE OF GDP) of the current and investment accounts,
which makes consistent the inclusion of
1988 1989 (II) 1989 (IV) the full value of an asset sale as a revenue
item, can be justified when looking at
Current revenue 17.6 13.0 18.2
Capital revenue2 0.9 3.8 0.3
the annual financing needs of govern-
ment (Stella 1989, pp. 19-22), but is mis-
Source: Centro de Estudios Macroeconomicos de Argen- leading regarding the sustainability of the
tina, Buenos Aires (unpublished). government's policy stance.
1 GDP ratios for 1988 are quarterly averages for the full The inclusion of revenues from assets
year; 1989 ratios are for the second and fourth quarters. other than investment goods as an "im-
2 Includes proceeds from asset sales.
provement" in government's ability to
pay is incorrect by any private sector ac-
counting practice. When the government
and the sale of other assets as a revenue sells land or mineral rights, for example,
item. Structural programs or pressures it has merely changed the composition
to cut the flow deficit have resulted in of its portfolio: it has the cash but it no
the conversion into liquid assets of nonfi- longer has the asset. If it earned the mar-
nancial tangible and even intangible as- ket value of the asset, then it is no better
sets that were not previously considered. or worse off than prior to the sale.46
When assets such as land, embassies, or c.. The conventional deficit can be se-
aircraftare sold, they provide immediate verely affected by "revenues" which cre-
cash to alleviate the current year's financ- ate liabilities for the future or "expendi-
ing burden. The amounts can be impor- tures" which represent the liquidation of
tant-and help to overcome drastic tem- past liabilities. On the revenue side, the
porary downturns in tax revenue (as in traditional deficit often includes changes
the case of Argentina during its recent in the net position of social insurance
hyperinflation; Table 6). However, the programs. However, social insurance
government is worse off by the replace- contributions supposedly confer entitle-
ment cost of the assets (arguably their ments on contributors and as such com-
realized market sale value; Raymond mit the government to higher future
Goldsmith 1985, p. 92). spending. Thus, social security contribu-
The nature of the problem asset sales tions do not represent free-and-clear rev-
pose for the deficit differs depending on enues, and their inclusion in the deficit
whether the assets disposed of have pre-
viously been purchased by government 45"Onboth a gross and a net basis the NIPA [Na-
tional Income and ProductAccountsmeasurefor the
through the budget or whether they have USA] measure was shown to understate the size of
"always"formed part of the public patri- governmentsaving mainlybecause NIPA treats capi-
mony (for instance, in the case of mineral tal outlays as a current rather than a capital account
item" (AttiatOtt and Jang Yoo 1980, p. 195).
rights). Treating as revenue the sales of 46 This is strictly true only when the value of the
previously purchased investment goods asset to the private sector is the same as to the gov-
in computing the measured deficit is just- ernment (Ali Mansoor 1988). If efficiency is higher
in the private sector, the gain from the sale of the
ified by the unorthodox treatment of cap- asset will be greater than or equal to the loss of its
ital expenditure in government accounts. income stream (depending on whether the govern-
Unlike private sector capital (and the ment or the private sector captures the capitalized
value of the efficiencyimprovement).In cases where
treatment of public capital in the SNA) the gain is nonzero, the inclusion of a revenue item
which is depreciated over its lifetime, (positive or negative) would be appropriate.
overstates government's ability to pay. government may change private sector

On the other hand, because they are con- behavior. Eisner (1990, p. 15) clearly re-
tingent claims (contingent not only on phrases the problem:
contributors' attaining old age, or ill It may be pointed out that loan guaranteesor
health, but also on changes in govern- deposit insuranceindirectlyfinancereal spend-
ment legislation), the magnitude of out- ing just as they might if treasuryexpenditures
lays they will eventually require is diffi- were made up front. In a sense, the explicit
cult to determine.47 and implicit deposit insurance or guarantees
raised the budget deficit at the time the S&Ls
Analogously, the conventional deficit made the loans that ultimatelyturned bad .
can be dramatically inflated in any year the expenditures were made then. They then
by government's payment of previously financed the now half-empty office buildings
guaranteed debt, or insurance contracts, or homes worthonly a fractionof their construc-
such as exchange guarantees or bail-outs tion costs. Current government borrowing to
financethe purchasesof S&L assets only makes
of underwritten entities (like insolvent explicit an element of deficit or debt that was
public enterprises, or the U.S. savings implicit earlier in the commitment of backing
and loan industry). In reality, such pay- to S&L liabilities.
ments are stock adjustments-the sum
Christopher Towe (1989, p. 2) takes
of the accumulated risk costs borne by
these problems one step further, recast-
government over the life of the guaran-
ing them in terms of their implications
tee. Unlike the private sector, which mi-
for budgetary control:
tigates the impact of bad debts by accu-
mulating loan loss reserves as offsetting since the issuance of such contingencies may
stocks, the government usually fails to not impact the current budget, while having
severe cash-flow implications for the future,
make provision for expected defaults. there may not exist sufficient controls, under
Hence, the costs of risk bearing are not conventional accounting constraints, to main-
spread out over the life of the risk, but tain the level of such contingent liabilities at a
are charged only upon realization of the prudent level.
risk's downside. Clearly, appropriate accounting for
The measurement problem in the con- contingent claims requires an intertem-
ventional deficit is not just that meeting poral framework.
current entitlements or paying up for
past guarantees boosts the deficit, but 2. The Deficit and Government
also that, at any time, the conventional Solvency: Changes in Public Sector
deficit provides an over-optimistic indi- Net Worth
cator of government's long-run ability to
pay, because it does not factor in the ex- The so-called deficiencies described
pected future cost of entitlements and above have one thing in common: unless
contingent liabilities assumed by govern- the valuation changes are realized or the
ment. Moreover, the calculation of the risks eventuate, they do not affect the
expected cost of contingent claims is current year's borrowing requirement.48
complicated by the possibility of moral Moreover, while the consequences of
hazard: even if the entitlements and these issues generate ample debate, their
guarantees are not funded or provisioned combined effect on aggregate demand in
against, the assumption of liability by any single year would be well-nigh im-
possible to measure. Hence, it should
4 The discussionhere does not depend on whether
programsare funded or unfunded;however, the size
of net future governmentexpenditureswill obviously 48 Although they may well have an impact on the
depend on future social security revenues. government debt.
be stressed that the main reason for tack- can be extrapolated from studies which
ling these difficulties is in order to refocus reconcile annual flow deficits with
the deficit as a measure of the long-run changes in outstanding public debt. (For
sustainability of government policy-put instance, Eisner 1986, p. 16.) The most
dramatically: of the solvency of govern- important methodological issue for this
ment. type of balance sheet is the treatment
According to Bean and Buiter (1987, of valuation changes in government as-
p. 27): sets and liabilities (Subsection b.(1), be-
low).
A government is solvent if its spending pro- Alternatively, government balance
gramme, its tax-transfer programme and its sheets on an SNA basis attempt to put
planned future use of seigniorage are consistent
with its outstanding, initial financial and real
the government on a par with the other
assets and liabilities (in the sense that the pres- sectors of the economy in the income and
ent value of its spending programme is equal wealth accounts of the nation, with the
to its comprehensive net worth). purpose of determining the sectoral ,dis-
tribution of the components of wealth.
In other words, while a government Goldsmith (1985) presents the most com-
can shift consumption between periods prehensive international collection of
by saving and borrowing, it will be un- SNA-based government balance sheets.
able to consume more, over its lifetime, Here, measurement problems are more
than its total income plus its initial extensive, encompassing as well the valu-
endowment.49 Under this definition, the ation of government real and intangible
"fiscaldeficit" would be equivalent to the assets (Subsection b.(2), below). Some of
dissaving of government (reduction in its the difficulties are not conceptually dif-
net worth) in any year. ferent from measurement problems in
Like the net worth of a firm, the net other SNA sectors-for instance, the
worth of government is specified in its choice of deflators and price indices, the
balance sheet, and the overall fiscal defi- derivation of stocks from flows,50and the
cit in any period is equal to the difference treatment of inventories. Only measure-
in balance sheets at the beginning and ment issues of relevance or sizeable im-
end of the period. The methodological portance to the public sector are covered
and measurement difficulties which be- here. For a broader discussion see Gold-
devil the specification of the government smith (1985).
balance sheet-far more than the Continual time series of SNA-based
firm's-are discussed below. balance sheets almost never exist, and
a. Existing Government Balance so (with the exception of the change in
Sheets. Government balance sheets net worth series presented by Ott and
have two bases, one with its roots in gov- Yoo 1980, pp. 190-91) there appear to
ernment financial statistics and the other have been no studies that compare the
inspired by national income accounting. change in balance sheets from one year
Financial balance sheets based on the to the next with flow-based deficits.
government's net financial asset position Moreover, while SNA-based balance
sheets provide valuable first approxima-
4 While governments are normallyconsidered in-
tions of governments' permanent in-
finitely lived, the issue of solvency seems to imply
a terminal point. Practically, however, the issue is
irrelevant, in the sense that present value calcula- 50 For a brief comment on the perpetualinventory
tions at a positive discount rate assign a weight ap- method and its shortcomings,see Goldsmith(1985,
proaching zero to transactions in the distant future. p. 333).
come, they include only a subset of assets (not augmented by government pur-
and liabilities and thus may not be a good chases and sales).51
indicator of the sustainability of fiscal pol- Despite these problems, valuable work
icy. has been done on many items in the com-
b. An Ideal Government Balance prehensive balance sheet. In particular,
Sheet. Buiter (1983, especially p. 310); Eisner and Pieper (1984), Eisner (1986),
also Bean and Buiter (1987, p. 28ff); de- and Boskin, M. Robinson, and Huber
scribes the ideal "comprehensive consoli- (1987), present improved balance sheets
dated public sector balance sheet at cur- containing many innovations which ad-
rent market or implicit prices." To dress the deficiencies in deficit measure-
capture the complete array of ways in ment detailed above.52 Specifically, as
which government can increase or run discussed below, efforts have been made:
down its net worth in a global balance (1) to assess the magnitude of valuation
sheet, government assets should include: changes in financial net assets, for a more
financial assets; real capital-including accurate picture of government liquidity;
nonmarketable social overhead capital, (2a) to provide a more economically cor-
equity (mainly in public enterprises- rect estimate of capital formation and the
partly marketable); land and mineral as- capital stock, by applying a more realistic
sets (discovered and undiscovered- depreciation scheme than the current
partly marketable); the present value of system of annual expensing; (2b and 2c)
the future tax program (including social to provide a more comprehensive picture
security contributions); and the imputed of government's ability to pay by includ-
present value of seigniorage. Liabilities ing in the balance sheet public land and
would include government debt (domes- mineral rights; and (3) to create a frame-
tic and foreign, indexed or not); the stock work for assessing the eventual impact
of high-powered money; and the present of contingent claims on the budget. How-
value of social insurance and other enti- ever, the remaining element of the com-
tlement programs (including guarantees). prehensive balance sheet, the present
Government net worth is then the bal- value of the tax program (4), presents
ancing item. conceptual difficulties large enough to
While Buiter's construct provides a cast doubt on the interpretation of any
clear conceptual frameworkdefining gov- measure of government net worth.
ernment net worth, it is far from opera- (1) The Valuation of Financial As-
tional. Even at the conceptual level, the sets. Budget deficits have been consid-
definitions of capitalized values of tax and ered damaging, in an intertemporal
spending programs are subject to enor- sense, because they add to the public
mous controversy. And the valuation of debt and thereby erode the sustainability
tangible assets presents special difficul- of the government's expenditure path at
ties when it must be undertaken on the current levels of tax revenue. However,
massive scale necessary to encompass as Eisner (1984, p. 140) points out:
complete public sector holdings. More- The "underlyingreality ... that every dollar
over, since public assets are less fre- of deficit. . . addsa dollarto debt"is simply
quently traded than private assets, their
prices may be difficult to identify. In- 51 See Eisner (1976) on establishing the prices of
deed, were public assets, traded, their capitalassets.
prices and those of their currently traded Boskin'sworkformspartofa largeon-goingproj-
ect to refinegovernmentaccounts;Eisner(1988)has
substitutes might be very different from incorporatedhis workin a proposalfor improved
private sector prices in a thinner market globalnationalincomeaccounts.
not true in a real sense if prices are not constant. is always amortized at its face value; nei-
And if interest rates fluctuate, the statement ther gains nor losses from shifts in market
is not true even with reference to the market
value of nominal debt.
valuation over the life of the loans are
ever realized.53 Hence, he claims, such
In particular, positive inflation rates shifts, however large their effect may be
erode the real value of public debt, so that in any year, are irrelevant to the con-
governments that are net debtors can sideration of the sustainability of the de-
have rising net worth while continuing ficit.
to run deficits. Moreover, increasing in- (2) The Valuation of Real Assets.
terest rates erode the market value of While some valuation problems are com-
previously issued fixed-interest debt; mon to all assets, specific issues arise in
and, if debt is callable, the government the valuation of depreciable assets, land,
can profit by any movement in the inter- and mineral rights.
est rate. (a) Real Capital and Depreciation.
Thus, to arrive at the change in net Because the capital stock is estimated by
worth attributable to changes in the val- accumulating annual government capital
ues of (net) financial assets, the change formation,54 it is sensitive to the form
in their nominal par value from one bal- of depreciation assumed across vintages
ance sheet to the next should be aug- of capital, i.e., to the assumption of the
mented by two adjustments-the differ- rate of net investment by government.
ence between the real and nominal The impact of different depreciation
values of net financial holdings, and the schemes on estimates of the capital stock
difference between their face value and is discussed in Boskin, M. Robinson, and
their market value at the time the net Roberts (1985). Of course, the validity
worth calculation is being made. of any depreciation scheme depends on
These adjustments have been more how closely it approximates economic de-
widely applied than any other balance preciation. Boskin et al. apply a geomet-
sheet reconciliation item, because, even ric depreciation scheme with rates in-
when economists were not concerned di- ferred where possible from the ratio of
rectly with net worth measures, they new to used asset prices, on the argument
were troubled by the discrepancy that "Equipment depreciates faster than
between measures of net government straightline in the early years, and struc-
spending and measures of changes in net tures depreciate more slowly" (p. 16).55
government liabilities (Muller and Price Goldsmith, Ott and Austin, Eisner, and
1984, p. 8; Eisner and Pieper 1984, the Bureau of Economic Analysis (United
p. 12). Adjusted series for public debt ap- States 1982) use straightline depreciation
pear in Marcus Miller (1982); Eisner and in their calculations, while John Ken-
Pieper (1984; recalculated in Boskin, M.
Robinson, and Huber 1987); de Leeuw 53 Prepaymentof debt may not be unusual. It oc-
and Holloway (1985); and Eisner (1986). curs, for instance, in secondaryforeign debt markets
or when consols have been retired.
Eisner (1976) presents revaluation esti- 54 "The two main ingredients [in the perpetual in-
mates for a range of government assets ventory method of estimating the capital stock in
and liabilities. the government sector] are a retirement pattern to
yield gross stock and a depreciation method which
Benjamin Russo (1987, p. 12), how- will reasonablyestimate net stocks"(Ott and Thomas
ever, has objected to the par-to-market Austin 1980, p. 266).
adjustment, on the grounds that (save if 55The SNA recommends excluding military asset
expenditure from capitalformation.However, Gold-
the government were to raise taxes in smith (1985, p. 67) notes that statistics usually do
order to prepay its debt) the public debt not permit the exclusion.
drick (1976) uses double-declining depre- sheet is arguably even more important
ciation. than the inclusion of government land,
(b) Land. Methods of land valuation because changes in the pace of their di-
have been of concern to policy makers rect exploitation, sale, or lease are seen
since governments started to collect by governments as an important way of
taxes, and a wide literature exists at the improving their short-term financial posi-
microeconomic level. The problem for tion, and are therefore a prime generator
the government balance sheet is one of of the problem mentioned earlier,
aggregation: the information required for whereby the sale of an asset/exhaustible
the micro-oriented techniques is too de- resource gives a misleadingly optimistic
tailed to be applied to all public sector picture of government wealth accumula-
holdings. There are also pitfalls in making tion, by not offsetting the revenue by
global inferences from partial data: for the cost of the depletion of the asset.56
many reasons, public sector land (such It is also true, however, that the large
as military land) may not be a close sub- fluctuations in oil prices observed over
stitute for private land; and, as men- the last two decades could create much
tioned above, were all public land mar- volatility in government net worth from
ketable, land prices might be very year to year, if applied directly to valuing
different from what they are at present. the stock of mineral rights-unhelpful
In fact, as Boskin et al. (1985, pp. 931- volatility since only a small portion of
32) point out, global estimates of the stocks would be sold.
value of U. S. federal government land (in One way or other, as Boskin et al.
Goldsmith 1985, Grace Milgram 1973, (1985, p. 924) point out, no work was
Ott and Yoo 1980, Eisner and Pieper done prior to their pioneering study on
1984, and Boskin et al. 1985) are each the valuation of federal mineral rights;
simply extrapolations (using different and we have seen no applicable study
combinations of price indices, and adjust- in other countries. Boskin et al. (1985)
ments for changes in total acreage and estimate expected unproven as well as
in land composition) of a 1946 estimate proven gas and oil reserves-in the spirit
made by J. E. Reeve (quoted in Boskin of Buiter's forward-looking comprehen-
et al. 1985). "These studies [. . .] dem- sive public sector balance sheet.57 The
onstrate how successive refinements of inclusion of undiscovered reserves is im-
basic data often hang by a very slender portant for the correct interpretation of
thread." (p. 931) "Anew benchmark esti- government revenues, because the lease
mate for the value of federal land in a of mineral rights typically begins with the
particular year is especially important" sale of exploration rights to unproven
(p. 935).
As to the valuation of government land "6"Nationalbalancesheets for about a dozen coun-
in other countries, Goldsmith (1985, tries . . . are nearly worthless unless they include
p. 119) cites difficultiesin valuing nonagri- the value of subsoil assets, particularlyoil and gas"
(Goldsmith 1985, p. 69).
cultural land, which is often consolidated 7 The paper containsa valuableexpositionof mea-
with the value of the buildings erected surement techniques (comparingthe present value
on it (so that a proportional valuation fac- method, the land price method, and the net price
method of determining a base year value to anchor
tor must be assumed), and in assessing the perpetual inventory calculation). Capital gains
the share of forest on so-called agricul- (an important issue in the case of exhaustible re-
tural land. sources) are included via the assumptionthat prices
grow with the interest rate. Estimates of federal min-
(c) Mineral Rights. The inclusion of eral rights are extended to state and local levels in
mineral rights in the government balance Boskin, M. Robinson, and Huber (1987).
fields. The government earns revenue TABLE 7

(bonuses) by exploiting firms' expecta- UNITED STATES: INFLUENCES ON FEDERAL NET WORThI
tions about reserves, even if the fields (IN BILLIONS OF CURRENT U.S. DOLLARS)
prove to be dry; and, as before, the reve-
nues are not free and clear but come from 1979 1980
the government's having ceded an (ex-
1. NIPA balancel -16.1 -61.3
pected) asset. 2. Change in value of
Two measurement complications make Federal land + 17.2 +36.9
accounting for exhaustible resources 3. Change in value of oil
more difficult than accounting for the and gas rights +93.8 +208.8
government's capital stock. First, stocks 4. Augmented balance
(lines 1 + 2 + 3)2 +94.9 +184.4
of undiscovered reserves must be recal-
culated each time discoveries are made Sources: Line 1: United States (1989a, Table B-79); Lines
and the relationship between proven and 2 and 3: Boskin et al. (1985b).
unproven reserves may not be linear. 1 Federal Government receipts less expenditures on a
Second, the inclusion of an estimate for National Income and Product Accounts basis.
2 Line 4 is illustrative only; it has not been checked for
mineral rights with estimates of the value
inconsistencies in definition.
of land is problematic, because it is not
clear to what extent the value of land
already internalizes the value of the min- The accumulated benefit cost approach
erals underneath.58 Ignoring these com- to valuing the net impact of an entitle-
plications, Boskin's work (Table 7) gives ment/insurance program is used in the
an idea of the implications of changes in private sector, where the expected liabil-
the value of real assets for the fiscal ity of the program is defined only with
deficit. 59 respect to current participants, and ac-
(3) The Valuation of Entitlements, cording to current rules (see also Boskin
Contingent Claims, and Guarantees. et al. 1987, p. 44). This approach would
Particularly in the United States, the narrowly restrict the consideration of
proper treatment of social security obli- contingencies (and therefore of govern-
gations in the fiscal accounts has gener- ment solvency) to the question of
ated much discussion (for instance, Da- whether present participants will con-
vid Rosenbaum 1990). Towe (1989, tinue to pay their expected subscriptions/
p. 10ff) describes the main options, from premia and become eligible (forexample,
the most restrictive method (the accumu- by living long enough) to collect their
lated benefit cost approach) to that most expected benefits.
comparable to net worth (the actuarial The somewhat less restrictive actuarial
balance). While these accounting treat- fairness approach to valuation defines the
ments have been developed mainly for deficit or surplus in a contingency pro-
social security programs, their applica- gram as the difference between the (ag-
tion can be considered for much broader gregated) expected present value of the
ranges of entitlement schemes and insur- payouts to each of a program's partici-
ance programs. pants over the program's duration and
the expected net present value of their
58 These complicationsare exacerbatedin the case payments, thus allowing consideration of
of reproduciblenaturalresources such as forests and expected changes in policy and participa-
fisheries (Goldsmith 1985, p. 68). tion. "Fairness" requires that over the
59 If net worth series are calculated over a longer
period, it would be more appropriateto adjustTable lifetime of each participant, the program
7 for general inflation. must be in balance.
Actuarial balance requires that ex- that "In the case of an insurance pro-
pected (present value) payments to all gram, . . . where the risks of default
present and future participants be equiv- across borrowers are highly correlated
alent to total expected contributions (ad- and very rare, a model based on histori-
justed for operating expenses and any rel- cal experience can be misleading" (p.
evant endowment or reserve). If the 32).
former exceeds the latter, the program The approaches described measure
has a negative net worth. Boskin et al. only the first-order present value of the
(1987) present estimates of the U.S. so- contingency program. Thus, according to
cial security balance based on this crite- these criteria, all programs in which
rion calculated over 75 years. However, guarantees are issued without charge (of-
they use these estimates to illustrate the ten the case with exchange guarantees
extreme sensitivity of such present value (Robinson and Stella 1988, p. 29) are
calculations to assumptions about contin- deemed to be in deficit-though the gov-
gencies: "[M]oving all of the economic ernment would not have issued them
and demographic projections from inter- without the expectation of some social
mediate to either optimistic or pessimis- benefit (such as risk-spreading). The
tic [assumptions] results in a change value of the social benefit might conceiv-
which is larger than the privately held ably be estimated-in some cases, by
national debt" (p. 45). comparing costs in a market without the
The calculation of program deficits un- guarantees (Wattleworth 1988, p. 58),
der any of the above criteria also requires and imputed to the government ac-
an estimate of probabilities. Degrees of counts, but it will usually be impossible
certainty in payments can vary widely to assess the impact of the social benefit
between programs, and have been used on other elements of the government bal-
as classification criteria-distinguishing ance sheet.6'
between, for instance, pension schemes, A final point made by Towe concerns
where expected outcomes are smooth the treatment of reserves sometimes set
and predictable once the demographics up to finance contingency programs.
have been identified, and deposit insur- While these reserves would seem to rep-
ance to financial institutions, where the resent an offset to any calculation of a
risks are highly correlated, leading with deficit in the program, they will do so
a small probability to extremely high pay- only when not held in the form of other
outs (Boskin et al. 1987, especially p. 15). government liabilities.
Moreover, risks may be even higher than (4) The Valuation of the Present
guarantees or premia paid would sug- Value of the Tax Program. Eisner (1984,
gest, if political or other pressures force pp. 139-40) takes the view that changes
government to treat noninsured agents in the value of contingent claims are
on a par with insured agents during a likely to be met by changes in taxes (or
systemic crisis.60 Boskin et al. derive other redistributory legislation), and
backward-looking estimates of probabili-
ties for defaults on loans from the Small 61The difficultyin capturingthe second-orderef-
Business Administration, but caution fects of government policy on government'sbalance
sheet is, of course, generalizableto any revenue or
expenditure programwhose impact is diffuse. This
60 Robinson and Stella (1988, p. 29) cite the case issue could become particularlyrelevantin budgeting
of debt rescheduling,where the public sector is often for pollution control and environmental manage-
forced to assume the external transferportion of pri- ment, which might have important effects-though
vate sector debt even when the debt has not been unpredictableand far in the future-on government
guaranteedby government. real assets.
hence, that the inclusion of such claims omy-in other words, on private agents'
in the deficit could give a misleading view of their net worth.64
measure of the fiscal stance, out of line Kotlikoff (1989, p. 2) recognizes this
with the private sector's perception of broadest of interrelationships in his pro-
its claims on government. But if Ricar- posal to substitute a "Fiscal Balance
dian equivalence is broadly defined, this Rule" for present indicators of budget
view could be generalized to all potential sustainability:
reductions in government net worth, and [The Fiscal Balance Rule] says take in net
the present value of the tax program sim- present value from each new young generation
ply replaces net worth as the balancing an amount equal to the flow of government con-
item in the comprehensive balance sumption less interest on the difference be-
sheet. tween (a) the value of the economy's capital
stock and (b) the present value difference be-
Even if Ricardian equivalence does not tween the future consumption and labor earn-
hold, the government's power to control ings of existing older generations.... [O]ne
its long-run net worth through altering can use existing data to check whether it is be-
tax and expenditure legislation62 suggests ing obeyed and, therefore, whether future gen-
that, even if government has a negative erations are likely to be treated better or worse
than current generations.
net worth given today's policy package,
it is not insolvent in the private sector In other words, if the present labor
sense, but merely must adjust the tax force pays for government consumption
program by the amount of its "permanent by taxes augmented by its interest earn-
deficit"63 in order to return to sustainabil- ings on the capital stock net of that part
ity. The indeterminacy of the net worth which finances dissaving by the old, gov-
measure inherent in the flexibility of the ernment policy will not run down the
government's power to tax is the main economy's capital stock and future gener-
philosophical problem with balance sheet ations will be as wealthy as past genera-
or net worth concepts of the deficit. tions. Under this criterion, the fiscal defi-
Given this indeterminacy, it is not clear cit would be defined as government
that net worth measures can be con- consumption in excess of taxes plus inter-
strained to be any less arbitrary than are est.
flow measures. c. Shortcomings of Net Worth Con-
In the limit, thus, government's concepts of the Deficit: A Tentative Conclu-
trol over resources encompasses all of sion. The jury is still out on the superior-
private sector income and wealth as well. ity of net worth calculations of the deficit
Obviously, the sustainability of govern- compared with traditionalflow measures.
ment policy would then depend on its On the one hand, it is clear that they
impact on the total wealth of the econ- correct for several blatant errors in treat-
ment in currently accepted economic in-
62 One good exampleis the largedropin U. S. social dicators. On the other hand, they fall be-
securityobligationsfollowinglegislationin 1982 (Eis- tween two stools. As discussed above,
ner 1986, p. 37).
63 The permanentdeficit (definedby Bean and Bui-
they are not broad enough to take into
ter 1987, p. 31) is the real perpetuity equivalent of
the differencebetween the present value of real gov- 64Moses Abramovitz(in private correspondence)
ernment spending plans and of net worth. "Although puts the point succinctly: "The government's "total
ex ante permanent deficits will not actuallymaterial- income" is not an exogenous datum. It is a function
ize, let alone be permanent, they represent the per- of economic growth, which itself is influenced by
manent adjustment that must be made, relative to government budget policy both on the expenditure
the ex ante inconsistent plans, to the flows of spend- and revenue sides . . .and by politics. How large
ing, tax receipts, or seigniorage revenue in order to a portion of future income will politics permit the
achieve solvency." government to obtain-and from whom?"
account the indeterminacy created by getary operations (such as regulation and

the government's power to change the implicit guarantees) should be accounted
present value of tax and entitlement pro- for, and the temporal dimension of gov-
grams. However, they are very broad ernment operations. These measurement
measures. All of the authors surveyed issues have generated the large body of
have stressed the huge movements in net methodological literature that has been
worth that can be occasioned by valuation the subject of this survey.
changes in assets such as land that the Although the survey is to some extent
government has no immediate intention taxonomic, several central messages
of liquidating. Hence, net worth mea- emerge. These bear on the implications
sures could be dangerous if used for near- of deficit measurement for policy, for
term fiscal policy.65 Even in the long run, cross-country comparison and time series
as Stella (1989, p. 21) points out: analysis, and on the futility of a search
[A]nimportant,thoughseeminglyignored, for "one" deficit measure.
point is that the appropriateness of using the In the first place, it is evident that the
netpresentvalueapproach dependson thegov- measurement of the deficit is not a minor
ernmentultimatelyrealizingthe capitalgains. issue but one that has significant policy
Whilethis mightbe reasonable forfinancialas- implications. Indeed, depending on how
sets, it is certainlynot the case for all realas-
sets. . . . A key factorupholdingthe validity it is measured, and over what period of
of accrualaccounting is the expectation thatthe time, the government deficit can signal
incomewill eventuallybe realized.In cases different stances and therefore call for
where the incomewill never be realized,ac- different fiscal policies. Similarly, the
crualaccountingis notjustified. definition of the public sector and the
type of operations included have impor-
VI. Final Remarks tant consequences for the design, imple-
The fiscal balance has a central role mentation, and monitoring of a macro-
in macroeconomic analysis, and countless economic package.
econometric studies have been con- Second, cross-country comparisons
structed around data on fiscal deficits. may be extremely deceptive if they do
Yet, a seemingly straightforward concept not adjust for country-specific economic
such as "the overall government deficit" characteristics and accounting conven-
hides a minefield of ambiguities, ques- tions. Moreoever, even the analyses of
tions of usage, and conflicting definitional time trends in a given country may re-
issues. Ideally, these should be resolved quire the constant upgrading of concepts
before conclusions from budgetary statis- in response to changing economic condi-
tics are drawn. Problems include the actions.
counting and classification procedures for Third, the sole reliance on pure flow
government operations, the feedback be- concepts of fiscal accounting can be mis-
tween the budget and macroeconomic leading and inadequate for fiscal analysis.
developments, the coverage of "govern- Rather, the literature suggests that the
ment, the manner in which nonbud- standard flow measures should be sup-
65
plemented, and in some circumstances
Net worth concepts of the deficit may not be a replaced, by stock-change concepts such
good measure of private agents' perception of the
impact of government on their net worth, since valua- as changes in government financial and
tion changes in government's real assets are included real assets, actual and contingent liabili-
in government net worth measures, while the private ties, and global measures of net worth.
sector (perhaps because of a different time horizon)
may not consider these changes as a factor affecting It should be stressed, however, that
it. many of these stock-based measures are
no less arbitrary,and probably more diffi- BOSKIN, MICHAEL J. "Federal Government Deficits:
cult to quantify, than the flow concepts Some Myths and Realities," Amer. Econ. Rev.,
May 1982, 72(2), pp. 296-303.
they are attempting to replace. More- . "Conceptsand Measuresof Federal Deficits
over, conventional flow measures are not and Debt and Their Impacton EconomicActivity,"
to be discarded since they have a specific in The economics of public debt. Eds.: KENNETH
J. ARROWAND MICHAEL J. BOSKIN. NY:St. Martin's
use in gauging the short-term financial Press, 1988, pp. 77-112.
impact of government imbalances. But BOSKIN, MICHAEL J.; ROBINSON, MARC S. AND Hu-
in order to generate longer-run measures BER, ALAN M. "Government Saving, Capital
Formationand Wealth in the United States, 1947-
of true fiscal impact it is necessary to con- 1985." NBER Working Paper No. 2352. Cam-
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BOSKIN, MICHAEL J.; ROBINSON, MARC S. AND ROB-
the nation. ERTS, JOHN M. "New Estimatesof Federal Govern-
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American Economic Association

The Measurement of Fiscal Deficits: Analytical and Methodological Issues

The Measurement of Fiscal Deficits:

is to be considered balanced. Most coun- 1. The Line

sector liquidity management. Unlike li- "lending" is composed of direct capital

(IN BILLIONS OF BOLIVARES) (IN PERCENT OF GDP)

1985 1986 1981 1982

Balance excl. net lending 32 4 Deficit incl. grants -12 -7

cyclical fluctuations" (Frank de Leeuw impulse have led to several intermediate

benchmark is still a relevant question, A comparison of the primary and con-

standard.32Stella (1989) claims that this included in a comprehensive measure of

overstates government's ability to pay. government may change private sector

fields. The government earns revenue TABLE 7

account the indeterminacy created by getary operations (such as regulation and

DIAMOND, JACK AND SCHILLER, CHRISTIAN. "Govern- ernmentfinancestatistics. Washington,DC: Inter-

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