Download Section 16. General Management of Fiscal Risks

Fiscal Risk managment in
Latvia
NILS SAKSS
DIREKTOR OF FISCAL POLICY DEPARTMENT
MINISTRY OF FINANCE OF LATVIA
Latvia’s perception of fiscal risk
Fiscal risk is defined as the possibility of short- to medium-term deviations in
fiscal variables compared with what was anticipated in the government
budget or other fiscal forecasts (IMF, 2008)
Fiscal risks are classified as:
general economic risks, (e.g., lower economic growth than predicated
resulting in loss of government revenues);
or specific risks (e.g., potential cost of natural disasters).
Fiscal risks from contingent and other opaque liabilities (e.g., government
guarantees) can cause serious fiscal instability if left unchecked. But under
conventional cashbasis government budgeting and accounting, the
treatment of contingent liabilities is often inadequate and their fiscal
consequences frequently overlooked in the standard fiscal analysis
Taxonomy
Hana Brixi and Allen Schick, Government at Risk: Contingent Liabilities and Fiscal Risks, 2002.
Narrow (operational)
definition
Section 16. General Management of Fiscal Risks
(1) The Cabinet shall ensure the general management of fiscal risks. The objective of
the general management of fiscal risks is to ensure the stability of indicators laid down
in Section 5, Paragraph three, Clauses 1, 3, 4, 5 and 7 of this Law (hereinafter – fiscal
indicators) in the medium-term regardless of the changes caused by external factors, as
well as to reduce impact of changes caused by external factors in fiscal indicators in
each year of the framework law period.
Key Fiscal indicator:
General Government Deficit
Incorporating Risks In The
Budget
Contingency reserves
Fiscal Safety Reserves
Statistical implications on
fiscal risk managment in
Latvia:
General government and accrual
accounting
Concept of general
government (1)
The general government sector by convention includes all the public
corporations that are not able to cover at least 50 % of their costs by
sales, and, therefore, are considered non-market producers. It has four
subsectors:
1.central government
2.state government
3.local government
4.social security funds
Examples: Latvia

Passenger railway company;

Universities;

Hospitals;

Theaters;

Municipal utility companies;

Special economic zones;
SoE
Outside GG
Inside GG
Are free in managment
decisions
All what they do falls on GG
accounts:
Unless:
1. They ensure projected
amount of dividends in the
state budget;
2. They unexpectedly not
ask for government
«support»
Borrow money in financial
markets - increase of state
debt;
Build something – full
construction costs
recognized as GG
expenditure at the moment
of construction – falls on
state deficit.
If GG SoE are not taken into account in State budget
preparation, they very likely fill produce «negative surprise» in
General Government accounts !!! This is high fiscal risk.
If GG SoE are included in fiscal projections produced for State
budget, risk has been reduced or even mitigated.
Residual risks relates only to deviation from projections.
Incorporation of GG SoE in
fiscal projections

Projections of Revenue – adjusted
expenditure (balance of SoE) ( adjustment :+
gross fixed capital formation – depreciation).
this is not a fiscal
risk.

The aggregate GG SoE balance is included
in GG balance projections as a balance
under no change policy scenario.

Then the issue is about «absorption capacity
of budget» of GG SoE deficits.
But can be if we
not incorporate
the GG SOE
accounts into
GG fiscal
projections.

If there is no absorption capacity, MoF
should intervene and propose to
government to take action.
If process is implemented, the risk is that SoE deficits are significantly
higher, than projected.
GG SoE net borrowing/net
lending: Projections and
outcome
Accrual accounting
The term “accrual” refers to a fundamental accounting concept concerning the
timing of recognition of economic events in financial reports. Accrual accounting is
a system of accounting in which transactions and other flows between institutional
units are recognized when economic value is transferred, increased, or lost,
regardless of the timing of the related cash receipts or payments.
This contrasts with the cash basis under which transactions and other events are
recognized only when the related cash is received or paid.
Accrual accounting is basic method for IMF, OECD, Eurostat reports.
Fiscal risk management as
defined in Fiscal Discipline Law

Fiscal risk management:
 Regular
identification, disclosure and
mitigation;
 Declaration of
 Fiscal
fiscal risks annexed to MTBFL;
safety reserve: ( expenditure ceiling in
MTBFL – expenditure in Budget Law)
depending of fiscal risks, at least 0,1% of GDP.
14
Regulation of General
Management of Fiscal Risks
Terminology

Specific risks

Individual risk

Risk event

Sorce of fiscal risk
Insitutional set up
General
management of
Fiscal Risks
Ministry of
Finance
1. Maintaining register of
Fiscal Risks
2. Monitoring and assistance
to central gov bodies in
managment of specific
fiscal risks
3. Proposals to CGB of
additional measures in risk
managment.
4. Calculation of size of fiscal
safety reserve.
5. Drafting the declaration of
Fiscal Risks
Register of Fiscal Risks
Nr. of
fiscal
risk
Assessment
of fiscal
impact and Assessme
Descripti
Source of
fiscal
net of
on of
fiscal risk
indicator
fiscal risk
fiscal risk
probability
which is
affected by
the fiscal risk
Description of current
management of fiscal risk
Addition
al
Institution
Additional
necessar
which is
necessary
y actions responsibl
actions
to
e for fiscal
(measures) to
eliminate
risk
reduce fiscal
the
managem
risk
consequ
ent
encesof
fiscal risk
Insitutional set up
Management of
specific risk
related to
assigned
government
funtion
Central
Government
Body (CGB)
1. Management of Specific
Risk and imrovement of
managment
2. Assesment of impact of
specific risk
3. Assesment of probability
4. Accumulation of
information of individual risk
5. Supervision of managment
of individual risks by public
agencies.
Insitutional set up
Management of
individual risk
Government
Agency
and
Project
implementing
body (PIB)
1. Managment of indicidual
risk;
2. Assesment of impact
3. Ssesment of probability
4. Accumulation of
information
Requests and reporting
Issue reguests
Ministry of Finance
CGB
Including the task
to include risks
maagment tasks
in PPP projects
Government
Agency and PIB
Fiscal risks
managment report
Submission of
information
Fiscal risk management
report
Fiscal risks
managment report
Ministry of finance
assesses
Whether the proposal for exclusion or
inclusion of specific risk into the register
has been justified
Whether the risk reduction measures are
sufficient to accept residual risk,
If necessary, makes its own assesment of
impact and probability
If necessary, proposes additional measures
to CGB
If no agreement between MoF and CGB – issue to be
discussed and decided by government.
Probability and fiscal
impact
Quantifiable and non –quantifiable risks
Calibration of probability
probability
Closer
to 0%
Closer to
10%
Closer to
30%
Closer
to 60%
Closer to
100%
value
1
2
3
4
5
ignored
Fully included as
expenditure in
budget
Non –quantifiable fiscal
risks
Calibrationn of impact
impact
More than
0,5% GDP
Between
Less than
0,01 and 0,5 0,01% of
GDP
significant
medium
insignificant
Fiscal Risks and Fiscal Safety Reserve
28
Fiscal risks
Not
included
Included in
Declaration
nonquan
tified
Above
0,1% IKP
Compensato
ry measures
quanti
fied
Escape clause
Below
0,1% IKP
FNR
No
immediate
compensatio
n
No compensation
No compensation
Ex- post correction
No ex post correction in long
term
Ex- post correction ( if having
impact on structural balance)
Fiscal risk declarations
Example: Australia (1)
Declaration of Fiscal Risks
Report of Fiscal Discipline
Council