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INTRODUCTION 1. GENERAL This publication presents the financial accounts of the general government sector, for the period 2000-2005, according to the Government Finance Statistics Manual (GFSM) 2001 1 of the International Monetary Fund. This format provides a comprehensive and thorough accounting framework for analysis and evaluation of the fiscal policy of the general government sector. The data in this publication aim to complement the statistics on national accounts, as well as to enable decision makers, researchers in the field, and the public at large to follow developments in economic activity, in the financial situation, and in the liquidity of the general government sector. The general government sector consists of institutional units and bodies that produce and provide non-market public and community services, which are primarily funded by compulsory payments imposed on institutional units belonging to other sectors. The general government sector in Israel includes government ministries, the National Insurance Institute, national institutions, local authorities, and non-profit public institutions. This publication of general government sector accounts according to the GFS framework was prepared concurrently with the existing presentation of general government accounts based on the SNA format, which is used in publications on national accounts and in CBS special publications. 2. STRUCTURE AND CHARACTERISTICS OF THE GFS FRAMEWORK Two types of flows are listed in the GFS framework – flows from transactions, and other financial flows. In most cases, transactions are financial interactions between two institutional units, which are made on the basis of a mutual agreement. The activities report of the general government sector presents the outcomes of every transaction made during a given accounting period. The transactions are divided as follows: revenue; expenses; net acquisition of nonfinancial assets; and net acquisition of financial assets. Other financial flows include changes in the value of assets and liabilities resulting from price changes or changes in exchange rates, as well as liabilities resulting from extraordinary financial events such as debt write-offs, war, natural disaster, etc. The balance sheet of the general government sector presents the stock of financial and nonfinancial assets and liabilities. The flows and the assets and liabilities are estimated, if possible, in current market prices and on accrual basis. 1 Government Finance Statistics Manual, 2001, International Monetary Fund, Washington D.C., 2001. - VII - 3. METHODOLOGICAL CHANGES IN THE GFS 2001 SYSTEM VERSUS THE GFS 1986 SYSTEM Basis for Recording Financial Events In the previous GFS system (GFS 1986), the flows were recorded at the time the payment was made or received (cash-based records). In the present system (GFS 2001), the flows are recorded on accrual basis, i.e., at the time the financial value of the transaction is generated or changed. Records based on accrual accounting make it possible to fully integrate economic changes attributed to the given accounting period, which were only partially recorded in the previous system. Analytical Framework The GFS 2001 system includes several balancing items, which highlight that analysis of the general government sector’s activities has to take a variety of financial variables into account. The previous system focused on only one item – total deficit. Net lending appeared on the expenses side of the account. 4. DIFFERENCES BETWEEN THE GFS AND SNA932 SYSTEMS In the last GFS update, an effort was made to harmonize the GFS system with the SNA93 system. However, there are still some differences between the systems. One substantive difference is that the GFS system focuses on financial transactions such as taxation, expenditures, and grants, whereas the SNA93 system presents data on production and consumption of goods and services in addition to financial activities. The difference between the two systems is reflected in the structure of the tables and the recording of some financial activities. Coverage and Accounting Guidelines The definition of the general government sector in the GFS system is the same as the definition in the SNA93 system. Most of the accounting guidelines are the same in both systems, especially guidelines related to the timing of recording and assessments of stocks and flows. Structure of the System Stocks and flows were defined in the GFS system in the same way as those in the SNA93 system. However, the presentation of the general government sector account in the GFS system differs from the presentation in the SNA93 system. 2 System of National Accounts 1993, Commission of the European Communities, International Monetary Fund, Organization for Economic Cooperation and Development, United Nations, World Bank, Brussels/Luxembourg, New York, Paris, Washington D.C., 1993. - VIII - The GFS system presents “gross” and “net” flows, i.e., initially the account includes the internal flows between units of the general government sector. Afterwards, consolidation is performed to attain a “net” presentation of the account for the entire sector. The SNA93 system, by contrast, presents the “gross” account (although it is recommended to present the “net” account as well). In contrast to the regular presentation of data in the SNA93 system, this publication presents separate data for each unit in the government sector, as well as consolidated data for the entire general government sector. The analytical framework for the GFS system consists of four accounts: a report on government activity, which presents all of the transactions recorded in the GFS system; a report on other financial flows, which summarizes the changes in assets and liabilities resulting from price changes or from extraordinary events; a balance that shows stocks; and a report on sources and uses of cash, which provides information on the cash flow. In the SNA93 system, the transactions are presented in a series of seven accounts: five current accounts (production account, generation of income account, allocation of primary income account, secondary distribution of income account, and uses of disposable income account); and two accrual accounts (capital account and financial account), which show acquisitions and disposals of assets and liabilities. Other financial flows are presented in two additional accounts, and stocks are presented in the balance sheet. The statement on government activities is divided into three parts. The data presented in the first part of the statement are similar to the current accounts data in the SNA93 system, with one exception – in the SNA93, capital transfers are presented in the capital account, which is one of the accumulation accounts. All transactions appearing in the second and third parts of the statement are presented in the capital and in the financial accounts of the SNA93 system, respectively. Classifications Several types of transactions are classified differently in the two systems, because the aims and emphases of each system are different. 5. USE OF GFS SYSTEM DATA TO CONSTRUCT GOVERNMENT ACCOUNTS ACCORDING TO THE SNA93 SYSTEM Collection of government financial statistics is an initial and necessary step in the process of constructing the general government sector accounts in national accounts according to the SNA93 system, despite the few differences between the SNA93 and the GFS system. - IX - 6. STRUCTURE OF THE STATEMENT a. Tables Presenting Financial Accounts of the General Government Sector for Each Separate Year Table 1 – Consolidated Account of General Government Operations on Accrual Basis – Revenue and Expenses, Net Lending/Borrowing Table 2 – Sources and Uses of Cash Table 3 – Revenue of the General Government Sector, by Type of Revenue Table 4 – Expenses of the General Government Sector, By Type of Expense Table 5 – Transactions in Assets and Liabilities in the General Government Sector Table 6 – Outlays of General Government, By Function b. Tables Presenting International Comparisons Tables 7.1-7.3 present international comparisons of revenue, expenses and outlays in the general government sector, by type of revenue, expense and function, for selected countries, in 2005. 7. SOURCES OF THE DATA Expenses and revenue of government ministries are estimated on the basis of analyses of government budget execution reports, with the addition of supplementary data obtained from the Ministry of Finance and the Ministry of Defense. Expenses and revenue of local authorities, national institutions, and nonprofit institutions are estimated on the basis of data obtained from analysis of the financial statements of those institutions, as well as on the basis of various indicators. 8. COVERAGE To date, not all of the accounts in the GFS framework are conducted by the CBS (e.g., transactions in financial assets), mainly due to the lack of appropriate data from various sources. Nor are all of the details appearing in the recommendations of the GFS calculated and presented in the tables (e.g., the sub-category of expenses by purpose). For the same reason, the transition to recording of transactions on accrual basis has not yet been completed. Nonetheless, the CBS has been making a persistent effort to reach a complete presentation of the system, both in terms of coverage and in terms of definitions. -X- 9. MAIN FINDINGS International Comparison of Revenue, Expenditures and Outlays in the General Government Sector, by Type of Expenditure and Function 2005 International comparison of general government revenue reveals that Denmark has the highest rate of revenue from taxes (47.5% of the GDP), followed by Sweden, Norway, and New Zealand, where revenue from taxes ranges from 34.0% to 37.0% of the GDP. The Israeli government’s revenue from taxes amounted to 30.0%-32.0% of the GDP in recent years, similar to countries such as Australia, the United Kingdom, Canada, Finland, France, and Russia. This rate is considerate high compared with most countries, where the share of revenue from taxes ranges from 8.0% to 25.0% of the GDP. In 2005, the current expenditures of the general government sector in Israel amounted to 47.5% of the GDP, similar to the rate in Germany (47.1%). This rate was low in relation to “welfare states” such as Denmark, Sweden, Finland and Hungary (50.0%-55.0%), but higher than in other Western countries such as the United Kingdom, Norway, Poland, and Luxembourg (40.0%-44.0%). In countries with a market oriented economy such as the United States, Australia, Japan, and New Zealand, government sector expenditures are 32.0%-36.0% of the GDP. Wages – Expenditure for wages in Israel were about 27.0% of the total current expenditures of the general government sector. In the United States, Sweden, and France the share of expenses for wages was similar (25.0%-28.0%), whereas the share of expenditures for wages out of the total current expenditures in Japan was only about 18.0%. Defence – International comparison of general government expenditures by function shows that defense expenditures in Israel comprised 17.3% of the total expenditures in the general government sector – the highest among the countries selected for the comparison. Israel was followed by Iran – 13.5%, Russia – 8.5%, and the United Kingdom – 6.0%. In most of the countries selected for comparison, the share of defense expenditures amounted to only 2.0%-4.0% of the total government expenditures. Health – Canada and Australia are the leading countries in terms of expenditures for health (18.0%-19.0% of the total government expenditures), followed by Norway, the United Kingdom, and New Zealand (16.0%-17.0%). The expenditure for health in Israel amounted to 12.2% of the total government expenditure in 2005, similar to countries such as Russia, Germany, and Denmark (12.0%-13.0%). Education – In 2005, the general government sector expenditure for education in Israel amounted to 15.4% of the total general government sector expenditure, similar to Canada, Australia, and Denmark. This rate is higher than in most of the countries selected for comparison: Norway – 13.9%, the United Kingdom and Poland – about 13.0%; France and Russia – about 11.0%; the Czech Republic – 9.7%; and Germany – 8.9%. In international comparison of expenditures for education and health, it is important to take into consideration that the population in Israel is considered younger in relation to Western countries. The - XI - percentage of young people subject to compulsory education is relatively high in Israel, whereas the percentage of elderly people who need health services is relatively low. Social Security and Welfare – The expenditure for social security and welfare services in Israel amounts to 24.0% of the total general government expenditures, and is among the lowest of all developed countries. In Germany, the rate amounts to 47.0%, compared with about 42.0% in Denmark, Poland, and France, 39.0% in Norway, 36.0% in the United Kingdom, and 32.0% in New Zealand. Most countries, including Israel, allocate up to 3.0% of total general government sector expenses to environmental protection. - XII -