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New Draft Fiscal Transparency Code & Evaluation: Outline of the Presentation I. Background and Context Japan IMF Sub Acc II. Revising the Fiscal Transparency Code III. The New Fiscal Transparency Evaluation 2 I. Background : Lessons from the Crisis a. Progress in Adoption of Fiscal Reporting Standards Institutional coverage has expanded… Coverage of Institutions (Number of countries) 200 150 100 48 78 22 16 200 General Government 150 9 29 Basis for Reporting Flows (Number of Countries) 12 52 Central Government 10 33 50 …and the shift from cash to accrual is underway… Budgetary Central Government Full Accrual Partial Accrual 100 No Data Reported Cash 146 98 120 50 63 0 0 2004 2011 2004 …but few countries prepare full balance sheets … Coverage of Assets & Liabilities (Number of Countries) 200 150 9 12 27 14 27 Financial & Non-Financial Assets 17 Financial Assets Only Liabilities Only 100 136 50 126 0 2004 2011 2011 …and timeliness of reporting is still a problem. Timeliness of Reporting in 2011 (Number of Countries) Unknown 16 Annually 37 No Balance Sheet Semiannually 3 Quarterly 32 Monthly 96 3 I. Background: Lessons from the Crisis b. Lack of Transparency Exacerbated Problems Sources of Unexpected Increase in General Government Debt (percent of GDP, 2007-2010) FRA DEU NLD Underlying fiscal position ESP PRT GBR USA GRC IRL ISL AVE* Issues Revealed by the Crisis 1.7 3.2 -2.4 1.8 11.3 3.7 8.1 16.3 1.3 10.9 6.0 1.7 1.8 -0.9 -0.1 0.1 1.5 7.1 2.5 1.6 4.0 4.7 -0.7 1.4 -0.2 0.6 9.4 1.9 0.9 11.2 -0.1 2.5 1.1 0.7 0.0 -1.3 1.3 1.7 0.3 0.0 2.6 -0.2 4.5 0.2 8.4 12.8 14.2 15.4 8.1 17.0 6.3 40.0 60.2 39.5 9.8 Macroeconomic shocks 8.3 4.7 5.2 13.0 4.4 8.9 3.8 38.4 35.7 -3.3 6.0 Financial sector interventions 0.0 8.1 9.0 2.5 3.6 8.1 2.5 1.6 24.5 42.8 3.8 Contingent Liabilities Policy changes 2.3 3.8 1.9 4.9 4.7 1.1 6.4 -8.0 -9.9 -4.3 4.7 Stimulus / Consolidation Other factors 2.1 -0.3 6.5 1.9 3.7 6.2 8.3 -6.7 7.5 21.6 5.9 14.4 19.5 20.2 24.0 27.8 28.0 29.1 41.7 59.1 67.7 26.4 Revisions to 2007 deficit & debt Changes to government boundary Cash-accrual adjustments Exogenous shocks Total Unforecast Increase in Debt * GDP-weighted average Unreported Deficits SoEs & PPPs Arrears Macroeconomic Risks 4 I. Background: Lessons from the Crisis c. Example: General Government Debt in Portugal 120 Arrears 120 General Government gross debt 100 80 100 SOE & PPP reclassifications SOE & PPP debt outside the General Government Non-SOE & PPP General Government debt 60 80 60 40 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Only includes Central Government SOE debt pre 2007 40 I. Fiscal Transparency : Lessons from the Crisis d. Addressing Weaknesses in Forecasting/Reporting Standards Problem Weakness in Current Standards Recommendation Revisions to Deficits Infrequent fiscal reporting Monthly operational fiscal reports Quasi-fiscal Activity by SoEs Exclusive focus on general government Publication of fiscal data for public sector Unreported Flows Losses on asset & liability holdings not recognized Recognition of doubtful debts in summary aggregates Macroeconomic Shocks Bias in macroeconomic forecasting Alternative macrofiscal scenario analysis No recognition of contingent liabilities Recognition of quantifiable contingent liabilities Exposure to Financial Sector I. Background and Context: e. Origins of the Global Fiscal Transparency Effort • A concerted effort to improve fiscal transparency since the late 1990s – Asian crisis highlighted weakness in public and private financial reporting – Also underscored the risks associated with undisclosed linkages between the two • New fiscal reporting standards were developed – – – – • General: IMF’s Code & Manual on Fiscal Transparency Budgeting: OECD Best Practices for Budget Transparency Statistics: EU’s ESA 95, IMF’s GFSM 2001, & UN’s SNA 08 Accounting: IFAC’s International Public Sector Accounting Standards (IPSAS) New tools for monitoring compliance with standards were introduced – Multilateral: Fiscal and Data ROSCs, GDDS/SDDS, & PEFA – Regional: Eurostat, WAEMU & CEMAC harmonization of fiscal reporting – Civil Society: Open Budget Survey and Index, GIFT Principles 7 I. Background and Context: b. Weaknesses of the Existing Code & ROSC • Code & ROSC evaluate clarity of reporting procedures not quality of reports – Code’s 4 “Pillars” reinforce focus on formal laws, institutions, and processes i. ii. iii. iv. Clarity of Roles and Responsibility Open Budget Processes Public Availability of Information Assurances of integrity – ROSCs pay too little attention to the content of fiscal reports themselves • Code & ROSC adopt a “one-size-fits-all” approach to evaluating countries – Do not take into account different levels of institutional capacity – Do not provide milestones to full compliance with international standards – Make it difficult to benchmark against comparator countries • ROSC assessments tended to be exhaustive rather than risk-based – Place equal weight on all elements of the Code – Difficult to judge relative seriousness of different fiscal reporting gaps – Include a large number of unprioritized recommendations 8 II. Revising the Fiscal Transparency Code: a. Objectives of the Revisions 1. Emphasize the quality and reliability of published information rather than clarity of reporting procedures 2. Update the principles and practices to reflect the lessons of the recent crisis 3. Align the principles and practices with relevant international standards (GFSM 2001, IPSAS, OECD Principles, PEFA) 4. Provide countries with a set of achievable milestones on the way towards full compliance with international standards 9 II. Revising the Fiscal Transparency Code: b. Architecture of the New Code Construction Pillar (Type of Report)) Fiscal Transparency Indicators Three Pillars of the Revised Fiscal Transparency Code & Evaluation I. Fiscal Reports Size of unreported flows Size of unreported liabilities Average revisions to deficit Institutional coverage Quality of Fiscal Reporting Openness of Fiscal Decisionmaking II. Fiscal Forecasts Average forecast error Source of forecast error Timing of forecast error Time horizon Accounting for flows Clarity of fiscal objectives Valuation of assets & liabilities Separation of baseline & new policies Timeliness of reporting Timeliness of budget submission Independence of statistics agency Audit of annual accounts Independent scrutiny of forecasts Supplementary budgets III. Fiscal Risk Analysis Size of contingent liabilities Impact of exogenous shocks Average stock-flow adjustment Fiscal sensitivity analysis Reporting of contingent liabilities Long-term fiscal projections Approval of contingent liabilities Oversight of local governments Surveillance of public corporations 10 II. Revising the Fiscal Transparency Code: c. More Graduated Set of Practices DIMENSION 1 FISCAL REPORTING Fiscal reports should provide a comprehensive, relevant, timely, and reliable overview of the government’s financial position and performance Coverage Fiscal reports should provide a comprehensive overview of the fiscal activities of the public sector Fiscal reports cover all entities engaged in public activity according to international standards. Fiscal reports cover all entities engaged in public activity according to international standards. Fiscal reports consolidate all central government entities. Fiscal reports consolidate all general government entities and report on each subsector. Fiscal reports consolidate all public sector entities and report on each subsector. Coverage of Flows Fiscal reports cover all public revenues, expenditures, and financing. Fiscal reports cover cash revenues, expenditures and financing. Fiscal reports cover cash flows and accrued revenues and expenditures. Fiscal reports cover cash flows and accrued revenues and expenditures and other economic flows. Coverage of Stocks Fiscal reports include a balance sheet of government assets, liabilities, and net worth. Fiscal reports cover Fiscal reports cover all financial assets cash and all debt and liabilities. 1.1 1.1.1 1.1.2 1.1.3 PRINCIPLE PRACTICES GOOD # BASIC ADVANCED Fiscal reports cover all financial and non-financial assets and liabilities, and net worth. 11 III. New Fiscal Transparency Evaluation a. Objectives of the New Evaluation 1. Distinguish between more and less serious deficiencies in countries’ fiscal transparency practices 2. Provide countries with a clear picture of where their fiscal reporting practices stand relative to comparator countries and international standards 3. Provide countries with a more targeted and sequenced action plan for addressing the main transparency weaknesses identified 12 III. New Fiscal Transparency Evaluation: b. Summary Heatmap Costa Rica: Assessment Against Fiscal Transparency Practices 1. Fiscal Reporting 2. Fiscal Forecasting & Budgets 3. Fiscal Risk Analysis & Management Coverage of Institutions Unity Macroeconomic Risks Coverage of Flows Gross Budgeting Specific Fiscal Risks Coverage of Stocks Macroeconomic Forecasts Contingency Reserves Tax Expenditures Medium-term Budget Framework Asset and Liability Management Fiscal Strategy Report Guarantees Budget Submission Financial Sector Exposure Classification Budget Approval Long-Term Contracts Internal Consistency Fiscal Policy Objectives Financial Derivatives Historical Consistency Separation of Existing and New Policies Sub-National Governments Comparability of Forecasts & Outturns Performance Information Public Corporations Statistical Independence Distributional Analysis External Audit Fiscal Sustainability Analysis Reliability Independent Evaluation Frequency of In-year Fiscal Reports Timeliness of Annual Financial Statements Practices Advanced Good Basic Not Met Supplementary Budget Forecast Reconciliation 13 III. New Fiscal Transparency Evaluation: c. Fiscal Transparency Indicators: Fiscal Reporting Ireland: Fiscal Transparency Indicators Coverage of Public Sector Entities Reporting of Assets and Liabilities (percent of expenditure) (percent of GDP) Public corporations remain outside fiscal reporting Only a quarter of public sector liabilities reported General Government Reported Non-Fin Public Corp Unreported Financial Public Corp Central Bank Liabilities Assets Consolidation Public Sector Net Worth -400 -300 -200 -100 0 100 200 300 400 III. New Fiscal Transparency Evaluation: d. Fiscal Transparency Indicators: Fiscal Forecasting and Budgeting Bolivia: Source of Budget Forecast Errors Revenue Forecast Errors (Percentage point Contribution) Expenditure Forecast Errors (Percentage point Contribution) 50 50 45 Percent forecast error 111% 40 99% Means budgeted expenditure bears little relation to actual outcomes 41% 40 35 Percent forecast error 30 30 32% 17% 25 20 120% 20 30% 15 Massive underestimation of revenue in the budget 31% 10 23% 10 5 0 10% 0 Tax Revenue Operating Revenue Other Revenue Capital Revenue Total Error Wages and Salaries Goods and Services Misc Current Capex Total Error III. New Fiscal Transparency Evaluation: e. Fiscal Transparency Indicators: Fiscal Risk Analysis and Management Selected Countries: Fiscal Risk Indicators Ireland: Uncertainty around forecast deficits (percent of GDP) African Country: Contingent Liabilities (percent of GDP) 80 70 Contingent Liabilities are large and diverse 60 50 37.6 15.3 40 Significant macro and fiscal forecast uncertainty 16.3 30 20 6.1 10 0 Guarantees (Public) Ireland: Govt Guarantees related to financial crisis (percent of GDP) 60 Liabilities of Finanical PCs Costa Rica: Distribution of Municipal Debt (percent of total) Large exposure to the financial sector 20 15 40 10 20 5 0 Central Bank 25 100 80 Gurantees (Private) 0 Sub-national risks are small but relatively concentrated III. New Fiscal Transparency Evaluation: f. Targeted Recommendations Ireland: Summary Assessment of Fiscal Reporting Practices Principle Assessment Importance Rec 1.1 Coverage of Institutions Good: Fiscal statistics consolidate all general government institutions High: Publicly-controlled entities with net expenditure of 12% of GDP outside fiscal statistics. 1 1.2 Coverage of Stocks Good: Fiscal reports cover all financial assets and liabilities High: Public liabilities of 279% of GDP outside fiscal reports 2 Coverage of Flows Basic: Fiscal reports cover all cash revenues and expenditures High: Accrued general government expenses of 1.1% of GDP outside fiscal statistics 3 1.4 Tax Expenditures Medium: Some of the estimated 6% of GDP in revenue lost Basic: Estimated revenue loss through tax expenditures not from income tax expenditures is reported. Tax expenditures published at least annually contributed to pre-crisis property boom. 1.5 Frequency of Inyear Fiscal Reports Advanced: In-year fiscal reports are published on a monthly basis Low: Fiscal reports are published within 2 days 1.9 Historical Consistency Basic: Material revisions to historical fiscal data are reported Low: Revisions to historical debt data are -0.5% of GDP on average 1.3 3 17 III. New Fiscal Transparency Evaluation: g. Sequenced Action Plan Ireland Fiscal Transparency Action Plan Action 2013 2014 2015 2016 2017 Incorporate NonCommercial SemiState Bodies into budget documentation Incorporate all central government entities in budget documentation Integrate noncommercial semistate bodies into departmental votes 1. Expand Institutional Coverage of Budgets, Statistics, and Accounts a. Present all gross revenues and expenditures of central government entities in budget documentation Incorporate NPRF into budget documentation b. Combine Finance and Appropriation Accounts into a consolidated Central Government Financial Statement Combine the information in the notes to the Appropriation Accounts to produce a summary report c. Provide an overview of the gross revenues and expenditures of the general government and its subsectors Reconcile gross revenues and expenditures of Exchequer and general government in budget Combine Finance and Appropriation Accounts into a partial Central Government Financial Statement based on existing accounting policies Incorporate SIF and NPRF into partial Central Government Financial Statement Incorporate NonPrepare Commercial Semicomprehensive State Bodies into consolidated consolidated Central provisional Central Government Government Financial Statement Financial Statement for audit by C&AG Provide summary of gross revenues and expenditures of central government in budget Provide summary of gross revenues and expenditures of central, local, and general government in budget Publish quarterly Publish monthly statistics on gross statistics on gross revenues and revenues and expenditures of expenditures of central, local, and central, local, and general general government sectors government sectors 18