4.16 Central government finances
See Table 4.16 hereCommentary
About the data
Definitions
Data sources
Fiscal deficits and economic growth
Many developing countries have implemented economic restructuring programs entailing sharp cuts in public spending and a reduced role for the government in the economy. The goal of these fiscal reforms is to increase domestic resources for investment, support market-oriented reforms, and promote a stable macroeconomic environment for growth. Several countries have made big strides in privatizing state-owned enterprises, liberalizing trade and financial policies, and strengthening tax administration. Other countries lag behind because of political or institutional constraints. But all developing countries face the challenge of improving fiscal management.
Fiscal discipline is critical to macroeconomic stability, although the consequences of a fiscal deficit depend on what it is financing and how it is financed. Large deficits may cause a resurgence of inflation, exchange and interest rate movements, and uncertainty about policy directions-and lead to weakening confidence and declining private sector investment. In general, the countries with the best growth records have been the most aggressive in pursuing conservative fiscal policies.
Since the 1980s the fiscal situation of many developing countries has markedly improved, as shown by declining deficit to GDP ratios and improving revenue to GDP ratios. But the overall reduction in fiscal deficits in developing countries conceals much variation among and within regions.
The difficulty for most governments arises from the need to strike a balance between making cuts in overall public spending and maintaining or increasing some types of spending. The reduction in fiscal deficits has come mostly from cuts in capital spending. But most developing countries need to increase government spending for infrastructure, health, and education and for improvements in public services. And they need to ensure that social safety nets protect the most vulnerable from the effects of spending cuts.
Tables 4.16–4.18 present an overview of the size and role of the central government in relation to the national economy. The IMF's Manual on Government Finance Statistics describes the government as the sector of the economy responsible for "implementation of public policy through the provision of primarily nonmarket services and the transfer of income, supported mainly by compulsory levies on other sectors" (1986, p. 3). In general, the definition of government excludes nonfinancial public enterprises and public financial institutions. Units of government meeting this definition exist at many levels, from local administrative units to the highest level of national government. But inadequate statistical coverage precludes the presentation of subnational data, making cross-country comparisons potentially misleading.
Central government can refer to one of two accounting concepts: consolidated or budgetary. For most countries central government finance data have been consolidated into one account, but for others only the budgetary central government accounts are available. Countries reporting budgetary data are noted in the Primary data documentation. Because budgetary accounts do not necessarily include all central government units, the picture of central government activities is usually incomplete. A key issue is the failure to include the quasi-fiscal operations of the central bank. Central bank losses arising from such operations can result in sizable quasi-fiscal deficits. Such deficits may also result from the operations of other financial intermediaries, such as public development finance institutions. Also missing from the data are governments' contingent liabilities for unfunded pension and insurance plans.
Government finance statistics are reported in local currency. Many countries report government finance data according to fiscal years. See Primary data documentation for the timing of fiscal years. For further discussion of government finance statistics see the notes to tables 4.17 and 4.18.
Definitions
• Current revenue includes all revenue from taxes and nonrepayable receipts (other than grants) from the sale of land, intangible assets, government stocks or fixed capital assets, or from capital transfers from nongovernmental sources. It also includes inheritance taxes and nonrecurrent levies on capital.
• Total expenditure includes nonrepayable current and capital expenditure. It does not include government lending or repayments to the government or government acquisition of equity for public policy purposes.
• Overall budget deficit is current and capital revenue and official grants received, less total expenditure and lending minus repayments.
• Financing refers to the means by which a government provides financial resources to cover a budget deficit or allocates financial resources arising from a budget surplus. It includes all government liabilities-other than those for currency issues or demand, time, or savings deposits with government-or claims on others held by government and changes in government holdings of cash and deposits. Government guarantees of the debt of others are excluded. Financing is broken down into financing from abroad (obtained from nonresidents) and domestic financing (obtained from residents).
• Debt is the entire stock of direct, government, fixed term contractual obligations to others outstanding at a particular date. It includes domestic debt (such as debt held by monetary authorities, deposit money banks, nonfinancial public enterprises, and households) and foreign debt (such as debt to international development institutions and foreign governments). It is the gross amount of government liabilities not reduced by the amount of government claims against others. Because debt is a stock rather than a flow, it is measured as of a given date, usually the last day of the fiscal year.
• Interest includes interest payments on government debt, including long-term bonds, long-term loans, and other debt instruments, to both domestic and foreign residents.
Data on central government finances are from the IMF's Government Finance Statistics Yearbook (1995) and IMF data files. The accounts of each country are reported using the system of common definitions and classifications found in the IMF's Manual on Government Finance Statistics (1986). For complete and authoritative explanations of concepts, definitions, and data sources see these IMF sources.