Accounting devices that make the deficit smaller

Il y a quelque temps, j’avais fait un carnet entre la bataille du vérificateur avec le gouvernement, pour appliquer les nouvelles règles comptables pour réduire les magouilles comptables, notre vérificateur a gagné.

Selon l’IMF plusieurs utilisent ces magouilles pour dissimuler les vrais coûts de l’État à la population, un article sur le sujet.

À la fin du carnet,  j’expose différents points importants du document : Accounting Devices and Fiscal Illusions.

Extrait de: Disappearing Deficits, Tim Irwin, iMF direct, March 28th, 2012

Accounting Devices and Fiscal IllusionsSuppose a government must reduce its budget deficit. Perhaps it made a commitment to do so; perhaps investors are beginning to doubt its ability to repay debt. It could cut spending or raise taxes, but that is painful and unpopular. What can it do?

In our work at the IMF, we sometimes discover that governments choose to employ accounting devices that make the deficit smaller without actually causing any pain, and without actually improving public finances.

In ideal accounting, this would not be possible. In real accounting, it sometimes is.

How the devices work

Some governments, for example, have been able to reduce their reported deficits by taking over companies’ pensions schemes. The government’s obligation to make future pension payments has a real cost, but it doesn’t count as a liability in the accounting. So when the government receives a pension scheme’s assets from the company, it can treat the receipt of those assets as revenue that reduces its deficit.

Many other governments have been able to defer spending, without significantly reducing it in the long run, by entering into public-private partnerships. Under these contracts, a private company builds and maintains an asset like a road or a hospital. In return, the government agrees to pay the company for its costs over 20 or 30 years. In a sense, the government has bought the asset on an installment plan, but government accounting seldom counts this obligation as a liability.

In each of the above cases—and in others analyzed in my note, Accounting Devices and Fiscal Illusions—the government’s deficit is lower at first, but only at the expense of bigger future deficits.

Improving transparency

The problem with the use of accounting devices is that the pain of spending cuts and tax increases is not avoided; it’s postponed and perhaps made worse. Accounting devices can also make the deficit a less accurate fiscal indicator, making it harder for citizens, journalists, think tanks, investors, rating agencies—and the government itself—to understand the true state of public finances.

The use of accounting devices cannot be eliminated, but several things can be done to reduce their use or at least bring them quickly to light:

Governments can prepare audited financial statements—income statement, cash-flow statement, and balance sheet—according to international accounting standards.

Statisticians can be given the resources and independence to be both expert and impartial, as well as the authority to revise standards in the light of emerging problems.

A variety of different indicators of the state of public finances can be monitored, since a problem suppressed in one indicator is likely to show up in another.

The chart below illustrates the last point and, in particular, shows the value of having two different indicators of the deficit in the United States. One is a mainly cash-based measure; the other, the net operating surplus, is more like the bottom line of a private company’s income statement. One cause of the difference between the two indicators is that the cost of incurring obligations to pay future pensions to government employees shows up in the net operating surplus but not in the budget surplus.

variety of different indicators of the state of public finances

These proposals do create more work for government accountants and statisticians, but the problems created by accounting devices cannot be solved with the stroke of a pen. Getting an accurate picture of government finances requires hard work, careful checks, and a willingness on the part of analysts to look at several different measures of the deficit.

Accounting Devices and Fiscal Illusions


In retrospect, it is clear that accounting devices contributed to the fiscal problems that many countries are now experiencing. They made public finances look better than they really were in the years before the crisis, and therefore encouraged looser fiscal policy then. But their significance should not cause us to lose sight of other, more important factors. In most countries the biggest fiscal problems arose from the financial crisis, which led governments to take over financial institutions and caused a recession that undercut their tax revenue.


The essence of an accounting device is to improve headline fiscal indicators without actually improving public finances, or without improving them to the extent suggested by the headline indicators. A device aimed at the deficit reduces this year’s deficit, but increases future deficits by an amount that largely or wholly offsets the initial improvement. To do this, it must either increase reported revenue or decrease reported spending in the year (or years) of interest. And, in return, it either decreases reported revenue or increases reported spending in future years.


The first accounting device, hidden borrowing, increases reported revenue now but increases reported spending later. In Europe, governments are able to reduce their headline deficits by taking over pensions schemes of private companies or public enterprises. The obligations to make future pension payments do not count as liabilities, so when governments take over the pensions in return for compensating payments, the compensating payments count as revenue.


The second accounting device, disinvestment, increases reported revenue now and reduces reported revenue in the future. Under some cash-accounting standards, the proceeds of privatization are revenues that reduce the deficit. But if the sale deprives the government of future dividends its true fiscal benefit may be much smaller than its reported effect.


The third accounting device, deferred spending, reduces reported spending now, but increases it later.

·         Less directly, governments sometimes defer maintenance of roads and other assets even though maintaining assets is ultimately cheaper than letting them deteriorate to the point at which they must be rebuilt.

·         Leasing instead of buying equipment can also defer reported spending.

·         Under some accounting standards, public-private partnerships can similarly defer the reporting of public spending. By involving private companies in the provision of public services in new ways, these partnerships can have real fiscal benefits. Yet often it is their illusory fiscal benefits that make them appealing. In Portugal, as in United Kingdom and many other European countries, the government has used public-private partnerships to build new roads, railways, and hospitals without having to count the investment spending as its own, even though the government assumed debt-like obligations to pay for the infrastructure later. Over time, the obligations have grown, and the government must now spend nearly 1 percent of GDP to meet the commitments made earlier (Portuguese DGTF, 2011).

·         Over time, civil-service pensions can create large liabilities, as shown for five central governments that report contractual pension liabilities on their accounting, as opposed to their statistical, balance sheets.  Noncontractual pensions for the public and other social benefits such as publicly funded healthcare can create (near) obligations that are larger still, even if they are not recognized as liabilities in any standard accounting.

Composition of Recognized Liabilities of Five Central Governments


The fourth accounting device, foregone investment, reduces reported spending now but reduces reported revenue later. When governments want new infrastructure to be built, they sometimes use concessions, a kind of public-private partnership in which the private company undertakes an investment under a long-term contract with the government, but receives its revenue from users.


A common way to reduce the reported deficit and debt in the short term is to have spending undertaken by a public entity that is not counted as part of the government for reporting purposes. Often the spending involves an investment, but one whose future profitability is doubtful. If the investment is unsuccessful, its cost may show up later either in the receipt ofsmaller dividends from the entity (foregone investment) or in the need to grant it greater subsidies (deferred spending). Because it can be hard to know in advance where the cost will show up, or how much it will be, it is convenient to discuss these cases together under the heading disappearing government.

Lambe (2005) puts the problem nicely.

As governments come under greater pressure to cut both costs and spending, more and more responsibility is being pushed down to the sub-sovereign level, to quasi-government bodies, municipalities and regional governments. Government-owned entities and their debt are being deconsolidated . . . .

VIII.                       THE SIZE OF THE PROBLEM

The nature of accounting devices makes hard data on size of the problem scarce. If the only indicator of the deficit is the one distorted by devices, there is no benchmark against which the use of such devices can be measured. Yet there are sources of information that allow a glimpse of the size of the problem.

Large, unexplained differences between the deficit and the increase in debt can also indicate problems in estimates of the deficit. The expected relationship between the deficit and the increase in debt depends on how the deficit and debt are measured, and there is no reason to expect them to be identical, for example because a government can borrow to purchase financial assets, a transaction that increases debt but does not increase the deficit as typically measured.

C’est comme au Québec, nous avons eu des supposément déficits zéros pendant des années, mais notre dette augmentait sérieusement, peut-être,
il y a anguille sous la roche ?


Long-term fiscal forecasts provide one set of alternative fiscal indicators. The archetypal accounting device reduces this year’s deficit at the expense of higher deficits in future years.

Thus one way of ensuring that fiscal reporting is more informative is to ensure that it includes estimates of future deficits (measured on the same basis) under current policy. To be effective, the forecasts must have a long horizon, perhaps 50 years. Otherwise, a government can still produce misleading reports by delaying the increase in the deficit to the year after the end of the forecast.