Tricks of the Trade Chiara Goretti Senato della

Tricks of the Trade Chiara Goretti Senato della Repubblica - Italy Bucharest, 10 th April 2008 1

Outline n n n Fiscal rules: incentive to creative accounting Forecasts: optimism bias Stock-flow adjustment: Ø Infrastructures: the ISPA case Ø Railway transfers Ø Securitisation and lease back Ø Tax collectors n Conclusions 2

Fiscal rules: incentive to creative accounting n n From restricted to non restricted activities The EMU case: Ø Ø Ø n optimistic growth forecasts deficit vs debt bias: the stock-flow adjustment fiscal surveillance: an evolving statistic and accounting model Coherence of definitions and quality of data 3

Forecasts: optimism bias n n n There is evidence of a significant degree of optimism in a number of euro area countries: boosting projected revenues and containing some types of spending; In 2000, the prevailing buoyant economic conditions were taken to be average or normal: medium-term growth prospects were erroneously assessed to be very bright; Afterwards, budgetary developments dramatically worsened. 4

Forecasts 5

Forecasts: Italy 6

Forecasts: lessons n n In a rules-based fiscal framework that sets limits on the budget balance, negative growth surprises will necessarily require a downward adjustment of expenditure plans; Budgetary plans should be built on economic growth projections which possibly err on the side of caution. 7

The stock-flow adjustment (SFA) n n Deficit vs debt bias: from restricted to unrestricted activities; Reconciliation between: Ø Ø n cash and accrual data; stock and flow indicators; Consistency across the data; Debtt – Debtt-1 = Deficitt + SFA 8

ISPA n n ISPA (created in 2002): joint-stock company (outside GG); Entire financing of high speed railway, raising money and providing proceed to RFI and TAV (both outside GG) to finance infrastructures; In 2005, Eurostat decided all debt issued by ISPA is to be recorded as gvt debt, with a counterpart as financial transaction in the form of a loan from gvt to RFI-TAV; In 2006, gvt consolidated the ISPA debt, for transparency reasons, with an increase in deficit of about 13 billions. 9

Railway transfers n n n Capital injections into the state-owned companies are treated as financial transactions; From 2004 on, capital transfers are treated as economic item after Eurostat decision 98/03 (if the company presents losses); Revisions to deficit figures in March 2005 due to railway capital injections: 3. 6 billion/euro for 2001; 4. 1 b/e for 2002; 4. 0 b/e for 2003; 10

Real estate: securitisation and lease-back n n 2001 and 2002: securitisation operations concerning a portfolio of buildings owned by the Social Security Fund (SCIP); In 2002, Eurostat decided that – if the initial payment is < 85% of the market price - securitisation are to be recorded as financial items until the full payment is made; n Revisions of deficit figures for 2001 and 2002; n Lease-back (FIP) of central and local building used as offices, then rented back to gvt; n Revenues for 3 bn euro in 2004 e 0. 6 bn in 2005. 11

Tax collectors n n From 1997, tax collectors have to advance the payment of indirect taxes due in the following year; budgetary impact only in the first year; In 2003, gvt introduced another type of prepayments; In 2005, Eurostat decided that pre-payments have to be recorded as financial transactions, without improving, in 2003 and 2004, the deficit; December 29 th, 2007, pre-payments by tax collectors abolished, in order to worsen the balance. 12

Securitisation 13

Data: statistical deficit revisions 2001: securitisation operations (0. 6%), capital injections in FS (0. 4%), re- calculations of current expenditures (0. 6%), transactions with the EU budget (0. 2%); 2002: capital injections in FS (0. 4%). 2003: capital injections in FS, reduction in the accrual estimate of social contributions, tax collectors. 2004: tax collectors. 14

Conclusions 1 Experience demonstrates that gvts: n aim to exclude expenditures and includes revenues in constrained balance; n n exploit absence of accounting regulations or opacity in recording methodology; abandon “tricks” when are forced to identify economic substance of transactions (accrual). 15

Conclusions 2 n n n Avoid temptations on forecasts: independent checks; Investments on quality of data and statistics; Cash and accrual, stock and flows: consistency and coherence of indicators 16