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Glossary

GuidelinesforFiscalAdjustment
HowShouldtheFiscalStanceBeAssessed?
Giventhesizeandcomplexityofmostgovernmentbudgets,itbecomesimportanttodevelopbroad
indicatorsthatconveyasenseoftheimpactoffiscalpolicyondomesticdemandandfinancial
resources.Ideally,suchindicatorsshouldreflectacomprehensivecoverageofthegovernment's
activitiesandbeeasilyderivedfrombudgetdocumentsandotheravailablestatisticalsources.The
realityisoftendifferentconsiderableeffortsarefrequentlyrequiredtopiecetogetheraccurateand
conceptuallyappropriateindicatorsoftheimpactoffiscalpolicy.Usually,thisrequiresanalysisof
policieseffectedbothinsideandoutsidethebudget.Also,takingintoaccountthewayinwhichthe
budgetaffects,andisaffectedby,othereconomicvariablescanrequireimportantadjustmentsto
officialdata.
Acommonlyusedindicatortoassessthestanceoffiscalpolicyistheoverallbalance,whichmeasures
thedifferencebetweenrevenuesandgrants,andexpenditureandnetlending. 6Thisbalancemaybein
surplusordeficit.Asastartingpointforanalysis,anoveralldeficit(surplus)wouldsuggestan
expansionary(contractionary)fiscalstanceonthebasisthatthenegativeimpactoftaxesandother
revenueonaggregatedemandismore(less)thanoffsetbythepositiveeffectsofgovernmentspending.
Developmentsintheoverallbalanceovertime,particularlywhenrelatedtoGDP(orGNI),providean
indicationofthechangingimpactofthegovernmentsectorontheeconomy.
Whiletheoverallbalanceisanimportantindicatorforassessingfiscalpolicy,itisameasurethatneeds
tobejudgedwithcaution.Sinceitoffersaperspectiveontheaggregatedemandeffectsoffiscalpolicy,
itis,notsurprisingly,deficientasanindicatoroftheimpactoffiscalactionsonotherpolicyvariables
ofconcern(growth,monetarystance,sustainability,etc.).Moreover,asasimpleindicator,itabstracts
fromtherangeofitemsthatcomprisegovernmentoperationsimportantly,thewaythedeficitis
financedaswellasfromtheparticularinstitutionalandotherfactorsthataffecttheimpactoffiscal
policyinanycountry.Thesecomplexitiesarediscussedbelowinrelationtotheeffectofthewaya
deficitisfinanced,specialmeasuresoffiscalimpactthatmaycomplementtheoverallbalance,thetime
frameofanalysis,andpossiblealternativedefinitionsofthegovernmentsectorandfiscalbalance.
Whenattentionshiftstothesupplysideoftheeconomy,thestructureoffiscalpolicytakesongreater
significance,andsimpleindicatorsoffiscalpolicystancebecomelessuseful.Indeed,structuralfiscal
adjustmentmaybeneededevenwhenstabilizationisnotanissue.Thisisbecausehightaxescanfoster
amisallocationofresourcesandcreateworkandsavingsdisincentives,andgovernmentspendingatthe
marginmaybelessproductivethanprivatespending.Issuesrelatingtotheappropriatestructureof
fiscaladjustmentareaddressedinthelastsection.

FiscalImpactofAlternativeMethodsofDeficitFinancing
Adeficitmaybefinancedfromdomestic(bankandnonbank)orexternalsources.Anyassessmentof
fiscalpolicystancewouldneedtotakeaccountofthewaythedeficitisfinanced,sinceeachmethodof
financinghasparticularmacroeconomiceffectsandcosts.However,forcountrieswithoutcapital
controlsthereislittledistinctionbetweendomesticandforeignnonbankfinancinggovernmentscannot
control(orinmostcasesmonitor)thepurchaseofgovernmentsecuritiesorthecapitalflowsthatoccur
inresponsetochangesindomesticinterestrates.
Monetizationofdeficits.Aspreviouslydiscussed,governmentborrowingfromthecentralbank
directlyincreasesthemonetarybase,andthusthemoneysupply,andmaybeasourceof
inflationarypressure.Relianceoncommercialbankfinancingmayhavesimilareffectsifbanks
arenotforcedtolimitcredittootherborrowers.Whereoverallcreditceilingsapply,borrowing

frombanksmaynotbemonetizedbutmayabsorbcreditthatcouldotherwisebeavailabletothe
privatesector.
Relianceonnonbankfinancing.Thescopefordomesticnonbankfinancingisusuallyafunction
ofhowfarcapitalmarketshavedevelopedandwhetherthereispublicdemandforgovernment
bonds.Inadditiontomarketbasedsecuritypurchases,nonbankborrowingmayreflectdirect
governmentinterventioninthecapitalmarket.Thus,thegovernmentmayrequirepublicsector
institutionstoholdgovernmentbondsforliquiditymanagementpurposesormaymandate
heavilysubsidizedgovernmentsavingsprograms.Suchinterferenceinthefinancial
intermediationsystemislikelytoadverselyaffecttheefficientuseoffinancialsavings.
Deficitsfinancedbyborrowingfromthenonbankprivatesectormayhaveamorelimitedimpact
onaggregatedemandthandirectmonetaryfinancing,insofarasthereisacompensating
reductioninspendingbytheprivatesector. 7Governmentborrowingmayincreasedomestic
interestratesandreduceprivateinvestmentalternatively,wheninterestratesarecontrolled,
privateinvestmentmaybemoredirectlyreducedthroughcreditrationing.Thus,whilenonbank
borrowingislikelytohavetheconsiderableadvantageofbeinglessinflationarythanmonetary
financing,thismaywellcomeatthecostof"crowdingout"productiveprivatesectoractivities.
Borrowingfromabroad.Liquidresourcesobtainedfromabroadcanbeusedtoexpanddomestic
demandaswellasimports.However,totheextentthatexternalborrowingfacilitatesthe
importationofadditionalresourcesfromtherestoftheworld,theimpactofadeficitonexcess
demandfordomesticgoodsandservicesisreduced.Concessionalityisimportant:fordeveloping
countries,foreignfinancingoftencontainsagrantelement,andthelargeritis,themorethe
governmentcanborrowwithoutjeopardizingthesustainabilityofthefiscalposition.Ineffect,
concessionalityreducestheeffectiveinterestrate.Externalgrantsaretheultimateformof
concessionalfinancing,althoughtheyareformallytreatedasrevenue.Relianceon
nonconcessionalexternalfinancingleadstoanaccumulationofdebt,whichneedstobeserviced
andeventuallyrepaiditmakestheeconomypotentiallyvulnerabletochangesintheexchange
rateandworldinterestrates.Suchfinancingalsofacilitatesthemaintenanceofamore
appreciatedexchangerate,damagingexportsandencouragingimports.Deficitsfinancedinthis
way,therefore,needtobeassessedinthecontextoftheexternaldebtpositionofthecountry,the
mediumtermbalanceofpaymentsprospects,thetermsunderwhichborrowingtakesplace,and
theusestowhichexternalborrowingmaybeput.
Accumulationofarrears.Delaysinpaymentsondebtservice,orongoodsandservices
purchased,areconsideredaparticularlycostlymeansoffinancingbudgetarycommitments.Such
arrearsarelikelytohavesimilarmacroeconomicconsequencestootherformsofpublic
borrowing,aswellasjeopardizingfuturefinancing,governmentcredibility,andtheintegrityof
thebudgetarysystem.Forexample,theimpactonpricesandthebalanceofpaymentswouldbe
essentiallythesamewhetheradeficitisfinancedbyborrowingfromthedomesticbanking
systemorbyaccumulatingdomesticarrearstopublicenterprisesandtheprivatesector,which
thenborrowfromthebankingsystem.

OtherMeasuresUsedtoAssesstheFiscalStance
Anumberofotherfiscalindicatorsareoftenusedtoprovideadditionalinsightsintotheimpactofa
government'sfiscalpolicystance.Mostrelatetospecialissuesorcircumstancesandareonlypartial
approachesandindicatorsforassessingcomplexsituations.Thefollowingprovidessomeexamplesof
commonlyusedmeasures:
Thecurrentfiscalbalancerepresentsthedifferencebetweencurrentrevenueandcurrent
expenditure.Itprovidesameasureofthegovernment'scontributiontonationalsavings.When
positive,itsuggeststhatthegovernmentcanatleastfinanceconsumptionfromitsownrevenue.
Afundamentalconcernwiththismeasureistheimplicitassumptionthatallcurrentexpenditure
isofaconsumptionnaturethatdoesnotcontributetogrowth.Byimplication,themeasurealso
assumesthatalloutlayscategorizedasinvestmentdonothavetheattributeofbeingconsumption

incharacter.Yetmanyexamplescanbefoundofunproductivecapitalspendingthatdoesnot
augmenttherealcapitalstockoftheeconomy(ordoessoinefficiently)conversely,someforms
ofcurrentexpenditure,forexample,spendingonhealthandeducationorontheoperationand
maintenanceofinfrastructure,maybehighlyproductiveandcontributeeithertohumancapital
formationortotheslowingofcapitaldepreciation.
Theprimarybalanceexcludesinterestpaymentsfromexpenditure.Itcanbesaidtoprovidean
indicatorofcurrentfiscaleffort,sinceinterestpaymentsarepredeterminedbythesizeof
previousdeficits.ForcountrieswithalargeoutstandingpublicdebtrelativetoGDP,achievinga
primarysurplusisnormallyviewedasimportant,beingusuallynecessary(thoughnotsufficient)
forareductioninthedebt/GDPratio. 8
Cyclicallyadjustedorstructuralbalancesseektoprovideameasureofthefiscalpositionthatis
netoftheimpactofmacroeconomicdevelopmentsonthebudget.Thisapproachtakesaccountof
thefactthat,overthecourseofthebusinesscycle,revenuesarelikelytobelower(andsuch
expenditureasunemploymentinsurancebenefitshigher)atthetroughofthecycle.Thus,a
higherfiscaldeficitcannotalwaysbeattributedtoalooseningofthefiscalstance,butmay
simplyreflectthattheeconomyismovingintoatrough.Essentially,calculationofacyclically
adjustedorstructuralbalanceinvolvesanestimationofwhatrevenuesandcyclicallyadjusted
expenditure(andthusthedeficit)wouldbeiftheeconomywereatitspotentialorforsome
measuresofthestructuralbalanceitstrendoutput,ratherthanitsactualoutput. 9
Theusefulnessoftheseindicatorsislimitedbydifficultiesinidentifyingpotentialandtrend
output,and,consequently,indistinguishingcyclicalandunderlyingelementsofthefiscal
deficit.Moreover,itisimportanttodistinguishnormaltendenciesinthebusinesscyclefrom
thosearisingfromexternaldevelopments.Particularly,whenthecyclicaldownturnreflects
adverseexternaldevelopments,thescopeforacceptingalargerdeficitmaybelimited.Unless
therehasbeenasubstantialprioraccumulationofinternationalreserves,anegativeexternal
shockislikelytorequireafiscalcontractiontoreduceabsorptionandfacilitateadjustmentto
changedproductionandincomeprospects.
Thedomesticfiscalbalanceincludesonlythosecomponentsoftheconventionaldeficitthatarise
fromtransactionswiththedomesticeconomyandomitsthosetransactionsdirectlyaffectingthe
balanceofpayments.Themeasureisusedtoidentifythedirectexpansionaryimpactof
governmentonthedomesticeconomy.Thishasprovedaparticularlyusefulindicatorforsome
oilproducingeconomies,wheregovernmentrevenuesfromexportsdonotreducedomestic
absorption.
Theoperationalbalancehasbeendevisedtotakeaccountofthefactthatthehighinterestrates
paidongovernmentdebtduringtimesofveryhighinflationeffectivelycompensatepurchasers
ofgovernmentdebtforthereducedrealvalueofthedebtprincipalcausedbyinflation.Insuch
inflationarycircumstances,boththeratiosofinterestoutlaysandthedeficit,relativetoGDP,are
veryhighafortiori,thedeficittoGDPratiosignificantlyoverstatestheextentofthedeficit
thatwouldprevailinalowinflationrateenvironment.The"operationalbalance"excludesthat
partofinterestoutlaysthatcompensatedebtholdersfortheimpactofactualinflationineffect,
thiscomponentofinterestistreatedasthoughitwereamortizationinordertomaintainan
unchangedrealvalueofthedebt.Useoftheoperationaldeficitconceptfacilitatesananalysisof
theunderlyingstanceoffiscalpolicybyadjustingforthisinflationinterestratenexus. 10

TheSensitivityofaFiscalAssessmenttotheTimeFrameofAnalysis
Theshorttermfiscalbalancecanprovemisleadingforthepurposeofassessingthesustainabilityofa
government'sfiscalposition.Thismaybeillustratedbythefollowingproblems:
Theannualbalancemayshowreceiptsfromprivatizationandthesaleofotherassetsasrevenues,
andthusmaskahigherdeficitexclusiveofsuchreceipts.Receiptsfrommarketbased

privatizationsalesdonotchangeagovernment'snetworthifitisassumedthatthecashreceipts
equalthemarketvalueoftheprivatizedassets.Indeed,thedivestitureofgovernmentassetsmay
implythatinsubsequentperiodsrevenueswillbediminishedtotheextentthatthereceiptsfrom
theassetsalehavenotbeenreinvestedinanequivalentyieldingasset(or,tothesameeffect,
usedtorepayoutstandinggovernmentdebt).However,insofarasprivatizationleadstoimproved
economicperformance,itmayboostthetaxbase.Moregenerally,inevaluatingthefiscal
positionatagivenpointintime,itisnecessarytobeparticularlycautiousininterpreting
revenuesoroutlaysthatarisefromchangesinthegovernment'snetwealthposition.
Theannualfiscalbalanceincludesbothrevenuesthatareassociatedwithafutureobligationby
thegovernmenttomakepayments(suchassocialsecurityexpenditures)andexpendituresthat
arisefrompreviousobligationsofthistype.Governmentguaranteesmayalsohavenocostsin
thepresentbutcouldimplylargefutureoutlays.
Suchproblemshaveledtoasubstantialacademicliteratureexploringthereplacementofthe
annualdeficitwithameasureofchangesinthegovernment'sdiscountednetworth.
Operationally,suchmeasureshaveprovendifficult,andmorepartialapproacheshavebeen
followedtotakeaccountofthesefactors.Forexample,wheresignificant,privatizationreceipts
shouldbeexcludedfromrevenuewhenassessingtheappropriatenessofthefiscalstancethatis,
theyshouldbetreatedascontributingtothefinancingoftheoveralldeficit.Similarly,fiscal
analystsoftenassessthemagnitude,probability,andlikelytimingofcontingentliabilities,
includinggovernmentguaranteesthatmaywellbecalleduponinthefuture. 11
Considerationoftheannualfiscalbalancemayalsoneedtobesupplementedbylongerterm
analysistoassessthefutureimpactofcurrentfiscalpolicies.Forexample,countrieswithaging
populationsarelikelytofindthatpensionschemesfinancedonapayasyougobasisareplaced
undergrowingstrainincreasingexpenditureneedsmayrequirehighpayrolltaxesandpossibly
budgetarytransfers.Alongertermassessmentwouldprovideabasisforassessingsuch
budgetaryimplicationsandguidingpossiblechangesinunderlyingpolicies.

DefinitionofGovernmentAccountsforMacroeconomicAnalysis
Effortsatassessingfiscalpolicyleadtoimportantquestionsabouttheinstitutionscomprisingthe
government,thetimewhenafiscaltransactionimpactsontheeconomy,andthetransactionstobe
includedwhendeterminingtheoverallfiscalbalance. 12

CoverageofGovernmentOperations
Fiscalpolicy(namelytheuseofthegovernment'staxing,spending,andborrowingpowerstoattain
publicobjectives)maybeeffectedbydifferentlevelsofgovernmentandthrougharangeof
institutions.Definitionsofgovernmentarebestdistinguishedbythefunctionperformed,ratherthanby
legalorinstitutionalcriteria.Onthisbasis,thefollowinggovernmentsectorsmaybedistinguished,
withcorrespondinglydifferentmeasuresoffiscaldeficits:
Centralgovernmentreferstotheactivitiesofthecentralauthorityofacountry.Importantly,
transactionsatthislevelshouldnotonlyreflectthelegalbudgetofthecentralgovernmentbut
alsothefiscalactionsofanyextrabudgetaryfundsorautonomousagenciesrelevanttocentral
governmentpoliciesorunderthecentralauthorities'effectivecontrol.
Generalgovernmentincludes,inadditiontothecentralgovernment,thebudgetaryand
extrabudgetaryactivitiesofgovernmentsoperatingonlyinpartsofthecountry(stateandlocal
governments,etc.).Notethatsocialsecurityfundsformpartofthelevelofgovernmentatwhich
theyoperate.Basedonafunctionaldefinitionofgovernmentandfiscalpolicy,thefollowing
twofurthersetsofactivitiesmaybeconsideredindefiningalternativemeasuresofthedeficit:
Nonfinancialpublicsectorenterprises(NFPEs)aregovernmentownedand/orcontrolled
corporationswhoseactivitiesmaybesignificantlyinfluencedbynonmarketfactors,often

includingapplicationofa"softbudgetconstraint."TheoperationalbalanceofNFPEsandtheir
investmentscanbeconsolidatedwiththeactivitiesofthegeneralgovernmenttoformabroad
measureofthefiscaloperationsofthenonfinancialpublicsector.
Quasifiscaloperationsofpublicfinancialinstitutionsaretaxandsubsidyoperationsthatmay
takeplacethroughtheactivitiesofthissector,themostimportantofwhichareundertakenby
thecentralbank.AsdiscussedinBox3,suchactivitiesmayhaveafiscalimpactcomparableto
thatofmoretraditionallydefinedgovernmentactivitiesandmeasures.
Inprinciple,anassessmentoffiscalpolicyshouldbebasedonthemostcomprehensivedefinitionof
governmentpossible.Consideringonlythecentralgovernmentfiscalbalancemayprovideadistorted
pictureofthefiscalstancewhensubnationalfiscalauthoritiesandasocialsecurityfundcarryon
substantialfiscaloperations,orwhenquasifiscalactivitiesareimportant.Atthesametime,forfiscal
assessmenttobeofthemostvalue,itshouldbebasedondatathatareregularlyandquicklyavailable.
Thisneed,combinedwiththeviewthatcentralgovernmentpoliciesareeasiertochangequickly,
createsatendencytofocusanalysisondevelopmentsinthecentralgovernmentaccounts.Also,if
certainlevelsofgovernmentareconstrainedintheirborrowingcapacityandthusforcedtorunbalanced
budgets,itmaybepossibletoabstractfromtheselevelsofgovernmentinconsideringtheaggregate
demandeffectsoffiscaldevelopments.Reconcilingtheseconflictingperspectivesrequiresthatsystems
beestablishedtocarryouttheperiodicmonitoringoffinancialdevelopmentsatsubnationallevelsof
governmentandinthepublicenterprisesector.Italsorequiresanattempttomeasureatleastthemost
importanttypesofquasifiscalactivities.

TimingoftheImpactofFiscalTransactions
Normally,governmentscommitresourcesbeforetheyareactuallydisbursedonacashbasis.Sometax
liabilitiesmayalsoaccrueforaconsiderableperiodbeforeataxpayerhastomakeapayment.This
givesrisetothequestionastowhetherthefiscalbalanceistobeassessedonacommitmentbasissince
theseimplicittransactionsmayaffectactivityintheeconomyoronlyonthebasisofcashtransactions
(andthecashbalance). 13Acashbasedmeasureofthefiscalbalancehastheadvantageofemphasizing
linkswithfinancialdevelopments,particularlyinthemonetaryaccounts.Inanumberofcountries,
however,governmentshaveresortedtonotmeetingtheircommitmentobligations,eitherduetoalack
ofliquidityand/ortomeettargetsforcashbaseddeficitreduction.Acashbaseddeficitwillthen
underestimatetheextentofagovernment'spreemptionofrealresources.Indeed,whenthearrearsare
toenterprises,which,inturn,borrowfromthebankingsystem,acashbaseddeficitconceptwillalso
underestimatethegovernment'scontributiontothegrowthofmonetaryaggregatesanddemand.In
thesecircumstances,wherepossible,thebudgetshouldbepresentedonbothacashandacommitments
basis,withchangesinarrearsprovidingtheprincipallinkbetweenthetwoconcepts. 14

Box3.QuasiFiscalActivitiesofPublicFinancialInstitutions
Inmanycountries,centralbanksandotherpublicfinancialinstitutions
(PFIs)playanimportantroleinfiscalpolicy.Byundertakingfinancial
transactionsthatservethesameroleastaxesandsubsidies,theyincrease
theeffectivesizeofthefiscaldeficit.Thesesocalledquasifiscalactivities
(QFAs)canhaveasignificantallocativeandbudgetaryimpactinmany
countries.
Inthecaseofacentralbank,themajorityofQFAsarisefromitsdualroles
asregulatoroftheexchangeandfinancialsystemsandasthebankertothe
government.QFAscaninvolvemultipleexchangeratearrangements
(typicallyataxonexportersandasubsidytoimporters),exchangerate
guarantees(acontingentsubsidytotheborrowerofforeignexchange),
interestratesubsidiesandsectoralcreditceilings,centralbankrescue
operations,andlendingtothecentralgovernmentatbelowmarketrates.
OtherPFIsoftenundertakeQFAsbyimposingrestrictionsonfinancial

OtherPFIsoftenundertakeQFAsbyimposingrestrictionsonfinancial
markets(suchasinterestratesubsidiesandcreditceilings),orby
providinggovernmentmandatedspecialtreatmentforspecificclassesof
borrowers(forexample,theagriculturalsector)andlenders.
ThereareavarietyofreasonswhycentralbanksandotherPFIsmay
engageinQFAs.QFAsmayallowthegovernmenttohidewhatshould
essentiallybeconsideredbudgetaryactivitiesintheaccountsofPFIs.
SuchQFAsmaynotreceiveequivalentlegislativeorparliamentary
scrutinycomparedtobudgetaryoperations.Anotherrationaleforsome
QFAsisthatitmaybemoreconvenienttoadministerthemrelativeto
budgetaryoperations.
Clearly,QFAsoughttobeexplicitlyconsideredintheformulationof
fiscalprograms.Asafirststep,anyquantifiableQFAsshouldbeaddedto
thefiscalbalancetoprovideabroaderandmoreappropriatemeasureof
thedeficit.Totheextentpossible,theseshouldthenbetransformedinto
normalbudgetaryoperationsbyreplacingquasifiscaltaxesandsubsidies
withexplicittaxesandsubsidies.Whilethiswouldbringthemoutintothe
open,theirdistortionaryeffectsontheeconomywouldremain.More
fundamentalactionnamely,structuralreformisrequiredinorderto
achievealongtermsolution.

Definingthe"OverallFiscalBalance"
Onacashbasis,totalincomingsandoutgoingsfromthebudgetmustalwaysbalance.Adeficit(or
surplus)isdeterminedbydrawingabalanceamongasubsetofreceiptsandpayments(classified"above
theline"),whicharethenfinancedbyothertransactions(shown"belowtheline").Thedelineationis
basedontheanalyticalneedssoughtfromthemeasureofthefiscalbalance.
Asnotedearlier,acommonmeasureofthefiscalbalanceistheoverallbalance,namely,thedifference
betweenrevenueandgrants,andexpenditureandnetlending(allofwhicharethusabovetheline). 15
Viewedfrombelowtheline,adeficitintheoverallbalanceisfinancedbyadrawdownincashassets
(anduseofotherfinancialassetsacquiredforliquiditypurposes)andbyanincreaseinthegovernment's
debtliabilitiesthroughborrowingfromexternalanddomesticsourcesthelatterencompassingnonbank
andbankfinancing.Thisdefinitionemphasizestheextenttowhichthefinancingofgovernment
expenditureandnetlendingrequirestheassumptionofdebtobligationsforfuturerepaymentand/ora
rundowninthegovernment'sholdingofliquidfinancialassets.
Thereareatleasttwoareasinwhichthisdefinitioncanbeadapted.
Externalgrants.Theseareincludedwithothergovernmentrevenueonthegroundsthattheydo
notaddtodebtandmayfinanceexpendituresthatwouldotherwisenottakeplace.However,
grantsreflectdiscretionaryfinancingbydonorsthatcanchangesignificantlyfromyeartoyear.
Theirinclusionmaymasktheirpossibleimpermanenceandmayelicitastructuralincreasein
expenditure,whichmaysubsequentlyprovedifficulttoreverse.Consequently,inassessingthe
fiscalposition,thedeficitisnormallycalculatedbothinclusiveandexclusiveofgrants.
Netlending.Byplacingnetlendingabovetheline,thereisanasymmetrybetweenthetreatment
ofchangesingovernmentfinancialassets(acquiredforpolicypurposes)andliabilities.Ineffect,
theformerareplacedabovetheline,thelatterbelow.Netlendingisprimarilycomposedof
directcapitalinfusionsoffundstopublic(andsometimesprivate)enterprises(forexample,
whenthegovernmentacquiresequity)andofgovernmentcreditprogramsundertakenforpolicy
purposes. 16Givenitsimplicitsubsidyelementandthepossibilitythatsomeoftheloanswill
neverberepaid,netlendingcannotbedefinedaspurefinancialintermediation.Thisusually

justifiesitstreatmentasadeficitdeterminingitemabovetheline.However,adeficitconcept
thatwasbasedondeterminingchangesinagovernment'snetfinancialworthorindebtedness
wouldplacenetlendingactivitiesbelowtheline.Emphasisonthegovernment'snetfinancial
worthwouldsupportplacingprivatizationreceiptsbelowtheline,withsomemeasureofthe
reducedvalueofequityholdingsoffsettingtheincreaseincashdeposits.Thiswouldbe
consistentwiththetreatmentrecommendedinthesectiononthesensitivityofafiscalassessment
tothetimeframeofanalysis.
6SeeInternationalMonetaryFund(1986,pp.1061 08).TheManualusestheterm"lendingminus

repayments"ratherthan"netlending."
7Thedemandeffectsofdeficitsfinancedbydebtissuancemay,toalimitedextent,beoffsetbyincreasesin

privatesectorsavingsinanticipationoffuturetaxationtofinancedebtservice.
8IfnominalinterestratesongovernmentdebtarenotgreaterthannominalGDPgrowth,aprimarysurplus

willimplythattheshareofgovernmentdebtinGDPwillfall.
9InitsWorldEconomicOutlookexercise,theIMFalsoprovidesanestimateofthefiscalimpulse,theinitial

stimulustoaggregatedemandarisingfromfiscalpolicyfromwhateversource,whetherdiscretionaryor
otherwise,duringagivenperiod.
10Thisindicatorhasbeencriticizedforimpartinganinflationarybiastofiscalpolicy,sinceunexpected

inflationmayreducetheinflationadjusteddeficitsubstantially.Moreover,itassumesthatbondholderswill
save100percentoftheinflationarycomponentoftheirnominalinterestearnings.Whileflawed,the
operationaldeficitconceptisausefulcomplementaryindicatoroffiscalpolicyinahighinflationrate
environment.
11Afurtherillustrationofpartialapproacheswouldbetheexclusionofthesurplusofapublicpensionfund

thatdidnotoperateonapayasyougo(PAYG)basisandaccumulatedfundsfromcontributorsinexcessof
payoutstocurrentretireeswhenassessingthesustainabilityofthecentralgovernment'sdeficit.
12Theseissuesareaddressedinsomedetail.SeeInternationalMonetaryFund,(1986,pp.1061 08).
13Evenwhenexpenditureismeasuredonacommitmentsbasis,revenueisnormallycalculatedonthebasis

ofactualreceipts.Thereasonisthatestimatesofunpaidtaxliabilityareusuallymuchhigherthanthe
amountthatwillactuallybecollected.
14Arrearsareusuallydefinedaspaymentswhichhavebeenoverdueforaperiodgreaterthanthelag

normallyassociatedwithacountry'spaymentsprocess.Theremaysometimesalsobeasignificantincreasein
budgetarycommitmentsthat,whilenothavingyetgivenrisetoarrears,maystillleadtoadivergence
betweenthemagnitudeofrecordedoutlaysonacashandcommitmentsbasis.
15Netlending(abovetheline)includesonlytransactionsindebtandequityclaimsundertakenforpurposes

ofpublicpolicy,ratherthanforliquiditymanagement.
16Sincegovernmentinvestmentoutlaysgeneratephysicalassets,inclusionoftheacquisitionofsuch

financialassetsabovethelinecontributestoauniformityoftreatmentwithregardtoassetacquisition.

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