Tricks of the Trade
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Tricks of the Trade Chiara Goretti Senato della Repubblica - Italy Bucharest, 10th April 2008. Outline. Fiscal rules: incentive to creative accounting Forecasts: optimism bias Stock-flow adjustment: Infrastructures: the ISPA case Railway transfers Securitisation and lease back

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Tricks of the Trade

Chiara Goretti

Senato della Repubblica - Italy

Bucharest, 10th April 2008

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  • Fiscal rules: incentive to creative accounting

  • Forecasts: optimism bias

  • Stock-flow adjustment:

    • Infrastructures: the ISPA case

    • Railway transfers

    • Securitisation and lease back

    • Tax collectors

  • Conclusions

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    Fiscal rules: incentive to creative accounting

    • From restricted to non restricted activities

    • The EMU case:

      • 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

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    Forecasts: optimismbias

    • 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.

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    Forecasts: Italy

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    Forecasts: lessons

    • 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.

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    The stock-flow adjustment (SFA)

    • Deficit vs debt bias: from restricted to unrestricted activities;

    • Reconciliation between:

      • cash and accrual data;

      • stock and flow indicators;

  • Consistency across the data;

    Debtt – Debtt-1 = Deficitt + SFA

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    • 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.

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    Railway transfers

    • 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;

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    Real estate: securitisation and lease-back

    • 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;

    • Revisions of deficit figures for 2001 and 2002;

    • Lease-back (FIP) of central and local building used as offices, then rented back to gvt;

    • Revenues for 3 bn euro in 2004 e 0.6 bn in 2005.

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    Tax collectors

    • 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 pre-payments;

    • In 2005, Eurostat decided that pre-payments have to be recorded as financial transactions, without improving, in 2003 and 2004, the deficit;

    • December 29th, 2007, pre-payments by tax collectors abolished, in order to worsen the balance.

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    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.

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    Conclusions 1

    Experience demonstrates that gvts:

    • aim to exclude expenditures and includes revenues in constrained balance;

    • exploit absence of accounting regulations or opacity in recording methodology;

    • abandon “tricks” when are forced to identify economic substance of transactions (accrual).

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    Conclusions 2

    • Avoid temptations on forecasts: independent checks;

    • Investments on quality of data and statistics;

    • Cash and accrual, stock and flows: consistency and coherence of indicators