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

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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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slide1

Tricks of the Trade

Chiara Goretti

Senato della Repubblica - Italy

Bucharest, 10th April 2008

outline
Outline
  • 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
slide3

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
forecasts optimism bias
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.
forecasts lessons
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.
the stock flow adjustment sfa
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

slide9
ISPA
  • 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.
railway transfers
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;
real estate securitisation and lease back
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.
tax collectors
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.
data statistical deficit revisions
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.

conclusions 1
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).
conclusions 2
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
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