Problems in quasi-public enterprises, like Fannie Mae in the United States, were largely out of sight until government bailouts were needed (photo: Karen Bleier/AFP/Getty Images)
Government Spending & Debt
In the wake of the crisis, a new IMF paper calls for improvements in fiscal reporting standards, faster adoption of those standards by member countries, and improvements in the way the IMF and others monitor fiscal transparency.
The past 15 years have seen improvements in both fiscal reporting standards and practices. However, the recent crisis has underscored that, even among advanced economies, governments’ understanding of their fiscal position—and the risks to that position—remains inadequate.
The IMF paper on fiscal transparency, accountability, and risk surveys the state of fiscal transparency and looks at what can be done to improve it.
Openness on the rise
Over the past 15 years, a set of internationally accepted standards for fiscal transparency have been developed. These include the IMF’s own Code of Good Practices on Fiscal Transparency and the Government Finance Statistics Manual as well as the International Public Sector Accounting Standards developed by the International Federation of Accountants.
This period has also witnessed a steady improvement in the comprehensiveness, quality, and timeliness of public financial reporting in countries across the income scale, according to the IMF paper.
Over 40 percent of governments now produce fiscal statistics covering the whole of the general government, while over 20 percent of governments produce balance sheets covering at least their holdings of financial assets and liabilities.
“Now is the right time to review our approach to improving fiscal transparency,” said Carlo Cottarelli, head the IMF’s Fiscal Affairs Department. “The crisis has reminded us that comprehensive, reliable, and timely information about the public finances is the foundation of effective fiscal management. It has also highlighted the gaps in both fiscal reporting standards and practices. Improvements in fiscal transparency should therefore be a central element of any government’s fiscal policy response to the crisis.”
Crisis revealed transparency shortcomings
According to the IMF, despite the advances made to date, current understanding of governments’ underlying fiscal position and the risks to that position remains inadequate. This was demonstrated by the emergence of previously unreported fiscal deficits and debts in the wake of the crisis in Greece and Portugal. It could also be seen in the United States where financial problems in quasi-public enterprises, like Fannie Mae and Freddie Mac, remained largely out of sight until government bailouts were needed.
Elsewhere, in countries with large domestic banking sectors, such as Iceland, Ireland, and the United Kingdom, the biggest shock to the public finances came from the crystallization of large, mainly implicit, government liabilities to the financial sector.
These shortcomings in fiscal transparency were due to a combination of gaps and inconsistencies in existing fiscal reporting standards, delays and discrepancies in countries’ adherence to those standards, and a lack of effective multilateral monitoring of compliance with those standards.
Building up transparency
The IMF paper outlines the elements of a revitalized fiscal transparency effort to address the shortcomings in standards and practices revealed by the crisis and guard against a resurgence of fiscal opacity in the face of growing pressures on government finances.
It examines the relationship between fiscal transparency and fiscal outcomes; reviews progress in promoting greater fiscal transparency over the past decade; considers the lessons of the recent crisis for existing fiscal transparency standards, practices, and monitoring arrangements; and makes a series of recommendations for renewing the global fiscal transparency effort in the wake of the crisis.
In practical terms, this means
• improvements in fiscal reporting standards, including the IMF’s Code of Good Practices on Fiscal Transparency. These include broadening the institutional coverage of fiscal reports; recognizing a wider range of flows, assets, and liabilities; and the development of new standards for fiscal forecasting and risk management;
• a more concerted effort to accelerate implementation of those standards. This requires action at the national level to strengthen domestic constituencies for fiscal transparency such as legislatures, supreme audit institutions, and fiscal councils. At the international level, the IMF and other multilateral institutions need to provide more practical guidance on issues such as the implementation of accrual accounting and fiscal oversight of public corporations; and
• enhanced international monitoring of country compliance with those standards. In particular, the IMF needs to replace the existing fiscal transparency Report on Observance of Standards and Codes with a more analytical, modular, and graduated approach to evaluating countries’ fiscal reporting practices and outputs.
