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

2. 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

3. 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

4. Forecasts: optimism bias
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.

5. Forecasts

6. Forecasts: Italy

7. 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.

8. 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

9. 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.

10. 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;

11. 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 e 0.6 bn in 2005.

12. 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.

13. Securitisation

14. 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.

15. 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).

16. 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