1. Copyright 2010, The World Bank Group. All Rights Reserved. 1 GOVERNMENT FINANCE STATISTICS ANALYTIC FRAMEWORK Part 1 This lecture introduces the analytic framework of the GFS system and describes the components and elements of its structure. It also provides references to an IMF Paper on the use of the GFSM 2001 statistical framework to strengthen fiscal analysis and the IMF Manual on Fiscal Transparency.

2. Copyright 2010, The World Bank Group. All Rights Reserved. 2 THIS LECTURE The previous lecture, Flows, Stocks, and Accounting Rules, discussed the flow and stock data that are collected from GFS statistical units and the rules for their recording and reporting. This lecture describes the relationship among the elements that constitute the GFS framework.

3. Copyright 2010, The World Bank Group. All Rights Reserved. GOVERNMENT FINANCE STATISTICS The government finance statistics (GFS) framework is designed to facilitate macroeconomic analysis. The framework facilitates a comprehensive assessment of the economic impact of government activity and the sustainability of fiscal policy. In the past, the governments’ priority was to focus on its financing constraint, which was best measured using the cash basis of recording. Contemporary approach to assessing fiscal policy is focused on resource- based accounting, which has led to the introduction of the accrual basis of recording. To achieve its analytic objectives, the GFS statistical framework has to generate data that are closely linked to the other macroeconomic statistical systems: national accounts, balance of payments, and monetary and financial statistics. ANALYTIC OBJECTIVES 3

4. Copyright 2010, The World Bank Group. All Rights Reserved. 4 GOVERNMENT FINANCE STATISTICS Three types of changes had to be made to the cash based 1986 GFS framework to produce a system that facilitates resource based accounting: 1.The definitions of individual statistical variables have been aligned more closely with economic concepts. 2.A number of conceptual modifications have been made to harmonize the GFS system with the 1993 SNA. 3.The previous GFS analytic framework has been expanded to include nonmonetary transactions, flows other than transactions, and balance sheets. For some types of analysis it is necessary to include the operations of public corporations in the coverage of GFS, thus statistics should be compiled for the public sector as well as for the general government sector. CHANGES TO THE 1986 GFS FRAMEWORK

5. Copyright 2010, The World Bank Group. All Rights Reserved. 5 OPENING BALANCE SHEET Nonfinancial Assets Financial Assets Liabilities Net Worth Changes in Net Worth F L O W S CLOSING BALANCE SHEET Net Worth Nonfinancial Assets Financial Assets Liabilities TRANSACTIONS Revenue Expense = NET OPERATING BALANCE minus Nonfinancial Assets = NET LENDING/ BORROWING minus Liabilities Financial Assets cash other financial assets minus OTHER ECONOMIC FLOWS Holding Gains & Losses Other Changes in the Volume of Assets Nonfinancial Assets Financial Assets Liabilities Nonfinancial Assets Financial Assets Liabilities THE GFS ANALYTIC FRAMEWORK

6. Copyright 2010, The World Bank Group. All Rights Reserved. 6 GOVERNMENT FINANCE STATISTICS The core of the analytic framework is a set of four financial statements. Three of the statements can be combined to demonstrate that all changes in stocks result from flows: 1.Statement of Government Operations, 2.Statement of Other Economic Flows, 3.Balance Sheet In addition, to provide key information on liquidity, the framework includes: - Statement of Sources and Uses of Cash. FINANCIAL STATEMENTS

7. Copyright 2010, The World Bank Group. All Rights Reserved. 7 GOVERNMENT FINANCE STATISTICS Two important analytic balances are derived in the Statement of Government Operations: 1.Revenue less expense equals the net/gross operating balance, which affects net worth in the balance sheet. 2.Addition of net acquisition of nonfinancial assets to the net operating balance derives net lending (+)/borrowing (–), which is also equal to the net result of transactions in financial assets and liabilities. The net/gross operating balance is an indicator of the ongoing sustainability of government operations. Net lending (+)/borrowing (–) is a summary measure indicating the extent to which government is either putting financial resources at the disposal of other sectors in the economy or utilizing the financial resources generated by other sectors. STATEMENTS AND ANALYTIC BALANCES

8. Copyright 2010, The World Bank Group. All Rights Reserved. 8 GOVERNMENT FINANCE STATISTICS Statement of Government Operations Revenue Minus (-) Expense Equals (=) Net/Gross operating balance Plus (+) Net acquisition of nonfinancial assets Equals (=) Net lending/borrowing Equals (=) Transactions in Financial Assets and Liabilities (Financing) Net acquisition of financial assets Domestic Foreign Net incurrence of liabilities Domestic Foreign

9. Copyright 2010, The World Bank Group. All Rights Reserved. 9 GOVERNMENT FINANCE STATISTICS The Statement of Other Economic Flows presents influences on the government’s net worth that are not the result of government transactions. The balancing item of this statement is the change in net worth resulting from Other Economic Flows. Changes in the value of assets, liabilities, and net worth due solely to price effects are called holding gains. Changes in the volume of assets and liabilities other than from transactions may arise for a variety of other reasons. They can be described as resulting from exceptional or unexpected events, from normal events, or from reclassifications. Statement of Government Operations

10. Copyright 2010, The World Bank Group. All Rights Reserved. 10 GOVERNMENT FINANCE STATISTICS Statement of Other Economic Flows Nonfinancial Assets Holding gains Other volume changes Plus (+) Financial Assets Holding gains Other volume changes Minus (-) Liabilities Holding gains Other volume changes Equals (=) Change in net worth resulting from Other Economic Flows

11. Copyright 2010, The World Bank Group. All Rights Reserved. 11 GOVERNMENT FINANCE STATISTICS The Statement of Sources and Uses of Cash shows the total amount of cash generated or absorbed by current operations, transactions in nonfinancial assets, and transactions involving financial assets and liabilities other than cash itself. Unlike the accrual-based Statement of Government Operations, the Statement of Sources and Uses of Cash reflects a cash basis of recording. Information on the sources and uses of cash is important for assessing the liquidity of the general government sector. The most important analytic balances in the Statement of Sources and Uses of Cash are: the cash surplus/deficit and the net change in the stock of cash. GOVERNMENT CASH OPERATIONS

12. Copyright 2010, The World Bank Group. All Rights Reserved. 12 GOVERNMENT FINANCE STATISTICS Statement of Sources and Uses of Cash Cash receipts from operating activities Minus Cash payments for operating activities Equals 1 Net cash inflow from operating activities Purchases of nonfinancial assets Minus Sales of nonfinancial assets Equals 2 Net cash outflow from investments in nonfinancial assets 1-2 Cash surplus/deficit Net acquisition of financial assets other than cash Minus Net incurrence of liabilities Equals 3 Net cash inflow from financing activities 1-2+3 Net change in the stock of cash

13. Copyright 2010, The World Bank Group. All Rights Reserved. 13 GOVERNMENT FINANCE STATISTICS The Balance Sheet presents the stocks of assets and liabilities at the end of the accounting period, and net worth, defined as total assets less total liabilities. Another balancing item in the Balance Sheet is net financial worth, defined as total financial assets less total liabilities. To facilitate aggregation and reconciliation of flows and stocks, stocks of assets are classified in the same way as transactions in assets. Financial assets are classified by residency of the counterparty and by type of instrument. Most classifications that apply to financial assets also apply to liabilities. Liabilities are first classified by residency and then by type of instrument. STATEMENTS AND ANALYTIC BALANCES

14. Copyright 2010, The World Bank Group. All Rights Reserved. 14 GOVERNMENT FINANCE STATISTICS Balance Sheet NET WORTH NONFINANCIAL ASSETS Fixed assets Inventories Valuables Nonproduced assets FINANCIAL ASSETS Domestic Currency and deposits Securities other than shares Loans Shares and other equity Insurance technical reserves Financial derivatives Other accounts receivable STRUCTURE OF THE GFS BALANCE SHEET Foreign Currency and deposits Securities other than shares Loans Shares and other equity Insurance technical reserves Financial derivatives Other accounts receivable Monetary gold and SDRs

15. Copyright 2010, The World Bank Group. All Rights Reserved. 15 GOVERNMENT FINANCE STATISTICS Balance Sheet LIABILITIES Domestic Currency and deposits Securities other than shares Loans Shares and other equity (public corporations only) Insurance technical reserves [GFS] Financial derivatives Other accounts payable Foreign Currency and deposits Securities other than shares Loans Shares and other equity (public corporations only) Insurance technical reserves [GFS] Financial derivatives Other accounts payable STRUCTURE OF THE GFS BALANCE SHEET (cont’d)

16. Copyright 2010, The World Bank Group. All Rights Reserved. 16 GOVERNMENT FINANCE STATISTICS To facilitate alternative fiscal analyses, other than the core GFS balances included in the statements of the GFS framework, a number of additional variables and balances can be derived from GFS data: Overall fiscal balance, Adjusted overall fiscal balance, Overall primary balance, Primary operating balance, Gross saving, Fiscal burden, Total expenditure, Total expenditure composition, Government final consumption expenditure, Gross investment, Net wealth position, Net financial wealth position, Gross debt position, and Contingent liabilities. ADDITIONAL SUMMARY MEASURES FOR FISCAL ANALYSIS

17. Copyright 2010, The World Bank Group. All Rights Reserved. 17 GOVERNMENT FINANCE STATISTICS REFERENCES The IMF Paper on the use of the GFSM 2001 statistical framework to strengthen fiscal analysis can be found at: http://www.imf.org/external/np/pp/eng/2005/102505.pdf The IMF Manual on Fiscal Transparency can be found at: http://www.imf.org/external/np/pp/2007/eng/051507m.pdf