Module 3

Question 0

For the following indicators: Net debt-to-GDP or taxable assessment

1. Interpret the indicator
2. Briefly discuss how it can be used to assess the element of financial condition

Answer 0

1. Net debt-to-GDP or taxable assessment - is a measure of net debt as a proportion of GDP (or taxable assessment). While this is not a feasible course of action, the ratio indicates how many years it would take to eliminate the debt if the entire GDP was devoted to the elimination of government debt. An increasing ratio indicates that government debt is increasingly straining the economy and it may not be sustainable.

Question 1

Identify three elements of indicators to assess a government’s financial condition and define each of them.

Answer 1

1. Sustainability
   The degree to which a government can maintain its existing financial obligations both in respect of its service commitments to the public and financial commitments to creditors, employees without increasing debt or tax burden relative to the economy within which it operates.
2. Flexibility
   The degree to which a government can change its debt or tax burden on the economy within which it operates to meet its existing financial obligations both in respect of its service commitments to the public and financial commitments to creditors, employees and others.
3. Vulnerability
   The degree to which a government is dependent upon the sources of funding outside its control or influence or is exposed to risks that could impair its ability to meet its existing financial obligations both in respect of its service commitments to the public and financial commitments to creditors, employees and others.

Question 2

For the following indicators: Public debt charges-to-revenues

1. Interpret the indicator
2. Briefly discuss how it can be used to assess the element of financial condition

Answer 2

Public debt charges to revenues measures public debt charges as a percentage of government revenue. It shows what proportion of government revenues must be expended to service its debt.
As governments spend a greater proportion of their revenues servicing debt, fewer resources are available to support program spending.

Question 3

For the following indicators: Net debt-to-total annual revenue

1. Interpret the indicator
2. Briefly discuss how it can be used to assess the element of financial condition

Answer 3

Net debt-to-total annual revenue measures government net debt as a percentage of total revenues. While this is not a feasible course of action, the ratio indicates how many years it would take to eliminate the debt at current revenue levels if all revenues were devoted to the elimination of the government debt.

While the elimination of government net debt is not necessarily desirable, an increasing ratio indicates that government debt is increasingly straining its resources, and an upward trend in the ratio may not be sustainable.

Question 4

For the following indicators: Foreign currency debt-to net debt measures

1. Interpret the indicator
2. Briefly discuss how it can be used to assess the element of financial condition

Answer 4

Foreign currency debt-to-net debt measures the proportion of its debt held in foreign currency. This measure helps illustrate the degree of potential vulnerability a government has to currency fluctuations.

Question 5

Define the government financial condition.

Answer 5

Government financial condition is a government’s financial health as assessed by its ability to meet its existing financial obligations both in respect of its service commitments to the public and financial commitments to creditors, employees and others. 정부의 재정적인 상태- 정부의 재정적 건강- 현존하는 재정적인 의무를 다할 수 있는 능력 (국민에게 서비스 제공할 의무와 채무자와 직원들등에게 재무의 빚을 다할 의무로 정의될 수 있는)

Question 6

Define economic condition and financial condition.

Answer 6

Economic condition is defined by GASB as “a composite of the government’s financial position and its ability and willingness to meet its financial obligations and service commitments on an ongoing basis.”

Financial condition is defined by PSAB as “a government’s financial health as assessed by its ability to meet its existing financial obligations both in respect of its service commitments to the public and financial obligations to the creditors, employees, and others.

Question 7

Define fiscal sustainability.

Answer 7

Fiscal sustainability refers to the ability of government to maintain a stable debt-to-GDP ratio over the long-term given its existing revenue and expenditure (fiscal) policies. Fiscal sustainability refers to the ability of the federal government only; whereas, financial conditions are related to the federal and local governments.

Question 8

In terms of the relationship between fiscal sustainability and the overall health of economy, what is the most important questions to ask?

Answer 8

The most important question is whether a government can maintain the current tax and expenditure structure now, over the medium term and over the long term given demographic projections and other relevant expectations about the economy. If the answer is no, then it is important to determine the urgency and magnitude of the required adjustment.

Question 9

Discuss the impact of external factors including major demographic and economic trends such as:

Answer 9

1. aging baby-boom generation
2. greenhouse gas emissions
3. sovereign debt issues in Europe
4. Countered by tax structure and provision of government services. The public’s appetite for paying taxes is low but the provision of government services is high.

Question 10

List the objectives that reporting on financial condition has.

Answer 10

1. helps users identify current foreseeable risks and trends. 현재에서 예상할 수 있는 위험도와 추세
2. enlightens users about a government’s fiscal stewardship
3. offers insights into the short and long-term impllications of policy decisions.
4. illustrates a government’s financial ability to maintain the level and quality of its services and to finance new programs.
5. illustrates a government’s ability to meet its financial obligations, both short and long term
6. enhances an understanding of government policy and operating decisions
7. provides a basis for comparison, with other similar jurisdictions.

Question 11

How does the way a government manages its current finances has an impact on its ability to manage it in the future. Illustrate this. (flexibility)

Answer 11

1. High debt today limits future borrowing opportunities.
2. High tax rates today may limit future taxing options.
3. Deferring maintenance today will lead to higher capital costs in the future.
   ex) flexibility indicators- public debt charges to revenue, own source revenues to GDP

Question 12

Describe the advantages of describing financial condition using the elements of sustainability, flexibility, and vulnerability.

Answer 12

1. It provides a framework to support a variety of strategic and policy discussions. (다양한 전략과 정책을 논하는데에 있어서 뼈대를 제공한다.)
2. It also helps reduce the risk that the inherently subjective process of assessing financial condition exclude the key data that could materially influence a user’s perception of a government’s financial performance. (근본적으로 정부 기관의 제무 상태를 평가하는 과정에 있어서 정부의 재무 상태를 인식하는 데에 지대한 영향을 줄 수 있는 중요한 정보를 빼뜨리고, 주관적인 과정을 사용할 위험도를 줄인다.)
3. Assessing and concluding on financial condition will vary according to several unique factos including, but not limited to, the level of government, the scale/scope of services provided, service standards and financial management policies. (재정상태를 진단하고 결론내리는 것은 몇 가지 독특한 요소에 따라 크게 다양하다. 그 요소들은 정부 레벨과 정부가 제공하는 서비스의 정도와 크기, 서비스 기준과 재무 관리하는 정책들에 따라 다르다.)

Question 13

Explain the characteristics of qualitative and quantitative data characteristics.

Answer 13

Qualitative characteristics include reliability, validity, relevance, fairness, comparability, consistency, and understandability.
Quantitative data involves multiple data sets and sources including financial statements.

Question 14

What are the factors to consider when a government chooses which indicators to report include:

Answer 14

1. supports assessment of financial condition.
2. meets objectives for reporting
3. meets the qualitative characteristics of reporting

Question 15

Selecting the right indicator is influenced by three factors. Describe these three factors.

Answer 15

1. Financial return (or net worth) is different in the public sector than in the private sector.
2. Assessing financial condition is not assessing the effectiveness of government policy.
3. Focus of the assessment is primarily based on historical data, not future financial plans.

Question 16

Regardless of the ratios chosen, financial stress warning signs include:

Answer 16

1. Decline or inadequate growth in revenue relative to expenditures
2. A decline in economic activity such as a decrease in retail sales or increasing unemployment levels.
3. Erosion of infrastructure
4. An increase in unfunded pensions and other post-employment obligations.

Question 17

An overall assessment of government’s financial condition includes

Answer 17

1. Has financial condition improved or become worse?
2. the reasons for the changes in each of the elements of financial condition over time
3. an analysis of significant events that may have impacted financial condition
4. Other information
   
   • Key assumptions used and whether they are susceptible to change
   • an explanation of the changes made to past assumptions
   • Effect of change in the underlying assumptions
   • the sensitivity of the assessment of financial condition
   • sources of the economic data
   • sources for the planned indicators reported.
   • the methodology applied in calculating indicators and any alternatives
   • an explanation of what has been done to ensure the reliability of the information used in the financial condition assessment.

Question 19

The Federal Accounting Standards Advisory Board (FASAB) issued Statement of Federal Financial Accounting Standards 36 (SFFAS 36) in September, 2009. How SFFAS 36 was developed and what does this SFFAS 36 aim to accomplish?

Answer 19

It is developed as a result of growing concern over the fiscal sustainability of the U.S. government. The U.S. faces significant demographic challenges over the next few years, which will lead to considerable fiscal challenges. Compounding these issues are the costs of the Iraq war and the generous tax cuts that were implemented in the early 2000s and continue. The U.S. Government’s fiscal position has significantly deteriorated over the last decade and it is borrowing heavily from China. This is attempt at increasing the transparency of government reporting.

Question 20

Define fiscal gap based on SFFAS 36.

Answer 20

Fiscal gap: is the change in non-interest spending and/or receipts that would be necessary to maintain public debt at or below a target % of GDP. More spefically, the fiscal gap is the NPV of projected spending minus projected receipts adjusted by the increase/decrease in public debt required to maintain public debt at or below the target % of GDP for the stated projection period.

The fiscal gap maybe expressed as:

a. a summary amount in Present Values $
b. a share of present value of the GDP for the projection period and/or
c. a share of present value of projected receipts or projected non-interest spending.

Question 21

Explain what SFFAS 36 deals with.

Answer 21

SFFAS 36 will be much more demanding than SORP4 once long-term projections become part of basic F/S information. SFFAS 36 information requirements will likely represent the maximum amount of information that could be asked of a government for fiscal sustainability reporting. SFFAS 36 is a standard, not a statement of recommended practice. SFFAS 36 puts a much stronger focus on prospective information and requires comprehensive projections of future cash flows and relevant measures.
The emphasis is on prospective information and requires comprehensive projections of future cash inflows and relevant measures.

Question 22

Based on the SFFAS 36, define the fiscal imbalance.

Answer 22

Fiscal imbalance is the net present value of existing federal debt plus projected non-interest spending, minus projected receipts. In other words, it is the fiscal gap when the target level of federal debt at the end of the projection period is zero. The fiscal imbalance illustrates the amount that would be necessary to balance projected receipts, projected non-interest spending and repayment of debt for a stated projection period.

Question 23

Explain what GASB (The Governmental Accounting Standards Board) is.

Answer 23

GASB has issued a number of standards regarding the measurement of financial and economic condition. GASB requires the reporting of comprehensive historical information similar to the indicators recommended in SORP-4. Reporting standards under GASB is less onerous than SFFAS 36.

Question 24

GASB states that the following components of information are necessary to assist users in assessing a government entity’s fiscal sustainability:

Answer 24

1. Projections of the total cash inflows and major individual cash inflows, in dollars and as a percentage of total cash inflows, with explanations of the known causes of fluctuations in cash inflows.
2. Projections of the total cash outflows and major individual cash outflows, in dollars and as a percentage of total cash outflows, with explanations of the known causes of fluctuations in cash outflows
3. Projections of the total financial obligations and major individual financial obligations, including bonds, pensions, other post employment benefits, and long-term contracts with explanations of the known causes of fluctuations in financial obligations

Question 25

Review the fiscal sustainability of Canadian governments and of the U.S. government.

Answer 25

The Office of the Parliamentary Budget Officer (2012) issued a report, Fiscal Sustainability Report, outlining the fiscal sustainability of the Government of Canada.

The fiscal structures of the federal Government and the CPP/QPP are sustainable over the long-term. The fiscal structure of the provincial, territorial, and local governments are not sustainable.

Question 26

Define economic performance, financial performance, financial condition, and fiscal sustainability.

Answer 26

1. Economic performance
   - Economic performance reflects a composite of a government’s financial position and ability and willingness to meet the financial obligations in meeting service commmitments and financial commitments on an ongoing basis.
2. Financial performance
   - Financial performance is a measure of government’s viability and has been termed financial condition, economic condition, and fiscal sustainability.
3. Financial condition (SORP 4)
   - Financial condition is a broad, complex concept with both short-and long-term implications that describes a government’s financial health in the context of the overall economic and financial environment.
   - Financial condition is a government’s financial health as assessed by its ability to meet its existing financial obligations both in respect of its service commitments to the public and financial commitments to creditors, employees, and others.
4. Fiscal sustainability
   - Fiscal sustainability is similarly defined as financial condition. FASAB indicates that fiscal sustainability reporting is to inform the financial statement user on “whether the budgetary resources will be sufficient to sustain public services and to meet obligations as they come due, which is essentially equivalent to PASB’s definition of financial condition.

Question 27

How might you evaluate fiscal sustainability?

Answer 27

A government takes resources out of the economy to finance its activities. If a government is offering a steady level of services over time in a non-growing economy, then you would expect that the share of the economy going to support these services to remain the same, and at the same time, government debt as a proportion of the economy to stay the same. If, over the long-term, the government is unable to provide the same level of services without increasing debt burden or tax, then the government has a fiscal sustainability problem.

Question 28

How does the analysis of government financial performance differ from performance management?

Answer 28

Performance management is an evidence-based strategic management approach that focuses on the effectiveness and efficiency of programs and policies. It relies on data from programs and policies to evaluate results.

Analysis of government financial performance is a macro point of view concept that focuses on how well the government is doing in its overall government finances rather than on specific programs and policies. It concentrates on concepts such as financial condition and fiscal sustainability and uses indicators such as the debt-to-GDP ratio or the percentage of revenues used for debt servicing to guage financial condition and fiscal sustainability.

Question 29

Are there accounting standards that require fiscal sustainability reporting?

Answer 29

Yes. FASAB (Federal Accounting Standards Advisory Board) issued the Statement of Federal Financial Accounting Standards 36 (SFFAS 36) in September 2009. SFFAS 36 requires the U.S. Government to report the present value of future receipts and expenditures and other measures that would assist the users in assessing the fiscal sustainability of the U.S. government. The information is required supplementary information. (RSI), which is not audited and does not give rise to a qualified opinion from the auditor if information is missing. It is expected to transition to basic information in the near future, and would then be audited or attract a qualified opinion from the auditor if missing. In Canada, PSAB’s SORP-4, a statement of recommended practice, recommends that governments present information about their financial condition (fiscal sustainability). SORP does not have the force of standards.

GASB and IPSASB both have current projects looking at this issue.

Question 30

Based on the sensitivity analysis in the PBO’s Fiscal Sustainability Report 2011, discuss its impact on the federal and provincial-territorial shares of the fiscal gap as estimated in the PBO’s Fiscal Sustainability Report 2011.
(The December 2011 announcement by the Government of Canada is concerned with the future growth of the CHT. That is the Canada Health Transfer to provinces would continue to grow at the current 6% rate.)

Answer 30

The federal fiscal gap can be eliminated by the policy announced by the federal government in December 2011. It appears that the federal government paid careful attention to the PBO’s report. But if consolidated government spending on health care continued to grow at the 6 % rate estimated in the 2011 report, then the policy announcement would simply result in a fiscal gap transfer from the federal government to the provincial-territorial governments facing all of the gap.

Question 31

Discuss potential provincial-territorial policy responses.

Answer 31

With the December 2011 announcement by the Government of Canada, provincial-territorial governments are now exclusively going to have to address the consolidated federal and provincial-territorial fiscal gap as the fiscal gap burden has been offloaded to provincial and territorial governments. The fiscal gap can be addressed by increasing revenues or decreasing spending. With an aging population, health care costs are expected to rise significantly even if coverage is left at the current levels. According to the sensitivity analysis included in the Fiscal Sustainability Report 2011, if health spending only grows in line with GDP plus aging impacts, the fiscal gap would be reduced to 1.2 % of GDP.
Provincial and territorial governments could follow the federal policy of limiting growth to health care spending in line with GDP. If they funded health care aging impacts over and above growth in line with GDP, they would need to find the remaining 1.2% of GDP elsewhere.

Question 32

Explain the impact that the adoption of accrual budgeting by a government would have on the fiscal gap, and more generally on fiscal sustainability analysis.

Answer 32

Fiscal sustainability analysis should tell us whether a government will be able to maintain its services over the long-term without having to raise taxes. This is a cash flow question: will future revenues be sufficient to pay for its existing levels of services? Accrual budgeting may be helpful in that the full cost of policies and programs may better be calculated and thus can assist in achieving a more efficient allocation of resources. The fiscal gap may change as a result of adopting accrual budgeting. Fiscal targets should be amended too to reflect the change in the accounting basis for budgeting.

Question 33

SFFAS 36 requires that a basic financial statement be included in the consolidated financial report of the U.S. government presenting three items for all the activities of the federal government. Identify these three items.

Answer 33

1. The present value of projected receipts and non-interest spending under the current policy without any change
2. The relationship of the present value of projected receipts and non-interest spending under the current policy without change to projected GDP
3. Changes in the present value of projected receipts and non-interest spending from the prior year.

Question 34

In the context of fiscal sustainability, define fiscal gap and fiscal imbalance.

Answer 34

Fiscal gap is the change in non-interest spending or receipts that would be necessary to maintain public debt at or below a target percentage of GDP.

The fiscal imbalance is the net present value of existing federal debt plus projected non-interest spending minus projected receipts. In other words, it is the fiscal gap when the target level of federal debt at the end of the projection period is zero. The fiscal imbalance illustrates the amount that would be necessary to balance projected receipts, projected non-interest spending and repayment of debt for a stated projection period.

Question 35

SFFAS 36 is more demanding than SORP-4. Briefly explain the differences between the two.

Answer 35

SFFAS 36 is much more demanding than SORP4 and likely represents the maximum amount of information that could be asked of a government for fiscal sustainability reporting. First, SFFAS 36 is a standard, not simply a statement of recommended practice. Second, SFFAS 36 focuses on prospective information, requiring comprehensive projections of future cash flows and relevant measures. On the other hand, SORP 4 focuses on historical measures to assess financial condition and does not use projections: “Financial condition is a government’s financial health as assessed by its ability to meet its existing financial obligations both in respect of its service commitments to the public and financial commitments to creditors, employees, and others.

Question 36

Discuss how aggressively governments should work on reducing debt in the context of a global economic slowdown.

Answer 36

Arguments are sometimes made that deficits should be avoided at all costs and that debt should be entirely eliminated. Such arguments have been the basis of balanced-budget-legislation. However, occasional deficits are an inevitable part of the business cycle for senior governments and debt should simply kept at a reasonable level. Government revenues normally decrease and expenditures increase in recessions, while revenues increase and expenditures decrease during economic booms. This occurs because the demand for public programs such as UI (Unemployment Insurance) and social assistance increases during recessions, and tax revenues decrease because individuals and businesses have lower incomes. Requiring a balanced budget each year would jeopardize these automatic stabilizers and result in unpredictable funding for public programs.

A reasonable level of debt is expressed as a percentage of GDP, and the objective should be to set a sustainable level of debt. Excessive government debt results in high public debt charges to revenues, leaving too few resources to support programs, and affects the economy by decreasing the amount of national capital available for other forms of investment. On the other hand, debt can and should be appropriately used to finance worthwhile long-term investments when debt levels are reasonable.

Question 37

Discuss the existence and comprehensiveness of Canadian reporting standards with respect to fiscal sustainability.

Answer 37

PSAB’s SORP-4 is a statement of recommended practice that provides guidance to Canadian governments on how they may report on their financial condition. SORPs do not have the same force as standards. SORP-4’s concept of financial condition is related to fiscal sustainability but is concerned with a government’s current ability to meet its obligations if the government maintains existing policies, given demographic and economic projections.

Question 38

Discuss fiscal sustainability of the Government of Canada.

Answer 38

The Government of Canada reduced its debt-to-GDP and its debt-servicing costs-to-GDP from the latter portion of the 1990s until the 2008 recession and did better on these measures than all of the other G7 countries. However, according to a report prepared by the Office of the Parliamentary Budget Officer (PBO), the federal government’s current policies are not sustainable over the long term. Assuming unchanged policies, a substantial and sustained increase in the federal government’s debt-to-GDP is projected over the long-term. Increased taxes, reduced program spending or some combination of both amounting to 1.0 and 1.9 % of GDP are needed to close the fiscal gap under two alternative scenarios evaluated by the PBO. The PBO estimates these changes to be feasible, and although the fiscal action required to achieve sustainability does not need to be taken immediately, a delay in implementing fiscal actions would substantially increase the magnitude of the required corrections. The PBO’s findings are consistent with the findings of an earlier report from the IMF that looked at the fiscal sustainability of governments of OECD countries.