Public Sector Governance and Accountability Series: Budgeting and ...

The Budget and Its Coverage 73
and also as a source of substantial fiscal and governance risks: government
guarantees and other contingent liabilities.
Types of Government Liabilities
In addition to legal commitments, governments have other explicit or implicit
commitments that can have an immediate or future fiscal impact. 3 Fiscal risks
and uncertainties are increasing. The international integration of financial
markets generates more abundant, rapid, and volatile cross-border flows, and
governments may become obliged to intervene to support the financial
system. State guarantees and insurance schemes have become common. Privatization
is often accompanied by implicit or explicit state guarantees.
Government liabilities can therefore be certain or uncertain (contingent),
and explicit or implicit. In descending order of fiscal predictability,
these liabilities are as follows:
Explicit liabilities and commitments are legally mandatory and predictable.
This category includes budgeted expenditure programs, multiyear investment
contracts, civil service salaries, pensions, and debt obligations.
Explicit and contingent liabilities are legal or contractual obligations triggered
by a discrete event that may or may not occur. This category
includes, for example, state guarantees for loans contracted by entities
outside central government (subnational governments, public and private
enterprises) and state insurance schemes (for banking deposits,
floods, crop damage, and the like). Often the probability that the event
will trigger the guarantee is high, because these guarantees are typically
granted to support ailing enterprises or sectors in difficulties.
Implicit liabilities represent obligations or expected burdens for the government
that are not contractual or prescribed by law but arise from public
expectations. For example, governments are expected to maintain public
infrastructure and to support a social security scheme, even when they are
not required to do so by law.
Implicit and contingent liabilities are the least predictable category, representing
a nonlegal obligation triggered by a discrete event that may or
may not occur. For example, the government is generally expected to
intervene if the banking sector risks bankruptcy or the country faces a
natural catastrophe.
Table 2.1 lists some of the measures that can be taken to deal with different
kinds of government liabilities and fiscal risks.