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

190 Paul Boothe
accounting, including accountability and ease of administration. 7 For example,
Tanzi (2003) quotes Financial Times columnist John Plender, who argues
that “the further the budget discussion moves from cash, the greater the risk
of becoming lost in the fiscal fog of war”(Plender 2003: 18). Indeed, Canada’s
Public Sector Accounting Board recommends that the cash accounting focus
on the government deficit be replaced with five separate measures under
accrual accounting (PSAB 2003).
The Model
To help analyze the interaction of fiscal rules and accounting regimes,
a simple government budget under alternative accounting regime is
sketched out. The model combines accounting identities with government
behavior described by fiscal rules relating to deficits and capital accumulation.
First, a cash accounting regime is described.
Assume that the revenue side of the government budget is exogenous.
Then total revenue grows at the same rate as the nominal economy. Total
expenditure is the sum of transfers to individuals and firms, gross public
sector investment, services to individuals and firms, and debt-service payments.
The budget surplus is simply the difference between total revenue
and total expenditure. Assume that the government adopts a no-deficit fiscal
rule. Then transfers are set in each period to ensure that the budget is in
balance—that is, total expenditures are equal to (exogenous) total revenues.
Investment in the model is determined by the government’s fiscal rule.
To begin, assume that the government adopts a rule for capital accumulation
whereby public capital grows at the same rate as the economy; that is,
the ratio of capital to revenue is constant. This assumption means setting
investment at the level required to get the appropriate level of public capital
(that is, to offset depreciation and add enough capital in each period to
increase the capital stock at the same rate as government revenue). Government
services, which are produced using public capital, are set equal to a fixed proportion
of last period’s capital stock. The stock of government financial
assets (or debt) is determined by adding the current period’s surplus or
deficit to last year’s stock of assets (debt). Debt-service costs (or interest
income) are determined by applying the interest rate to the government
stock of debt and assets. The capital stock is assumed to the depreciate at a
constant rate and to grow through gross investment.
To transform the basic cash accounting model of the budget into one
that conforms to an accrual accounting regime, one must modify the
definition of total expenditure and the way the accumulation of