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

Accrual Accounting in the Public Sector 191
government financial assets and debt is measured. Under accrual accounting,
spending on public sector capital is excluded from total expenditure,
whereas the depreciation of public sector capital is included. Thus, the
definition of total expenditure is changed by eliminating gross investment
and adding depreciation.
An antideficit fiscal rule under an accrual accounting regime becomes an
anti–operating deficit rule because spending on capital is no longer included
in the definition of expenditure. As shown later, the change in the fiscal rule
from no cash deficit to no operating deficit has important implications for
budget outcomes.
Assume that the fiscal rule for the accumulation of capital is the same as
before. Then also modify the way government financial assets and debt are
measured. Under the accrual regime, set this period’s financial assets (and
debt) equal to the last period value, plus the difference between the surplus
and net investment. In other words, any net investment that cannot be
financed by the operating surplus must be financed by borrowing, with the
attending impact on government financial assets.
Benchmark Fiscal Rules
To establish a benchmark for comparison, begin by looking at the behavior of
a government that adopts the two fiscal rules referred to earlier. The first is a
rule for the accumulation of public sector capital—that is, that a constant ratio
of capital to revenue be maintained. The second is an antideficit rule. Under a
cash accounting regime, the two rules imply that a portion of current revenue
must be reserved to fund new capital. Under an accrual regime, capital accumulation
can be financed by borrowing.
Assume that the overall government goal is to maximize total spending
while respecting the two fiscal rules. Interestingly, the interaction of the different
accounting regimes with the fiscal rules produces different incentives
and government behavior. It does so because the variable on which one of
the fiscal rules is based, the deficit, is measured differently under cash
accounting than under accrual accounting. For example, under the cash
accounting regime, the level of financial debt is constant—the direct consequence
of the antideficit rule. Under accrual accounting, the level of financial
debt grows because capital accumulation can be financed by borrowing. The
mix of spending also differs across accounting regimes. Under the cash
regime, capital spending is financed by current revenue, hence reducing the
revenue available for other purposes. Under the accrual regime, capital
spending is partially financed by borrowing, initially leaving more revenue