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

Budget Preparation and Approval 255
setting of explicit fiscal targets frames the preparation of the detailed annual
budget, calls on government to define clearly its fiscal policy, and allows the
legislature and the public to monitor the implementation of government
policy, ultimately making the government politically as well as financially
accountable. Fiscal targets and indicators should cover fiscal position (for
example, fiscal deficit); fiscal sustainability (for example, debt-to-GDP
ratio); and fiscal vulnerability (for example, future liabilities and fiscal risk).
Fiscal position and deficit measures
The summary indicator of a country’s fiscal position used most commonly
is the overall balance on a cash basis, defined as the difference between actual
collected revenues plus grants (cash or in kind) and actual expenditure payments.
The cash deficit is by definition equal to the government borrowing
requirements (from domestic or foreign sources) and is thus integrally linked
to the money supply and inflation targets and prospects. The overall deficit
is obviously a major policy target and is used for international comparisons
as well. How the deficit is financed also requires attention: the same level of
fiscal deficit can be manageable or not, depending on whether it is financed
in cost-effective and noninflationary ways.
The cash deficit does not take into account payment arrears and floating
debt. In countries that face payment arrears problems, the cash deficit plus
the net increase of arrears is also an important indicator; it is very similar (but
not necessarily identical) to the deficit on a commitment basis—that is, the
difference between annual expenditure commitments and accrued revenues
and grants. When the fiscal accounts are on a cash basis, the International
Monetary Fund’s Code of Fiscal Transparency requires that countries report
payment arrears as a memorandum item at least, to avoid mistaking a fragile
situation for a healthy one when the government is simply pushing off
payment obligations to subsequent years.
The primary balance is the overall balance excluding interest payments.
Because interest must be paid in any event, the evolution of the primary
deficit is a better measure of the government’s efforts for fiscal adjustment.
It is a better policy target also because it does not depend on the vagaries of
interest rates and exchange rates.
The current balance is the difference between current revenue and current
expenditure. By definition, it thus represents government saving and, in
theory, the contribution of government to investable resources and economic
growth. (A current deficit represents government dis-saving, and thus the
subtraction of resources from resources available for investment.) Defining
the fiscal position in this way would insulate investment expenditure from