Posted by David Bailey[1]
The COVID-19 pandemic is imposing significant and varied costs to governments across the world, from both additional spending and from reduced revenue. To contain the spread of the virus, governments have enforced closure, or partial closure, of businesses and quarantining of individuals. To support struggling business and households impacted by these measures, governments have launched a variety of emergency schemes. These include the provision of subsidies, benefits, loans and guarantees as well as the temporary deferment, or cancellation, of tax obligations and other government revenue sources. Governments have also increased spending on healthcare. In many countries, these interventions have involved large amounts of public spending. Taken together with reduced revenues as economic activity has faltered, these actions will push many government deficits and debt levels above the heights reached during the 2008-09 financial crisis. Properly recording these measures in fiscal statistics is essential for assessing the impact of the COVID-19 pandemic on the government deficit and debt, as well as on the wider economy.
While governments battle the pandemic, it is important that Public Financial Management (PFM) systems accurately track spending in a timely manner to assist policy makers in understanding the cost and economic impact of the government support measures. Equally important, the spending needs to be classified correctly, according to its economic nature and function, so as to support meaningful analysis, and measure its financial and economic impacts accurately. The best way to achieve this is to follow international standards, notably the IMF’s latest Government Finance Statistics Manual (GFSM 2014) which ensures, amongst other things, consistency with other macroeconomic statistics and cross-country comparability.
The GFSM framework assists in answering questions such as:
- Would the free provision of food, medicines, and medical goods by the government impact the deficit? What if this assistance was provided as aid from foreign donors?
- Under which conditions would bailouts of corporations increase the government deficit and debt?
- How would the postponement, reduction or cancellation of tax revenues impact the government deficit and debt?
- Would lending by the central bank to meet liquidity needs of financial markets have an impact on the government’s debt? What about the impact of market volatility on the recording of government debt securities?
- When should government support payments be recorded as health spending and when as social protection or support for economic activities?
- How does the recording of fiscal transactions in government accounts impact other macroeconomic variables, such as GDP?
Why is any of this important?
One important question for all countries is: how are the government deficit and debt affected by the different government interventions to support businesses and households? For the deficit to be accurately measured, it is important to distinguish between those government interventions where government has provided funds and can realistically expect a market return on their investments or loans (financial transactions, which don’t impact the deficit), and those where government has spent the funds on goods and services or provided the funds without any expectation of a return to government (nonfinancial transactions, which do impact the deficit).
Regarding debt, most government spending will require financing, which thereby increases the government gross debt. However, some government interventions do not increase government debt at the point of introduction. Think here of guarantees, tax deferrals, or reductions in loan interest rates, none of which directly impact government debt, although the reduction in foreseen revenues, and increased spending on guarantee calls, will result in a faster rise in debt than previously forecast.
It must be emphasized that the advantage of using the GFS framework goes well beyond measuring the impact of COVID-19 related interventions on the deficit and debt. The GFS framework allows countries to look beyond the label of a government scheme (for example, as a ‘subsidy’, ‘lending’, ‘benefit’, ‘grant’, ‘transfer’ or ‘guarantee’) and record it according to its economic substance in a standardized and internationally comparable way. By applying the principles of the GFS and classifying government interventions in accordance with the GFS framework, analysts and policymakers can draw conclusions as to the size, impact and effectiveness of the different government policy measures and make meaningful comparisons across countries.
Looking beyond the government’s deficit and debt, consider the question whether government payments should be included as government output and counted in GDP. If government payments or the donation of goods to households and businesses get included as government output when they should actually be recorded as transfers, then such recording would lead to an overstatement of GDP. Similarly, payments to businesses which are labelled as ‘subsidies’ but which are actually capital injections into financially distressed companies could, if recorded as subsidies, result in misleading estimates in a country’s macroeconomic statistics of the gross value added and gross operating surplus of the companies concerned.
How can the IMF help?
The staff of the IMF’s Statistics Department has produced a guidance note which provides advice on the statistical recording of a wide range of different government interventions related to the COVID-19 pandemic. The guidance distinguishes eight broad categories of interventions and sets out in simple terms the principles that countries are recommended to follow when recording COVID-19 related government policy measures. We hope that readers find this resource useful and would welcome any feedback on further improvement.
This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.
[1] Statistics Department, IMF.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
