Working with International Data on Government Finances
0. Case Study Learning Outcomes are often employed by organisations to work with data of that type. Having successfully studied this case, you will be able to: Patterns in countries’ public finances frequently made the headlines during Knowledge and Awareness and following the international financial Describe and explain the data crisis of the late 2000s. Particular production process from data search attention has focused on public sector to data interpretation borrowing; the excess of spending over Identify distinctive challenges of receipts, and also the vast accumulating working with data on government stocks of debt in some countries. finances in an international economic analysis Economists invariably disagree about Describe methods of economic the mechanisms through which public analysis which involve working with finance variables may affect the global international public finances data economy. The economic impact of public sector deficits and the sector’s stock of Skills, Qualities and Attributes debt are perpetually in dispute. Search, select, transform, Nonetheless, any deficit must be present, describe and interpret financed (`funded’) and any debt published data sets in ways which interest owing must be paid (or support economic analysis otherwise `serviced’). Therefore, Apply quantitative methods in an financial institutions and investors will international economic context have a keen interest in the trends in Apply economic analysis with the countries’ public finances. support of international data More generally, many businesses trade in more than one country. Changes in 1. Introduction: Data Use the fiscal stance or fiscal health of a country are considered by businesses, in deciding which markets to exploit or Many organisations, in the public and where to deploy their scarce resources. private sectors of the economy, demand international data about governmental Data can also be used to inform public or other public sector finances. policy decisions about the use of Concisely-presented figures on public taxation or public expenditure (fiscal revenues and expenditures across the policy). For example, national world, including any trends or governments may study international variations, can be valuable information evidence when considering changes to for their decision making. variables such as tax rates or specific classes of expenditure. In other words, A wealth of public finance data on many they use international comparisons to countries is available. We can obtain `benchmark’ local policies, practices or figures on total flows or on particular performance; before deciding what categories or components of flow. We changes to make. can track expenditures and receipts, including the gap between them, over Working with data on the public finances time and between countries and the which span national boundaries often accumulated stock of debt. Economists adds to the complexity of analysis. For example, data sources and series of
1 data for different nations are less likely international differences between data to be consistently comparable and sources might distort the comparisons compatible with each other. Extra made and any implications we might caution is required when interpreting the draw from them. results derived from them (see below, in Section 3). If so, options include: seek transformations of the data available to remedy the risk of distortion; accept the 2. Data Search and Selection data as they are and interpret them with extra caution, or reject them altogether In this case study, we select published (with or without seeking alternative data quantitative data about aspects of sets). Sound judgements about which of national government, for 6 countries these options to pick are part science, including the UK. One criterion for part art but they do at least seem less selecting the countries is relative difficult to make after some experience accessibility of relevant, reliable and of making them. comparable secondary data. The selection we have made of 6 Public finance data for a cross-sample of countries will enable us to reveal some countries is available from several commonality, and also some national international organisations including the differences, of data patterns across the European Union, the World Bank and world. The selection also enables some the OECD. In this Case Study, we careful generalisations to be made about choose to employ data from the Word a wider range of countries or regions. Economic Outlook published by the International Monetary Fund1. No 6 countries, however, will be fully representative of everywhere in the The Economic Outlook database world, in respect of national or regional contains long runs of public finance data patterns in the public finances and the for many countries, and also features reasons for them. For example, the forecasts for the next few years. The selection excludes Eastern Europe, most dataset enables us to identify the of Asia and South America. structural (noncyclical) elements of government finances as well as the We write this Case Study in mid-2011, cyclical elements (see explanation in when there is a spectacular reason for Section 3, below). exploring data like these. Widespread uncertainty and concern is voiced about One possible problem of working with consequences of financial problems the Economic Outlook dataset is its affecting whole countries within the sheer enormity containing, as it does, financial grouping called the Eurozone: comprehensive coverage both of specifically, Greece, Ireland, Portugal countries and of measurable economic and Spain. variables. Nonetheless, a common issue when working with international data We have chosen to includes one of these sets is that the span of available time four countries in our sample. Our overall series data for some countries can vary. choice of countries reflects the specific purpose of this Case Study, which is to Gaps in data place some limits on the introduce this type of analysis to you. reliability of international comparisons. However, you may wish to repeat the Consequently, judgement is always analysis you read about in this Case required to decide whether any Study for these other countries. See below our Section 5: Summative 1 The World Economic Outlook Databases Assessment Task. can be accessed at http://www.imf.org/external/ns/cs.aspx?id=28
2 common to consider net lending in a 3. Data Transformation and country relative to its GDP. Chart 2 Interpretation displays that ratio for the 6 countries.
Chart 2: General Government Net A popular starting point for thinking Lending relative to GDP, % about governmental finances is to consider international differences in the scale of expenditures. One way to do this is to compare the size of general government expenditures in each country, relative to its own GDP. Being a percentage (a ratio), so without volume or currency units, such a figure is useful for international comparisons, not only at one point in time (cross section) but also across time (longitudinal). Source: World Economic Outlook Database, April 2011, International Monetary Fund. Chart 1: General Government Expenditure to GDP, % One feature of Chart 2 is the prevalence of observations consistent with general government deficits. In other words, for most of these countries during this period, general government has usually been a net borrower; its expenditures exceeding its receipts. Sweden is a partial exception, having budget surpluses more often than have the 5 other countries, including much of the period around and since the millennium. Source: World Economic Outlook Database, April 2011, From 1993-2012, the UK general International Monetary Fund. government is shown as a net borrower Chart 1 plots general expenditure, to the equivalent of 4 per cent of GDP, relative to GDP, for our 6 countries since on a par with the US and France ratios. 1980. It shows a tendency for Japan has a been larger net borrower, differences in the size of government more than 6 per cent of GDP. spending, relative to GDP, to narrow over time; albeit with individual and One problem of interpreting figures for occasional exceptions. The decline in net lending (or net borrowing), as a Sweden ratio is particularly marked; measure of the general government’s falling by around 20 percentage points budget surplus (deficit), is the extent to across the period, including projections which they might reflect deliberate ahead of the time of writing. The UK government policy. The size of net ratio, during the same period, is lending is affected by the state of the typically near the middle of the range economy. In a cyclical downturn in across the 6 countries in the sample. economic growth, the amount paid in income-related taxes might be relatively The term `general government net low. On the other hand, the rate of lending’ refers to the extent to which unemployment might be relatively high revenue exceeds expenditure. In other and hence the amount paid out in words, it is a measure of a unemployment benefits also high. government’s financial surplus. When making comparisons across time and The combined effect of reduced tax across countries, for economic meaning revenues and increased benefits, during and for standardisation purposes, it is cyclical downturns, tends to increase the
3 likelihood of general government deficits Budget deficits or surplus are an or else smaller surpluses. The opposite example of what economists refer to as would be true during a cyclical upturn in a `flow concept’. By contrast, debt economic growth (around a `boom’): (which might accumulate over a number general government would tend to run of periods) is a `stock concept’. A smaller deficits or larger surpluses country’s budget balance is determined during that phase of the cycle. by a flow of payments and receipts per period. Typically, as we have seen, One way to see past the cyclical impact governments run deficits, so they must of the economy on government finances borrow money in order to fund them. In is to try and estimate what the size of doing so, they accumulate a stock of expenditures and revenues would be, if debt. Budget surpluses (net lending) actual output of the economy fully enable governments, if they so choose, matched its potential. `Potential output’ to repay and so reduce their stock of is defined as the quantity consistent debt. with normal utilisation of productive capacity. Chart 4 indicates, for our 6 countries, the accumulated stock of general Consequently, figures are sometimes government debt at the end of each subjected to a technical transformation year, relative to the annual flow of GDP. by being cyclically-adjusted; that is, This common method is also used in statistical methods are used to eliminate respect of other holders of debt, the cyclical component from the overall including firms and households. It is figures. That transformation leaves an important to recognise that we are indicator of what is termed the comparing an outstanding stock of debt `structural’ component of the (at one point in time) with a flow of government finances which, by income over a 1-year period. definition, is unaffected by cyclical influences. Chart 3 shows estimates of cyclically-adjusted net lending, relative Chart 4: General Government Gross to GDP, for our 6 countries. Debt relative to GDP, %
Chart 3: Cyclically-adjusted Net Lending relative to GDP, %
Source: World Economic Outlook Database, April 2011, International Monetary Fund.
Chart 4 shows how, with the exception Source: World Economic Outlook Database, April 2011, International Monetary Fund. of Japan, national governments had managed to either stabilise or reduce Chart 3 shows a tendency for countries their debt-to-GDP ratios prior to the to run structural deficits: they are the deep financial crisis of the late 2000s. negative percentage figures. The one Japan was a notable exception, the ratio exception, especially over the past quadrupling between 1980 and 2009. decade, is the case of Sweden. The UK Following financial and economic crisis, average structural deficit since 1980 is which saw governments use fiscal policy just short of 3 per cent of its GDP. to support aggregate demand and to ensure the stability of the financial
4 system, debt-to-GDP ratios rose rapidly. (c) If we were using quarterly data The exception is the case of Sweden, rather than annual data, what whose budget surpluses enabled early considerations or adjustment would we repayment of government debt. need to make when comparing government debt relative to GDP?
4. Review Questions
1. 5. This is a question for reflection and In the context of published secondary possible further study. data on government or public finances, what are the main stages in the data Identify those factors you think could production process undertaken in this affect, from one period to another, the Case Study? magnitude of general government expenditure and general government receipts. 2. (a) What do you understand by the term Do you think the factors you have ‘general government’? identified might be part of an explanation of any of the patterns you (b) If, over a given period of time, have described in your answer to expenditure by general government Question 2 above? exceeds its receipts would government be a net lender or a net borrower?
(b) List the public finance variables 5. Summative Assessment Task relating to general government covered in this Study. What other public finance Locate the World Economic Outlook variables might be of interest for database. Repeat the analysis of this analysis? Case Study, but for a selection of countries of your choice. 3. (a) Describe any common national long term and short term patterns you observe in the public finances variables 6. Data Appendix data presented in this Study. Source: World Economic Outlook (b) Describe any nationally distinctive Database, April 2011, International patterns you see in those data. Monetary Fund. http://www.imf.org/external/ns/cs.aspx?id=28
4. (a) What purposes are served by presenting nominal public finance variables relative to nominal GDP?
This Case Study was designed and authored by: (b) In comparing the size of the general Dean GARRATT and Stephen HEASELL, of government debt relative to GDP we are Nottingham Business School, Nottingham Trent comparing a stock with a flow. Explain University with acknowledgment of funding from what this means and the possible The Economics Network, the subject Centre for Economics of the UK Higher Education Academy. rationale for doing this.
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