Fiscal transparency is a critical element of effective fiscal policymaking and risk management, but the recent crisis has highlighted the gaps in governments and understanding of their financial position.
In the wake of the crisis, a new International Monetary Fund(IMF)Paper calls for improvements in fiscal reporting standards, faster adoption of those standards by member countries, and improvements in the way the IMF and others monitor fiscal transparency.
It said the past 15 years have seen improvements in both fiscal reporting standards and practices. However, the recent crisis has underscored that, even among advanced economies, governments’ understanding of their fiscal position—and the risks to that position—remains inadequate.
“Now is the right time to review our approach to improving fiscal transparency,” said Carlo Cottarelli, head the IMF’s Fiscal Affairs Department. “The crisis has reminded us that comprehensive, reliable, and timely information about the public finances is the foundation of effective fiscal management. It has also highlighted the gaps in both fiscal reporting standards and practices. Improvements in fiscal transparency should therefore be a central element of any government’s fiscal policy response to the crisis.”
According to the IMF, despite the advances made to date, current understanding of governments’ underlying fiscal position and the risks to that position remains inadequate. This was demonstrated by the emergence of previously unreported fiscal deficits and debts in the wake of the crisis in Greece and Portugal. It could also be seen in the United States where financial problems in quasi-public enterprises, like Fannie Mae and Freddie Mac, remained largely out of sight until government bailouts were needed. Elsewhere, in countries with large domestic banking sectors, such as Iceland, Ireland, and the United Kingdom, the biggest shock to the public finances came from the crystallization of large, mainly implicit, government liabilities to the financial sector.
It added that these shortcomings in fiscal transparency were due to a combination of gaps and inconsistencies in existing fiscal reporting standards, delays and discrepancies in countries’ adherence to those standards, and a lack of effective multilateral monitoring of compliance with
those standards.
