FEATURE ARTICLE: GROSS PUBLIC SECTOR DEBT: CONCEPTS AND MEASUREMENTS


INTRODUCTION

The term 'public sector debt' is used to describe the level of debt liabilities owed by a government to its creditors. Reliable, timely and internationally comparable statistics on public sector debt are highly important to policy makers, because they are indicative of the level of solvency and liquidity of a government.

The International Monetary Fund (IMF) is the international standard setter for government finance statistics (GFS), where statistical data on public sector debt are collected and then fed through the national accounts for the derivation of key economic indicators. In the International Monetary Fund Public Sector Debt Statistics: Guide for Compilers and Users, 2011, the IMF highlights the importance of reliable and timely statistics on public sector debt as a critical element in countries’ fiscal and external sustainability, particularly in light of the recent international financial crisis.

In 2012, the IMF released a staff discussion note titled What Lies Beneath: The Statistical Definition of Public Sector Debt which states that the indicators related to public sector debt often do not follow international standards and have several different definitions. The IMF note states that the absence of standard nomenclature can lead to major misunderstandings in the fiscal policy debate, and illustrates this using data from 61 member countries. The IMF note also defines a headline measure for the concept of gross debt, and introduces a comprehensive way of presenting these data as a grid by recording public sector debt by debt instrument and institutional level.

This article explores the concept of debt, examines the IMF approach of presenting public sector debt data and looks at the way Australia currently measures public sector debt.


WHAT IS DEBT?

The System of National Accounts, 2008 (2008 SNA) is the international standard for the compilation of national accounts statistics. However, the definition of debt contained in the 2008 SNA has a certain degree of ambiguity. It identifies debt as:

.......all liabilities that require payment or payments of interest or principal by the debtor to the creditor at a date or dates in the future. Consequently, all debt instruments are liabilities, but some liabilities such as shares, equity and financial derivatives are not debt. However, due to specific legal, institutional or practical arrangements some other definitions of debt may also exist. It is therefore useful in all cases to clearly identify the definition of debt according to the instruments included. (Paragraph 22.104, System of National Accounts, 2008)

The IMF note suggests that:

..........debt can be thought of as a subset of liabilities in terms of a balance sheet. Liabilities are obligations that provide economic benefits to the units holding the corresponding financial claims. The criterion to define a liability as debt is that future payments of interest and/or principal are due by the debtor to the creditor. (Part II (B), What Lies Beneath: The Statistical Definition of Public Sector Debt, IMF 2012)

This IMF definition requires the use of a balance sheet to positively identify debt components but says nothing about the classification of the remaining liabilities. Some of the contracts that create liabilities may not be specific about whether the future payments are principal or interest.

An alternative approach is to avoid the specifics of contracts altogether and identify debt liabilities as those liabilities payable by the debtor to the creditor within the life of the debtor entity. The non-debt liabilities (under this definition) can therefore be described as equity. This second definition is consistent with paragraph 7.127 of the 2008 SNA, which describes equity as those financial instruments that entitle the holder to claim on the residual of the corporation on liquidation (noting that the 2008 SNA has a specific definition of a corporation that also includes certain types of unincorporated entities). This implies that all liabilities that rank before equity on liquidation are payable, and are therefore debt.


THE INSTRUMENT DIMENSION OF DEBT

In order to provide reliable, comprehensive and internationally comparable statistical data on public sector debt for fiscal policy makers, debt should be recorded by type of financial instrument. The 2008 SNA and related international standards use common definitions and classifications of financial instruments. How these definitions and classifications are applied in Australia is noted in the Australian System of National Accounts: Concepts, Sources and Methods, 2013 (cat. no. 5216.0). For the purpose of this article, the following high level listing is sufficient:

F1. Monetary gold and Special Drawing Rights (SDRs)
F2. Currency and deposits
F3. Debt securities
F4. Loans
F5. Equity and investment fund shares
F6. Insurance, pension and standardised guarantees
F7. Financial derivatives and employee stock options
F8. Other accounts receivable / payable (includes non-contingent 'provisions')

Note that monetary gold is a contract restricted to central banks and for which asset positions exist without a counterpart liability. SDRs are contracts between the IMF and national governments. Also note that F5 Equity and investment fund shares are not debt. Further note that, according to the 2008 SNA classification, some items classifiable as 'provisions' under commercial accounting standards (such as accrued employee leave), are classifiable as accounts receivable / payable, and provisions without a debtor / creditor dimension (such as depreciation) are not recognised as an asset / liability.


THE SECTOR DIMENSION OF THE PUBLIC SECTOR

In addition to recording public sector debt by type of financial instrument, debt should also be recorded by level of government subsector in order to provide a comprehensive picture of a government's financial obligations. The 2008 SNA defines a number of levels of aggregation for the presentation of macroeconomic statistics (including debt), based on the grouping of institutional units into sectors and subsectors.

The sectoring is summarised in the following list, noting that the Rest of World is technically not a sector of the Australian economy but is statistically convenient to treat it as if it were, and the data recorded in Australian accounts are only that part of the Rest of World with transactions and positions with Australian residents. It should also be noted that some of the classification points (such as social security funds) are non-existent or not material for Australia. Equally, some data important to Australia (such as local government) are compiled, although not represented in the classification:

1. Non-Financial Corporations
1.1 Private Non-Financial Corporations
1.2 Public Non-Financial Corporations
1.2.1 Central Government Non-Financial Corporations
1.2.2 State and Local Government Non-Financial Corporations
2. Financial Corporations (detailed sub sectoring not shown, public / private splits are “of which” alternatives on the main categories)
2.1 Private Financial Corporations
2.2 Public Financial Corporations
2.2.1 Central Government Financial Corporations
2.2.2 State and Local Government Financial Corporations
3. General Government
3.1 Central Government
3.2 State and Local Government
3.3 Social Security Funds
4. Non-Profit Institutions Serving Households
5. Households
6. (Rest of World)

PRESENTING DEBT DATA

The IMF staff discussion note What Lies Beneath: The Statistical Definition of Public Sector Debt presents suggested groupings for public sector debt based on the type of debt instrument and level of government which are consistent with those of the 2008 SNA (with the exception of the budgetary / non-budgetary distinction, which is also not relevant to the Australian economy). The ABS favours this representation of public sector debt statistics, and is considering adopting it in the forthcoming revision to Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2005 (cat. no. 5514.0) which is currently being reviewed.

The IMF note suggests that public sector debt data should be reported as a grid, with widening debt instrument coverage on one axis (D1 - D4), and widening institutional coverage on the other axis (GL1 - GL5) - see Figure 1 below. Also proposed is an internationally comparable public sector debt 'headline' measure for gross debt of the consolidated general government as GL3 / D4 on the grid.

The different types of public sector debt instruments and level of government subsectors that appear in the IMF note are defined below and are presented with the associated IMF debt code.

HOW IS DEBT PRESENTED IN AUSTRALIA?

Australian government finance data are currently collected by the ABS on an annual basis through its GFS collection. These data are published separately in Government Finance Statistics, Australia (cat. no. 5512.0) but they are also a key statistical input into the Australian national accounts. The ABS does not presently publish separate statistics on public sector debt.

Australian public sector debt data are reported to the ABS under a narrow instrument definition of debt (D2 / GL5). The forthcoming revision of the Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2005 (cat. no. 5514.0) will align it with the 2008 SNA and the latest revision of the IMF Government Finance Statistics Manual. As part of this revision, the ABS proposes broadening the definition of public sector debt on a gross and consolidated basis to D5 / GL5 on the grid. This expands the instrument coverage to include derivatives thereby equating the ABS concept of debt with non-equity liabilities.

Figure 4 presents a dataset which is indicative of Australian gross public sector debt as a percentage of GDP using the instrument and institutional dimensions suggested in the IMF note. The data shown are sourced from the latest releases of Australian National Accounts: Financial Accounts (cat. no. 5232.0) and Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0) as they are not currently collected through the ABS GFS collection. As part of the aforementioned review, it is proposed that Australian gross public sector debt be collected through the ABS GFS collection on this basis.

Figure 4: Australian gross public sector debt as a percentage of GDP
	June 2007				June 2013
	GL2	GL3	GL4	GL5(a)	GL2	GL3	GL4	GL5(a)
Debt Securities	5.2%	5.2%	5.3%	9.7%	19.0%	19.2%	19.2%	31.7%
plus Loans	0.1%	3.0%	7.7%	0.8%	0.1%	8.9%	15.9%	1.4%
Equals D1	5.3%	8.2%	13.1%	10.5%	19.1%	28.0%	35.2%	33.1%
plus SDRs	0.1%	0.1%	0.1%	0.1%	0.3%	0.3%	0.3%	0.3%
plus Currency and deposits	0.2%	0.2%	0.2%	4.1%	0.2%	0.2%	0.2%	4.3%
Equals D2	5.6%	8.5%	13.4%	14.6%	19.6%	28.6%	35.7%	37.7%
plus Accounts Payable	2.7%	2.8%	3.5%	3.8%	1.5%	1.8%	2.4%	2.6%
Equals D3	8.3%	11.3%	16.8%	18.4%	21.1%	30.4%	38.1%	40.3%
plus IPSGS	9.4%	15.3%	15.3%	15.3%	12.7%	23.0%	23.0%	23.0%
Equals D4	17.7%	26.6%	32.1%	33.7%	33.8%	53.5%	61.1%	63.3%
plus Derivaties	0.5%	0.5%	0.5%	1.4%	1.0%	1.0%	1.0%	2.5%
Equals D5	18.1%	27.0%	32.6%	35.1%	34.8%	54.5%	62.1%	65.8%
(a) GL5 for Australia has only partial coverage due to data availability.
Source: Australian National Accounts: Financial Accounts (cat. no. 5232.0) - December quarter 2013; and Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0) - December quarter 2013.
Note: All data at end of June quarter and valued at market prices in accordance with the established principle of market valuation in all circumstances in ABS economic statistics.

Figure 4 demonstrates that the level of public sector debt increases from D1 through D5 as successive instruments are added to the definition of debt. It also shows that the level of public sector debt fluctuates as successive subsectors of government (GL2 through GL5) are added to the definition. This is due to debt between public subsectors not being included in total debt.

At the total public sector level (GL5), the majority of loans occur between the public subsectors, while the predominant instrument used to raise debt external to the public sector are debt securities. Between 2007 and 2013, the large rise in total public sector debt (GL5 / D5) as a percentage of GDP was predominately due to the increased issuance of debt securities by government and growth in insurance, pension and standardised guarantee scheme liabilities.


CONCLUSION

Reliable, timely and internationally comparable statistics on public sector debt are highly important to policy makers, particularly in light of the recent international financial crisis. The IMF has identified a high level of failure in the application of international guidelines to compile public sector debt statistics which, in no small part, has been caused by a lack of clarity about the definition of debt. To address this problem, the IMF has released a staff discussion note, What Lies Beneath: The Statistical Definition of Public Sector Debt, that suggests a presentation of public sector debt based on type of debt instrument and level of government which is consistent with internationally accepted national accounting standards.

The ABS favours the proposed representation of public sector debt statistics and is considering adopting it in the forthcoming update to Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2005 (cat. no. 5514.0). In order to provide reliable, coherent and internationally comparable statistics, the ABS needs to broaden the definition of public sector debt on a gross and consolidated basis. This means expanding the current way that debt is presented, to include public sector debt by type of instrument and institutional subsector. By doing so, the ABS will not only meet the international standard on debt reporting, but will publish statistics that will better assist fiscal policy making.


REFERENCES:

Australian National Accounts: Financial Accounts (cat. no. 5232.0) - December quarter 2013

Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0) - December quarter 2013.

Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2005

https://www.abs.gov.au/ausstats/abs@.nsf/mf/5514.0.55.001

Australian System of National Accounts: Concepts, Sources and Methods, Edition 1, 2013

https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5216.02013?OpenDocument

International Monetary Fund Government Finance Statistics Manual, 2001

http://www.imf.org/external/pubs/ft/gfs/manual/pdf/all.pdf

International Monetary Fund Public Sector Debt Statistics guide for Compliers and Users, 2011

http://unstats.un.org/unsd/EconStatKB/KnowledgebaseArticle10369.aspx

International Monetary Fund Staff Discussion Note: What Lies beneath: The Statistical definition of Public Sector Debt,

http://www.imf.org/external/pubs/ft/sdn/2012/sdn1209.pdf

The System of National Accounts, 2008 United Nations statistical Division, et. al.

http://unstats.un.org/unsd/nationalaccounts/sna2008.asp