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Central government's total balance sheet boosts transparency

by Sami Yläoutinen

Photos by Lauri Rotko

The financial crisis of the past years has revealed serious shortcomings in the ability of many, if not most, countries to identify risks, particularly those outside the traditional budget or central government accounts. Ultimately, it is the central government that is responsible for the functioning and continuity of society. Thus, the responsibilities of the central government are diverse, and risks related to its finances may originate from countless sources.

Thus, Finland has also attempted to broaden the perspective on factors affecting public finances and to increase reporting on public finances. As an example, take the preparation of the annual review of the central government's financial liabilities and risks.

In February 2015, the International Monetary Fund (IMF) published a so-called fiscal transparency evaluation pertaining to Finland. In this context, it published a rough balance sheet for the Finnish public economy and recommended that Finland should, among other measures, extend the final central government accounts to cover funds and unincorporated state enterprises external to the budget and gradually develop the statistical consolidated reporting of the entire public sector to cover real and financial assets and liabilities, including pension liabilities.

Also, the National Audit Office of Finland (NAOF) has stated that the funds external to the budget decrease the transparency of the central government’s financial position. In the absence of consolidated final accounts for the entire central government and the balance sheet management based on that, there is a danger that the understanding of the central government’s financing position as a whole deteriorates. In addition, the Parliament’s Audit Committee has addressed the same issue. Prime Minister Sipilä’s government programme states that the accounting policy of the central government’s finances should be altered to improve transparency and openness during the government’s term.

More openness

The transparency and openness of the reporting policies concerning the central government’s finances have been improved by developing the description of the state of the central government’s finances using financial statement accounts commonly used in businesses and other organisations in addition to the macroeconomic review. Accrual-based accounting and financial statement reporting per se have been used by the central government since 1998 and by the municipalities since 1997.

The general background of the budget proposal for 2016 and 2017 now includes the so-called total accounts and liabilities for the central government’s finances. The review covers the budget accounts, income and expenses of state funds external to the budget and unincorporated state enterprises, the financial standing (balance sheet) and contingent liabilities external to the balance sheet. Owing to the February 2015 amendment of the State Budget Decree, the corresponding review must also be included in the government’s annual report given by the government annually to Parliament. According to the amendment, the annual report is to include also a review of the state of the public economy and central government’s finances as well as an estimate of the key financial risks for its operations and their significance. The data are based largely on the risk review.

The purpose of the new state total accounts, prepared by the State Treasury, is to provide an improved overall view of the central government’s finances under the government’s control (the government as a legal entity). The total accounts have been prepared based on the official financial statements of the above units but, to date, they have not been audited. In the total accounts, the effect of items internal to the central government’s finances, i.e. transactions between state agencies, funds and unincorporated enterprises, have been eliminated from the profit and loss statement and the balance sheet. Significant items eliminated include internal rent, asset items and income recognition of the profit of unincorporated state enterprises, the cash balance in funds, central government internal pension payments and transfers to the budget accounts. Companies and joint ventures under the central government’s control are included in the accounts in the fixed assets securities.

Sami Yläoutinen

Sami Yläoutinen

Sami Yläoutinen is Director General in the Ministry of Finance. During 2011–2014 he worked in the Fiscal Affairs Department of the International Monetary Fund in Washington. Previously employed by the Bank of Finland, he joined the Ministry of Finance in 1999 and has since held several positions in the Ministry. He holds a Doctor of Sciences degree in economics, and his dissertation focused on fiscal frameworks.

Better view of central government’s finances

The profit and loss account indicates whether the income from the financial year has sufficed to cover the expenses of the financial year. According to the total accounts of 2015, the central government's income totalled EUR 45.0 billion while the expenses totalled EUR 51.2 billion, giving a deficit of EUR 6.2 billion. The deficit has decreased by EUR 0.8 billion since 2014. The deficit of the central government’s total accounts was EUR 1.5 billion greater than the deficit in the budget. This is because of the elimination of internal transactions, the greatest of which were fund transfers (e.g. EUR 2.3 billion from the State Pension Fund) and entry as income of profits from unincorporated enterprises (EUR 0.7 billion) to the budget accounts. The total accounts provide a better view of the deficit of the central government's finances than the separately presented profit and income accounts.

The balance sheet describes the financial standing in terms of assets and liabilities on the date of closing of the accounts. The assets include the national property (cultural and natural heritage, e.g. historical buildings, national parks), fixed assets and other long-term assets (e.g. land, buildings, information systems) and trading and current assets. The balance sheet values are based on the central government’s accounting and are cost-based. The balance sheet total on 31 December 2015 was EUR 84.4 billion. In the assets, national property amounted to EUR 1.9 billion, fixed assets and other long-term assets totalled EUR 65.2 billion, and the trading and current assets amounted to EUR 17.4 billion. The greatest single assets were securities in fixed assets, 37.2 billion, and transportation networks, EUR 19.6 billion.

The liabilities include borrowed capital divided into long-term and short-term liabilities and reserves (only for funds). A debt or part of a debt is considered long-term if it matures in one year or later. The central government’s debt according to the total accounts was EUR 112 billion on 31 December 2015, EUR 88.5 billion of which was long-term and EUR 23.6 billion short-term. The amount of the debt has increased by EUR 6.0 billion since 2014.

The equity reflects the net assets, obtained by deducting reserves and borrowed capital from assets. The equity in the central government’s total accounts is comprised of the equity of the budget accounts, funds and unincorporated enterprises. The equity in the central government's total accounts was EUR -27.7 billion in 2015. Compared to 2014, the negative equity has grown by EUR 5.1 billion.

The equity according to the central government’s total accounts is clearly less negative than the equity of the budget accounts. This is because of the significant positive equity of the funds and unincorporated enterprises. The total equity, however, has deteriorated during the past two years for which information is available. This is largely because of the deficit in the state budget.

The balance sheet that commenced the central government’s budget accounts on 1 January 1998 showed a negative equity of approximately EUR 30 billion. This was due to the severe indebtedness at the beginning of the 1990s and due to the solutions in the preparation of the initial balance sheet. Part of the national property was excluded from the balance sheet and state enterprises were valuated very moderately. The central government’s profit and loss accounts in 1998–2008 were mostly positive. This strengthened the central government’s financial standing, making the equity in the 2008 budget accounts only EUR 8.1 billion negative.

Because of the financial crisis, the financial statements for the central government’s budget accounts have shown a loss since 2009. This has deteriorated the central government’s financial standing and resulted in the growth of its negative equity. As of 2012, the central government's financial standing has nominally been weaker than in the initial balance sheet of 1998. In addition, the central government’s assets have not grown in the same proportion as the borrowed capital. Non-investment expenses have been covered by loans.

Balance sheet interpretation is not unambiguous

The interpretation of the central government’s balance sheet is not unambiguous, and any policy conclusions resulting from it must be considered carefully, as the balance sheet review does not consider the coming tax income based on the central government’s taxation right as assets. Thus, the balance sheet review does not, for example, allow for drawing conclusions regarding the sustainability of the central government’s finances. Traditional sustainability calculations are more suitable for this task. The balance sheet review does, however, allow for a comprehensive review of the central government’s financial standing at a given time, and thus provides a good contribution to the review on its total risks.