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The Proper Measurement of Government Budget Deficits: Comprehensive Wealth Accounting or Permanent Income Accounting for the Public Sector

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  • Willem H. Buiter

Abstract

The paper studies budgetary, financial and monetary policy evaluationand design using a comprehensive wealth or permanent income accounting framework. A set of stylized balance sheets and permanent income accountsis constructed for the public, private and overseas sectors.These are then contrasted with the conventionally measured balance sheet and flow of funds accounts. This permits a new look at the issues of "crowding out"and the "eventual monetization of fiscal deficits."The conventionally measured public sector financial surplus, evenwhen evaluated at constant prices or as a proportion of GNP, presents apotentially very misleading picture of the change in the real net worth of the public sector. One reason is that capital gains and losses on outstanding stocks of marketable financial assets and liabilities are not included in the flow of funds. This includes changes in the real valueof nominally denominated public sector debt due to inflation.A second reason is the omission of revaluations in non-marketable (and often merely implicit) assets and liabilities such as the future stream of tax receipts and the future stream of benefit payments.The paper then proposes some general rules for the design of stabilization policy-policies to facilitate expenditure smoothing by avoiding or minimizing the incidence of capital market imperfections.Both national governments and international agencies should designfiscal, financial and budgetary policies so as to induce an evolution of the conventionally measured balance sheet and flow of funds accounts that permits private agents and national economies, respectively, to approximate the behavior that would be adopted if comprehensive wealth or permanent income were the only binding constraint on economic behavior. This can beachieved by keeping disposable income in line with permanent income and by ensuring an adequate share of disposable financial wealth in total wealth.

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  • Willem H. Buiter, 1982. "The Proper Measurement of Government Budget Deficits: Comprehensive Wealth Accounting or Permanent Income Accounting for the Public Sector," NBER Working Papers 1013, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1013
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    References listed on IDEAS

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    Cited by:

    1. Michael Anyadike-Danes & Jean-Paul Fitoussi & Jacques Le Cacheux, 1983. "De l'austérité budgétaire en période de récession," Revue de l'OFCE, Programme National Persée, vol. 5(1), pages 121-148.
    2. repec:hal:spmain:info:hdl:2441/5948 is not listed on IDEAS
    3. Henri-Paul Rousseau, 1983. "The Dome Syndrome: The Debt Overhanging Canadian Government and Business," Canadian Public Policy, University of Toronto Press, vol. 9(1), pages 37-52, March.
    4. Mr. Marc Robinson, 2009. "Accrual Budgeting and Fiscal Policy," IMF Working Papers 2009/084, International Monetary Fund.
    5. repec:spo:wpmain:info:hdl:2441/5948 is not listed on IDEAS

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