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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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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    2. Miller, Marcus, 1982. "Inflation-Adjusting the Public Sector Financial Deficit : Measurement and Implications for Policy," The Warwick Economics Research Paper Series (TWERPS) 209, University of Warwick, Department of Economics.
    3. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    4. Benjamin, Daniel K, 1978. "The Use of Collateral to Enforce Debt Contracts," Economic Inquiry, Western Economic Association International, vol. 16(3), pages 333-359, July.
    5. Willem H. Buiter & James Tobin, 1978. "Debt Neutrality: A Brief Review of Doctrine and Evidence," Cowles Foundation Discussion Papers 497, Cowles Foundation for Research in Economics, Yale University.
    6. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-274, June.
    7. Boskin, Michael J, 1982. "Federal Government Deficits: Some Myths and Realities," American Economic Review, American Economic Association, vol. 72(2), pages 296-303, May.
    8. William H. Buiter & Marcus Miller, 1981. "The Thatcher Experiment: The First Two Years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(2), pages 315-380.
    9. Siegel, Jeremy J, 1979. "Inflation-Induced Distortions in Government and Private Saving Statistics," The Review of Economics and Statistics, MIT Press, vol. 61(1), pages 83-90, February.
    10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    11. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
    12. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
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    Cited by:

    1. Marc Robinson, 2009. "Accrual Budgeting and Fiscal Policy," IMF Working Papers 09/84, International Monetary Fund.

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