Contingent government liabilities : a hidden risk for fiscal stability

This paper points out that Governments are facing increasing fiscal risks and uncertainties. Two of the reasons for this situation are: first, the international integration of financial markets, which has meant greater volumes and volatility of cross-border flows of private capital; and, second, the privatization of state functions, accompanied by implicit or explicit state guarantees. The third reason is that policymakers pursuing a balanced budget or some deficit target tend to favor off-budget forms of state support that do not require immediate cash and that, at least for some time, hide the underlying fiscal cost. This paper first classifies and analyzes the potential obligations and fiscal risks governments face and their sources. It next outlines the options for reducing fiscal risks in the context of fiscal adjustment, with particular attention to the typology and analysis of specific fiscal risks, the high risk exposure of governments of transition and emerging-market economies, and the quality and bias in government decision-making at the time of fiscal adjustment. Several questions are addressed. How can policymakers be made accountable for recognizing the long-term cost of all forms of government activities? How can the moral hazard induced by government interventions be reduced? What standards for public sector accounting, budgeting, reporting, and risk management would foster sound fiscal performance in the long term?