relying on estimates which are by their nature subject to an element of subjective
evaluation.105
Partly reflecting concerns over these fragilities, since 1994 EU Member States are
required to provide the European Commission with a reconciliation account between
deficit figures and the corresponding change in debt, the latter being a good proxy of the
cash gross borrowing (Balassone et al., 2006). Moreover, when reliance on accrual
accounting within the European System of Accounts (ESA) increased (with the switch
from the 1979 to the 1995 version of the system), Eurostat specified that revenue
computed in accrual terms should include only those items that are likely to be actually
cashed in and that over the medium-term accrual and cash data should converge.106
However, in the implementation of the excessive deficit procedure relatively little effort
was put in the analysis of consistency between deficit and debt data, thus failing to
exploit synergies arising in the joint monitoring of EMU fiscal rules. The problem is
witnessed by the tolerance exerted by European institutions towards Member States
submitting incomplete reconciliation accounts. It is probably a consequence of the failure
to give operational content to the debt rule, and the subsequent focus on the deficit rule.107
The chapter argues that even simply comparing deficits with changes in debt can help the
early detection of inconsistencies in fiscal data. Indeed, changes in general government
debt were much larger than initial deficit figures in Greece, Italy and Portugal before the
large upward deficit revisions experienced in recent years.
Nevertheless, the chapter points out that consistency checks between deficits and changes
in debt must go deeper than the overall difference between the two indicators. Since
different items in the reconciliation account (henceforth, SFA for stock-flow adjustment)
can offset each other, an underestimated deficit does not necessarily imply a large
discrepancy between deficit and change in debt.
The chapter presents a simple model of the incentives to resort to fiscal gimmickry under
EMU deficit and debt rules, based on the partition of SFA into two groups.108 One group
includes items that can be used to affect the Maastricht deficit but leave the change in
debt unaltered (a “deficit-specific” SFA), the other includes items that can be used to
reduce the change in debt but leave the Maastricht deficit unaffected (a “debt-specific”
SFA). Econometric estimates based on such model provide evidence that deficit-specific
SFA tend to increase with the underlying deficit, and debt-specific SFA tend to offset the
impact of such an increase on total SFA. This suggests not only that opportunistic
accounting may have taken place to ensure formal compliance with the deficit rule, but
105
106
107
108
Cash-based deficit measures are by no means exempt form the risk of manipulation. However,
contrary to what happens with accrual estimates, manipulation of cash figures obtained by
postponing payments and/or demanding anticipated payments find a natural limit in the voice of the
interested counterparts.
The Treaty and annexed protocols rely on the ESA for the definition of deficit. When the Treaty was
signed in 1992, and until 1999, the ESA79 version of the system was in place, which allowed
government accounts to be computed mostly on a cash basis. ESA95 was first implemented in 2000,
in the release of fiscal data for 1999. See Eurostat (2000) and Regulations (EC) N° 2516/2000 and
995/2001.
The debt rule demands that, if the debt-to-GDP ratio is above 60 percent, it must be declining at a
“satisfactory” pace. However, the meaning of “satisfactory” is yet to be defined.
The model is similar in spirit to Buti et al. (2007), but differs in several significant respects.
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