recording of transactions with financial assets.5 Specifically, the government balance is
the difference between expenditures and revenues, excluding financial transactions.
However, government debt is compiled in gross terms, and it changes when the financial
assets of the government change, thus generating flows of payments and receipts that do
not enter the deficit. When the government accumulates financial assets, debt increases
above the right-hand side of equation (2.8), while the opposite applies for a reduction of
financial assets. Such a residual is known as the stock-flow adjustment (SFA). Taking it
into account, equation (2.8) becomes:
where sfa is the stock-flow adjustment in percentage of GDP.
dt
dt-1 =deft
1 + λt
I dt-1
+ sfat
(2.9)
Averaging over the sample period both sides of expression (2.9) it is possible to obtain
the average contribution of each of the right hand side components to the average debt
growth, all in terms of GDP. The result is shown in Table 2.2 for the whole sample
period, 1977-2005, and for the first half of it, 1977-1993. Table 2.10 in Appendix 2.A
presents the results of the same exercise for different sub-periods between 1994 and 2005.
Considering the whole sample period, the most striking feature in Table 2.2 is that, as a
general rule, the growth dividend has fully offset pervasive budget deficits. The
exceptions appear to be Germany, where annual deficits have been around ¼ of a
percentage point of GDP higher than the growth dividend, France, with a difference
slightly above ½% of GDP, and Italy (and Japan), where the difference is around 1% of
GDP. The table also reveals that SFAs have been important for debt dynamics in an
ample majority of the 16 countries in the sample.6
The picture changes slightly if one looks at the first part of the period. Until 1993, the
number of countries in which the growth dividend did not compensate for the deficit
includes not only France and Italy (and Japan), but also Belgium, Greece, Spain, and the
Netherlands. On the other hand, the contribution of the SFA is even greater that in the
whole sample period.
Interestingly, both over the full sample and until 1993, the number of countries that
managed to maintain primary surpluses is not negligible, although the surpluses were in
many cases relatively small. As a matter of fact, primary deficits appear to be the
characteristic of only some catching-up countries, such as Greece, Spain and Portugal,
where the growth dividend was relatively high.
This is not the only reason (European Commission, 2005). The fact that deficits are compiled in
accrual terms, while debt is a cash concept also leads to differences between the changes in debt and
the deficit in any given year. Additional differences arise from other adjustments and valuation
effects.
As noted in European Commission (2005) large SFAs are a source of concern, especially in high-
debt countries in deficit. On the one hand, by excessively focusing on deficits, budgetary
surveillance may create incentives to shift budget items from deficit (‘above the line’) to SFAs
(‘below the line’). On the other hand, large SFAs may be indicative of inconsistent and low-quality
budgetary statistics. However, large SFAs may not always be the result of bad fiscal behavior. It
appears that countries with low debt levels and in surplus (see the cases of Finland, Denmark or
Sweden in Table 2.1) would prefer to invest in financial assets rather than to reduce the already low
debt.
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