Tsaruk O.V.
Ph.D. in Economics
Senior Consultant of Budget Committee Secretariat
Verkhovna Rada of Ukraine
This article considers the indicators of debt financing of state budget deficit in Ukraine. It compares coherence of Ukrainian state budget deficit indicators with international standards and assesses compliance with its economic substance. The author detects approaches to improve the statistical evaluation of debt financing deficit of state budget.
Keywords: state budget, public debt, budget deficit, government borrowings, debt burden.
The first years of Ukrainian independence government deficit and high government borrowings for its coverage led to the formation and rapid growth of state debt. Significant amounts of state debt and therefore substantial costs on its repayment and service often are the problem for macroeconomic stability and necessity for improvement of management. The state of public finances of the country is the object of analysis not only of the public and governing bodies of state but also international financial institutions and private investors. State debt and government deficit (according to ESA 95, the total deficit of consolidated budget and state social funds) are among the key indicators of financial stability of state economy. Therefore, reliability, objectivity and comparability of information on financial commitments public sector are not only the necessary conditions of fiscal and monetary policy, but it is also necessary for identification of potential risks and threats to economic development.
Domestic and foreign scholars paid much attention for the study of state debt problem, debt security, debt impact on economic of the country.¹ Some researchers have made significant contribution to the development of public sector statistics and solution of the harmonization problem with international standarts². However, inconsistency with international standards approaches on the evaluation of state debt, hence the performance of government borrowing and debt service indexes, complicates the analysis of the budget deficit and its comparison with other countries indicators. Thus, the goal of this research is to examine approaches of statistical estimation of a state budget deficit performance in the government finance statistics system. In turn, this requires:
- adjustment of Ukrainian state budget deficit parameters with international standards and conformity assessment of its economic essence;
- determination of approaches for improving the statistical estimation indicators of debt and government deficits.
It is known that there is a positive correlation between volume of budget deficit and government debt. The increase of state debt occurs primarily through additional borrowings, which prevail by volume of the repayment, thus the budget deficit appears. The service of already existing debt requires specific budget expenditures, which in turn also increases the size of its deficit. The latter is formed in case of excess expenditure over budget revenues. The main reasons for government debt grows are: the budget deficit; trade imbalance; formation of state reserves and exchange rate interventions; acceptance by the state the financial liabilities of public and communal entities; default of loans under government guarantees; the lack of prudent debt policy; excessive social payments from the budget; political instability.
Thus, the budget deficit is a major factor of debt, which growth, in turn, plays main role in increasing the budget deficit because of the need in repayment of existing debt. Thus budget deficit and state debt are interwoven and this should be taken into account in modelling these indicators (the first is the factor for the second and the second - for the first simultaneously). Economic literature provides many definitions of the essence of state debt, but in most cases it is interpreted as accumulated sum of previous government budget deficits with minus of surplus that occurs in the country³.
However, in practice the indicator of state budget deficit is often not fully or not at all reflects the volume growth of state debt. There are many reasons can be, but primarily it happens because the deficit (surplus) is not covered only by government borrowing (or debt), but at the expense of privatization (or government spending on property transactions: purchase securities in exchange for government liabilities) and others factors.
Thus, there is an urgent need for calculated values, which would reflect the contribution of state debt to cover the deficit (surplus) of state budget. The indicator “Net debt financing” shows the amount of financing the budget deficit due to government borrowing, adjusted for the amount of debt. This indicator helps to estimate the actual size of funds allocated to cover budget deficit by goverment debt increase. This indicator reflects how much the volume of direct government debt increased due to government borrowings. However, its value increases and due to other factors such as implementation of state guarantees, change in exchange rates, which denominated debt, and others.
Despite the fact that during 2003-2008 state budgets was formed without a surplus, net debt financing acquired negative values in 2003 and 2005 (See Table). So during these years, the volume of repayment of state debt dominated government borrowing and budget deficit financed by privatization revenues and assets operations.
Table. Dynamics of absolute and relative changes of funding deficit volumes of the state budget of Ukraine during 2003-2009
Indicator | Year |
2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009* |
Borrowing volume: | 7 135,6 | 10 316,1 | 13 422,2 | 11 860,4 | 10 447,6 | 33 316,5 | 88 877,4 |
– internal | 5 919,8 | 6 186,3 | 6 896,6 | 1 581,9 | 3 573,0 | 27 118,56 | 70 069,51 |
– external | 1 215,9 | 4 129,9 | 6 525,6 | 10 278,5 | 6 874,63 | 6 197,98 | 18 807,87 |
Repayment volume (principal): | 7 356,6 | 9 205,6 | 14 289,1 | 9 842,8 | 6 470,6 | 6 028,2 | 27 447,7 |
– internal | 2 019,1 | 3 659,2 | 8 341,1 | 4 157,3 | 2 366,8 | 3 659,71 | 14 518,04 |
– external | 5 337,6 | 5 546,4 | 5 948,0 | 5 685,5 | 4 103,7 | 2 368,44 | 12 929,70 |
Net debt financing | –221,0 | 1 110,5 | –867,0 | 2 017,6 | 3 977,0 | 27 288,4 | 61 429,6 |
– internal | 3 900,7 | 2 527,1 | –1 444,5 | –2 575,3 | 1 206,1 | 23 458,8 | 55 551,5 |
– external | –4 121,7 | –1 416,5 | 577,6 | 4 593,0 | 2 770,9 | 3 829,5 | 5 878,2 |
Net debt financing coeficient, %: | 97,0 | 112,1 | 93,9 | 120,5 | 161,5 | 552,7 | 323,8 |
– internal | 293,2 | 169,1 | 82,7 | 38,1 | 151,0 | 741,0 | 482,6 |
– external | 22,8 | 74,5 | 109,7 | 180,8 | 167,5 | 261,7 | 145,5 |
Acceleration of debt financing , %: | 14,3 | 15,1 | –18,1 | 26,6 | 41,0 | 391,2 | -228,9 |
– internal | 233,1 | –124,1 | –86,4 | –44,6 | 112,9 | 590,0 | -258,4 |
– external | –86,4 | 51,7 | 35,3 | 71,1 | –13,3 | 94,2 | -116,2 |
Net debt financing per GDP | -0,1 | 0,3 | -0,2 | 0,4 | 0,6 | 2,9 | 5,9 |
Budget deficit per GDP | 0,4 | 3,0 | 1,8 | 0,7 | 1,4 | 1,3 | 3,0 |
* According to the Law of Ukraine "On State Budget of Ukraine for 2009 ".
It is well known that large amount of privatization is typical for transitive economies with a significant share of the state, to which Ukraine belongs as well. Therefore the use of indicator “Net debt financing” at compiling and analyzing the state budget allows to evaluate level of balance in government borrowing and balance of state budget. In the budget classification this index corresponds to index “Financing debt transactions” (code 400 000) Classification of financing of the budget by type of debt obligations⁵.
In relative terms, the indicator “Net debt financing” can be submitting a debt coverage ratio, as ratio volume of borrowing and repayment. Of course, absolute values do not give possibility to fully compare the performance of the same name in time and space for this use relative value. In our case a relative coordinate of value that reflects the ratio of borrowing and repayment, is directly dependent on the rate “Net debt financing”. This coefficient takes values greater than 1 (or 100%), provided that net debt funding greater than zero or exceed the amount of borrowing, and vice versa.
Weigh up of the current trend movement in net debt financing can be done through a relative indicator - the rate acceleration of debt financing, i.e. the ratio of debt coverage ratio for the reporting and basic years. It is a relative term of dynamics which shows the ratio of the volume of borrowing and repayment of the different time points. Therefore, this index takes values greater than 1 (or 100%), provided that debt ratio in the reporting period exceeds the appropriate baseline, with an increase in net debt financing or accelerating the pace of budget financing through state debt. Each of the indicators should be viewed in the context of internal and external borrowing, since the fluctuations of international financial markets, politics and public borrowing schedule affect the amount of repayment.
Appropriateness of the proposed indicators and comparison confirms the efficacy of using a net amount of debt financing in measuring budget deficits. So, if in 2003 the net debt financing was -0.1%, when the deficit amounted to 0,4% of GDP, in 2008-2009 on the contrary, net debt financing amounted to 2,9-5,9% and the deficit - 1,3 - 3,0% of GDP . Therefore, evidence confirming the hypothesis that among dynamics of government debt and budget deficit (surplus) there can be both straight and reverse correlation. Worth mentioning is a situation where the net debt funding far exceed the budget deficit. This means that in such years the indicator of deficit does not fully reflect the funding requirements for state budget. Thus, the analysis of borrowings volumes compared to the amount of repayment allows evaluating the actual contribution of borrowings to finance the budget deficit using the net debt financing and debt coverage ratio indicators. These trends over time can be gauged by the coefficient of acceleration of debt financing.
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Опубліковано: Фінанси України. - 2010. -№4, с.98-101
