GFS Analytical Framework 1: Summary Table

GFS provides an analytical framework of transactions and debt stocks, supported by detailed classifications of the framework's major components; revenue, expenditure, financing and debt.

Apart from debt stocks, the analytical framework of GFS is presented in one single account. Since transactions are recorded on a cash basis, the statement includes government receipts and payments only. Each receipt and payment is classified as revenue, a grant, an expenditure, lending less repayments, or as financing. The difference between receipts and payments is identical to the change in governments holding of currency and deposits, the change in cash balances.

The system is organized around six basic distinctions between different types of transactions;

1. Receipts versus Payments, i.e. whether the transaction carries funds into or out from the government. This holds for most transactions because GFS follows the principle of gross accounting. Exceptions to this rule; refunds (adjustment items in general), netting of departmental enterprises, and repayments (lending/borrowing).

2. Non-repayable versus Repayable, a payment or receipt is repayable when a fixed term contractual liability flows in return. This distinction is important because asset and liability positions affect future government payments and receipts.

3. Requited versus Unrequited, a non-repayable payment or receipt is requited when goods and services flow in return, and unrequited when nothing flows in return.

4. Current versus Capital, capital transactions involve payments or receipts for the acquisition, construction, or sale of non-financial assets (products meant to be used for more than one year in the process of production). Capital transactions cover requited payments or receipts for which fixed assets, stocks, land, or intangible assets flow in return and unrequited payments or receipts for the purpose of permitting the recipients to acquire such assets, compensating the recipients for damage or destruction of capital assets, or increasing the financial capital of the recipients. All other non-repayable transactions are considered to be current transactions. Thus, current transactions includes inheritance taxes and non-recurrent capital levies (defined as capital transfers in SNA).

5. Financial Assets versus Liabilities, a distinction between others liabilities to government (financial assets) and governments liabilities to others has to be drawn, because there is a fundamental asymmetry between the government's financial assets and liabilities. The asymmetry reflects the government's motivation, government is motivated by purpose of public policy and not by the need to earn a return, and unlike other sectors, the government does not “feel” richer and acts differently when its financial assets increases. -This is the reasoning for the Manuals distinction between assets and liabilities, and the recording of acquirement of financial assets for policy purposes as an expenditure, rather than an financing item.

6. Public Policy versus Liquidity Management, the distinction between public policy and liquidity management is made in relation to government financial claims on others only, thus, it introduces an asymmetry in the tables.

Illustration of the table

Revenue and Grants

Revenue includes all non-repayable receipts, requited and unrequited, other than grants (non-compulsory, non-repayable, unrequited receipts which comes from other governments, domestic or foreign, and international organizations).

Current Tax Revenue are defined as compulsory, unrequited, non-repayable contributions extracted by government. Current tax revenue includes Taxes on income, profits, and capital gains, Social security contributions, Taxes on payroll and workforce, Taxes on property (including inheritance and gift taxes), Domestic taxes on goods and services, Taxes on international trade and transactions, as well as other taxes like Stamp and Poll taxes. Also included are interest collected on tax arrears and penalties collected on non- or late payment of taxes, collection of fees and charges out of all proportion to the cost or distribution of government services provided to the payer, together with profits transferred to government from fiscal monopolies.
Current Non-tax Revenue includes requited revenues as property income, fees and charges, non-industrial and incidental sales and cash operating surplus of departmental enterprises, and non-requited revenues as fines, forfeits and current private donations.

Capital Revenue includes receipts form the sale of capital assets as well as capital transfers from non-governmental sources.

Grants are non-compulsory, non-repayable, unrequited receipts (transfers) which comes from other governments, domestic or foreign, and international organizations. Grants can be (i) tied to a specific expenditure, project, or program which would not be carried out in the absence of the grant, or (ii) providing general budget support for expenditures and programs the recipient has already undertaken, or would undertake in any case. The manual operates with to categories of grants - current and capital.

Grants for permitting the recipient government to acquire capital or financial assets or compensating the recipient government for damage or destruction of assets are classified as capital grants. All other grants are classified as current grants.

Grants of goods and services, grants in kind, received by a government are not included in grants, since the GFS is a cash-based system. However, it might be shown as a memorandum item.

In arriving at an overall surplus or deficit the Manual groups grants with revenue as transactions that reduce the deficit rather than financing it. However, the separate identification of grants makes it possible to rearrange grants for the purpose of economic analysis.

Expenditure includes all non-repayable payments by government, whether requited or un-requited, and whether for current or capital purposes.

Unlike the treatment of receipts, grants paid to other governments are included within expenditure rather than being reported as a separate category. Analysts may sometimes want to group grants received as part of financing rather than as part of revenue, but this kind of regrouping is not interesting for the government paying the grants.

Expenditure is reported gross, with the exception of operating expenditure related to departmental enterprises. Relating to departmental enterprises are any cash operating surplus showed as revenue and any cash operating deficit as expenditure. Also, any refunds of previously paid taxes are not shown as an expenditure, but are treated as an offset to tax revenue.

Current expenditure includes requited payments other than for capital assets or goods, services and compensation of employees when used in the production of capital assets, and unrequited payments or purposes other than permitting the recipients to acquire capital assets, compensating the recipients for damage or destruction of capital assets, or increasing the financial capital of the recipient.

Current expenditure covers expenditure on goods and services, either in the form of wages and salaries to employees, employers contributions to social security schemes outside the accounting part of government, or purchases of goods and services, interest payments, subsidies (including cash operating deficits in departmental enterprises) and other current transfers to other governments, households and non-profit organizations, as well as to abroad.

Capital expenditure are payments for the acquisition of fixed capital assets, strategic or emergency stocks, land, and intangible assets, or unrequited payments for the purpose of permitting the recipients to acquire such assets, compensating the recipient for the damage of destruction of capital assets, or increasing the financial assets of the recipients.

Lending minus repayments covers government payments giving rise to financial claims upon others or to government equity participation in the ownership of enterprises, less government receipts reducing such claims or equity holdings, undertaken for public policy purposes rather than for the management of government liquidity or the earning of a return. It thus includes loans made and equities purchased by government less government receipts from loans repaid, equities sold, or equity capital returned to government. (Government lending includes only the lending activities of government units whose funds come entirely from government, since any unit empowered to both acquire financial assets and incur liabilities in the capital market belongs to the financial sector, not government.)

GFS groups lending minus repayments for policy purposes as part of expenditure, thus as a component determining the deficit (or surplus), in contrast to the treatment in SNA where lending for policy purposes, as well as for management of government liquidity, is recorded as a financial transaction, in the financial account.

Financing, total financing, by definition is equal to the deficit or surplus, with a opposite sign. Financing covers transactions involving government liabilities, government acquisition of claims on others for liquidity management purposes, and repayment or sale of such items, in addition, net change in government holdings of currency and deposits resulting from government transactions during the period but not from valuation changes.

Financing includes amortization, repayment of the principal of government obligations, but not interest, payments for the use of funds, which is included in government expenditure.

Financing includes government borrowing and amortization vis-à-vis all other sectors, domestic as well as foreign. Important effects may be determined by which sector the government draws upon for its borrowing operations, e.g., an expansionary budget may have a less expansionary effect if it is financed through domestic sources than if it is financed through foreign ones, but this, of course, depends on the other sectors’ habits of spending, saving etc.

Surplus / Deficit; An important element in the organization of government transactions is the choice of receipts and payments to be counted in determining the government's surplus or deficit. In any cash accounting system – total receipts plus any decrease in cash holdings equals total payments plus any increase in cash holdings. Alternative surplus / deficit measure can be derived, serving different analytical purposes. While a single concept provides the organizing principle for calculation of a surplus / deficit measure in the GFS manual, the ‘building blocks’ are provided which make possible the derivation of other surplus / deficit concepts as well.

The surplus / deficit concept as defined and utilized in the GFS Manual;

This surplus / deficit concept measures whether the government meets the cost of expenditure and lending activities undertaken for public policy purposes with receipts from revenues, grants and loan repayments, without increasing its obligations for future repayments or running down its liquidity holdings.

Alternative Deficit / Surplus measures; Alternative measures may be constructed from the ‘building blocks’ provided by the GFS-manuals classification of transactions. This may be applied in particular circumstances to measure significant aspects of government impact on the rest of the economy, e.g., one may wish to add government lending minus repayments for policy purposes to government financing to measure the overall effects of government operations upon financial asset and liability positions in the rest of the economy, or categorize grants (total, or capital only) as a financing item rather than together with revenues making the deficit smaller / the surplus larger.

The GFS-manual operates with two concepts of savings; Own Saving and Saving. Non of them directly comparable with the saving concept defined in the System of National Accounts.

Own Saving isdefined as current revenue less current expenditure, and is also named current account surplus without receipts of grants. It can be questioned whether current grants received should be included with current income in calculation of saving and the current account surplus. Interest appears to focus on governments own saving without inclusion of current grants received, particularly when such grants are from abroad. An argument against focusing on own saving is that the pattern of expenditure most probably is a function of current grants as well as total revenue (plus other variables), however, it is not possible to distinguish which expenditures come about as a result of the grants and therefor a ‘clean’ own saving concept can not be calculated.

Saving is defined as current revenue plus current grants less current expenditure, or current account surplus.

Also, another alternative measure is the primary deficit, a measure of the current account surplus/deficit excluding interest payments. By excluding any interest payments, it measures the result (surplus/deficit) of this periods activity only.

Debt; Government debt presents a different kind of measure of government operations. Debt is not a flow, but a stock of liabilities with different time dimensions, accumulated by government operations in the past and scheduled to be extinguished by government operations in the future.

While little may happen on the governments side of the interface so long as the debt is outstanding, a great deal of activity may take place on the creditors’ side. Like money, government debt may become a prime component in the economy's asset structure, and a vehicle for important shifts in financial conditions unrelated to government borrowing. The types of government debt generated and outstanding can play distinctly different roles in the economy, depending on their liquidity, maturity, type of holder, marketability, and eligibility for application to particular legal uses, such as meeting bank reserve requirements.

The stock of outstanding government debt is of concern to government policy and management; (1) The schedule of maturing debt indicates when funds will be needed for repayment, (2) Because the stock of outstanding debt is not homogeneous, plans for sale of additional debt will require additional information – whether the existing debt is negotiable or non-negotiable, in bearer form or registered, placed by compulsion or voluntarily, sold by auction or by subscription, with interest payment by coupon or through discount, indexed or un-indexed, redeemable at maturity only or at penalty before maturity, and what interest it carries and by whom the debt is held, and (3) plans for servicing outstanding debt through interest payments must be based on the size and coupon rate of issues being serviced.

The debt statistics should, of course, correspond in coverage to the government being studied, that is, central or total general government. Like transfers within government, debt should be shown on a consolidated basis, eliminating from the totals for a single government any debt own by another part of government (whether on the same level or another level of government). Intergovernmental debt could be shown as a separate memorandum item.

For several reasons, changes in the stock of outstanding debt during a period need not necessarily correspond to the flow of net borrowing shown in ‘financing’. The basis for measuring outstanding debt should be the amount that will have to be repaid, not the money received when the debt arose, thus, revaluations and adjustments may be necessary.