The way of estimating the Nominal value of Public Sector Expenditures

A few days ago, the IMF published a study on the impact of inflation on public finances (“The Effects of Inflation on Public Finances“, May 5, 2023). The Study is based on the data of the member countries of the Fund from 1962 to the present day and comes to two interesting findings:

1. Regarding the debt of the general (federal) government, that the jump in inflation reduces it as a percentage of GDP, but this does not constitute a sustainable way of reducing it.

2. That, inflation initially limits the deficit in the budget of the general (federal) government, because only the revenues increase immediately with inflation, but in two years it also increases (public sector expenses, civil servants salaries, pensions) and thus the initial benefit is spread out.

Governments of countries that intent to mislead both the markets and their people, either to win elections or to present a rosy picture of their country’s economic situation, tend to present different ways of calculating public spending. Yes, they accept that high inflation has the effect of reducing the debt of the general (federal) government, affecting nominal GDP, income and market prices of goods, but they also do not accept that inflation has a negative effect on public spending.

The share of public expenditure in GDP is declining much faster than that of revenue at almost twice the rate because the effect of inflation on public expenditure is underestimated. In this way, the respective governments accept that the deflator of public expenditure is much smaller than that of GDP or consumption or investment. In this way, the nominal value of public expenditures is reduced and it follows that they either have a strong primary surplus or that they do not have a deficit in the State budget of the general (federal) government.

The problem is that all governments will have to follow the guidelines for calculating public spending that are indicated by the International Monetary Fund. However, if this is not done and they follow strange methods of calculation, then in the future the problem will appear either in the form that the primary surplus is not achieved or in the form of a deficit where in the future in order not to be seen, these governments will have to take hard fiscal measures in the future measures to reduce government spending (cutting salaries, pensions of civil servants equally, etc.).

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