government surplus

government surplus

Analyzing the Impact and Management of Government Surplus

1. Introduction to Government Surplus

This paper presents a number of issues surrounding government surpluses. There are many definitions of a government surplus. Initially, we focus on the “desired” surplus, i.e., the surplus that is deliberate, the surplus that the stakeholders want the government to have. The desired surplus is the amount necessary on a sustainable basis to pay interest, amortize debt and, in some countries, run down insurance funds for social security or government employee retirement. This amount is not fixed and it is possible to make changes in the short-term desired amounts with consequences for the level of government spending, and for various interest rates and capital flows. In that sense, the desired surplus is an active fiscal policy variable. We conclude the paper by stating that ongoing economic discussions at the international level should involve participants who are well aware of the expectations of the stakeholders.

In many countries, fiscal accounts have shown dramatic improvements in recent years. This positive trend is the result of a variety of policy changes including fiscal consolidation, the end of the Cold War reducing defense spending, the beginning of social security reform, and technological and tax law changes generating increased revenues. Good management led to the reduction of the debt and then the management of the large deficits of the early 1990s. Now that structural surpluses have begun to appear in many Group of Seven countries and in an increasing number of emerging market economies, the new challenge is managing the new fiscal reality. I address why governments have surpluses, whether they affect other economic sectors, and what proactive policies governments should take to manage these surpluses. Without an examination of the impact of these surpluses, we will not pay much attention to them.

2. Economic Implications of Government Surplus

Suppose the economy is characterized by investment demand which is unstable and not anchored to the underlying variables, marketability in individual private assets, and that the government surpluses, after feeding a sufficient reduction in the public debt, could be absorbed by still higher nominal treasury surpluses, engineered to stabilize nominal interest rates. Such a policy could help the economy avoid great variability and speculative excesses in the structure of interest rates, in the term premia, and more generally in the valuation of term securities and demand deposits. In this paper we invite this relatively controversial re-examination of fiscal policy as a means to achieve a nominal target consistent with full private employment and economic stability.

This chapter deals with fiscal and debt implications of government surpluses. We compare, in that respect, a regime where policy is passive and surpluses feed a pre-announced reduction in public debt, to another where surpluses are recycled. In this latter case, budget balances are allowed to deviate from their initial dynamics. The government can thus implement an active fiscal policy designed to influence the money supply and its price. If the economy is characterized by imperfection in the private asset market, such a policy, based on the government surplus to influence the money supply and, indirectly, interest rates, would also result in greater stability and lesser volatility in the economy.

3. Strategies for Managing Government Surplus

This confusion arises, in part, because the government surplus arises for two very different reasons. A surplus can be generated either because of a strong economy or because of a mismatch between revenues and expenditures which arise independent of the cyclical situation. However, these causes are not mutually exclusive. A strong economy can influence the budgetary accounts and changes in budgetary accounts can influence the economy. The condition where the government’s revenue is in excess of the amount needed to cover its outlays is portrayed graphically with a demand and supply curve. The current surpluses are accompanied by either pressures on interest rates or excess reserves.

It is quite clear that policymakers are concerned with the projection and the implications of large government surpluses. Some, it is reported, are even planning how they might avoid such surpluses if the situation should arise. This paper considers a variety of strategies which the government might apply to avoid a budget surplus or, if it should arise, to mitigate its possible adverse effects. Policymakers and economists differ on the appropriate policy actions. Some commentators believe that large surpluses would indicate that revenue was in excess and encourage policies which would reduce the level of revenue. On the other hand, policymakers have a difficult time determining whether the surplus projected is of a temporary or permanent nature.

4. Case Studies and Best Practices

Capital: These entities have either their own capital explicitly defined as an endowment or have common capital coming from several different state sources merged into a single fund. If a fund has an explicit visionary dimension, this capital should be well defined and could be used to finance the preparation works required to implement a visionary program. Under the circumstances of natural resources exploitation, government savings funds will certainly have an increasing or highly variable revenue stream. As average returns (real and nominal) on real capital are likely to be of the order of the annual price variations of the corresponding revenues, the decision is related to the fact that the growth of real capital could be of a similar order than the size of the fluctuations of government revenues over a long-term perspective. Thus, these schemes allow public authorities to cope with the revenue variations depending on the statute of the funds (ex. temporary).

In order to draw lessons from best practices of government savings in other countries, we examined seven cases of national pension reserves and/or stabilization funds: A) Government Pension Fund (Global) of Norway (GPFG), B) National Pension Reserve Fund of Ireland (NPRF), C) Future Fund of Australia (FF), D) Stabilization Fund of Russia (SF), E) Korea Investment Corporation (KIC), F) Investment Corporation of Dubai (ICD), and G) Kuwait Investment Authority (KIA). In this section, we describe these cases and present in box format their relevance to a VNU government savings fund, as well as best investment practices applicable to VNU.

5. Conclusion and Future Considerations

There are many implications of the analysis at the macroeconomic and financial level on the fiscal procedure and theory in the Lao case. However, more importantly, the implied fiscal policy recommendations have two general policy implications. First, the importance of a relative fiscal administered and anticipated macro-fiscal stabilization policy; and second, and equally important, the implications of a fiscal surplus management policy. Moreover, the results imply that the adjustment of fiscal policy in order to increase economic output is consistent both with a means of affecting greater government solvency, and with an attempt to use macroeconomic fiscal stabilization procedures to reduce the debt service payment that the government and the country have to tender in the long run. Externally, the study examines the link between fiscal and monetary risk periods which result after the Lao government has received foreign aid and world interest rates decline. In response to external shocks, it is suggested that the Lao government suppose a prudential fiscal policy after ex post requesting the obligatory retire foreign debt.

In conclusion, this study provides a comprehensive examination of the impact of various fiscal surplus variables on some key indicators of an economy. One of the main contributions of the study is the examination of the impact of surplus/deficit management policy on the economic condition of an economy. The study uses the current GDP weighted fiscal balance, total revenue, and primary surplus variables in order to assess their impact on the Solow macroeconomic growth model, the prices of key government securities, and the short and long-run movements in the term structure of interest rates. While the direction of the qualitative development relationships could be considered mixed, the majority of time significant group impacts are mixed. At the same time, the directions of the quantitative development impacts, upon work, can be seen as indifferent as evidenced by the various model of moments and error components regressions estimation. The combined results of the structural and instrumental variable time series regression analyses, which are presented in the results section, suggest that uninspired surplus management policies can hurt long-run growth and the term structure, and ex ante, the monetary-fiscal linkage is important.