In the business talk on the 8th of February Peter van de Ven addressed an important macroeconomic issue, which has nowadays more relevance than ever: government finance indicators. In his talk he promised to debunk some of the myths surrounding those indicators and provided some new insights in the relevant parts of national accounts (NA). Peter van de Ven is an expert in this field, working almost 30 years in the area of NA. He started his career in the NA department of Statistics Netherlands and served in several leading positions before becoming head of the NA division. In July 2011, he joined the OECD, to become the head of the NA division over there.
In today’s information age statistics are thriving. Economic indicators are nowadays in the center of attention and the media coverage is rising and therefore also the demand for more and more recent data. Analysts make a big effort to interpret and forecast economic trends and statistical offices dramatically increase the amount of data and metadata they process and publish. Among OECD countries there is a strong tendency to produce more accurate and timely indicators. The two major indicators used in the analysis of government finance within the European Union (EU) are Government Deficit and Government Debt as a percentage of GDP. These indicators are politically extremely important; consider, for example, for the EU Excessive Debt Procedure (EDP), i.e. EU Member States agree under the Stability and Growth Pact respecting two criteria: a deficit of 3 percent (of GDP) and a debt of 60% of GDP.
The question is if such an extensive focus on numbers and percentage points is healthy for countries and whether the relevant indicators are indeed the most appropriate ones to use. Right from the start of his presentation Van de Ven made it clear that the debate on government debt and deficit surely has some value added but is nevertheless mostly overrated. Van de Ven motivated this talk by telling anecdotes on what happens when politics and statistics come together. Statistics become a very political issue especially when the data is on very sensitive topics such as government deficit and debt. The “success” of governments seems to be measured by the level of those two indicators and therefore governments have great incentives to make the numbers look as good as possible. Van de Ven compared the advantages and disadvantages of the use of NA data to make a judgment of the appropriateness of the use of government finance indicators. He mentioned that the extensive attention lead to considerable improvements of the quality of the data and also their international comparability. It is also good that there is now more awareness of the importance of statistics and the insights they can give. Also legal structures have changed as a response to this new awareness: statisticians can nowadays be prosecuted if they purposely produce wrong data in relation to deficit and debt. However, Peter van de Ven drew attention to the fact that there are also problems going hand in hand with the extensive interpretation of NA data. First of all, the allocation of resources within statistical offices has changed. There is a lot of money spent on statistics for “administrative purposes” whereas the focus on research is more and more losing its prominence. In addition, since the indicators are used at EU level, e.g. to calculate the contribution of the Member States to the EU budget, governments have an incentive to go for “exactly wrong” instead of “approximately right” estimates, when it comes to, for example, including new economic developments in the system of national accounts that are difficult to measure. In practice countries are also continuously looking for “grey areas” to “manipulate” the relevant NA data. They create constructions that have a lowering impact on the deficit. For instance, they could sell government buildings making a surplus but then lease them back. From an economic point of view, however, this may not be a wise decision, when the leasing rates are higher than the annual costs of owning the buildings. Another way to use those “grey areas” is the recording of Public Private Partnerships (PPP) where private companies make the investment in e.g. transport infrastructure. Van de Ven mentioned in this talk also the example of France Telecom “trick”, which was copied by several other countries. In 1996 France Telecom made a huge one-time payment to the government and in return the government was shouldering its pension liabilities. Therefore the deficit was reduced and since the future pension liabilities of the government were not included in government debt this effort enabled France to meet the 3% Maastricht criteria. It can be shown that this trick accounted almost for half of France’s deficit reduction in 1997.
Given some of the disadvantages of using government debt and deficit as main indicators, Van de Ven proposed instead to use two different indicators: net saving and net debt. Net saving are current incomes minus current expenditures (including depreciation). This would be a more appropriate indicator, as it would exclude investments that may be important to generate future income. It would also be a fairer indicator for emerging economies. Furthermore the present debt indicator does not include all liabilities and gross debt does not take into account the asset holdings of the government. Therefore, it would be more appropriate to use net debt meaning gross debt minus financial assets. He underlined his argument by showing the discrepancy between net debt and gross debt. One striking example is Norway with its huge funds due to the oil reserves; the difference between these two indicators is about 194 percentage points. Also Japan, known for its huge debt would be located at a much more decent level using net debt instead of gross debt. In his concluding remarks Peter van de Ven said that as a statistician he would stop focusing on a few indicators and put the data in context. More story telling around the data may be capable of creating a broader picture for a better analysis and tailor-made policy measures. Many improvements have already been already made and this discussion is an important step forward to ameliorate indicators.
In the following Q&A round the speaker answered many questions from the audience. He explained that the focus of a statistician as well as a politician should lie on the well being of people. Today’s world is obsessed with GDP growth as indicator of economic growth and performance and the news coverage makes you believe that there might be a connection between well-being and GDP growth. Peter van de Ven commented that there is certainly a relationship between the two but the relationship is not linear. GDP growth is an indicator for economic activity but does not give insights on environmental issues like pollution, nor does it say anything on health or distribution of income and wealth. An important step forward would be, for example, to rather focus on households and their real disposable income as an indicator, instead of GDP growth.
The talk was very insightful and gave fruitful thoughts. On behalf of all TSE students we would like to thank Peter van de Ven for coming to TSE to share his thoughts and talk about his work as an economist at the OECD.
Work at the OECD
The best way to gain insight in the work at the OECD is through an internship of several months. You can apply online under http://www.oecd.org/careers/internshipprogramme.htm. For internships starting in July 2013, for instance, applications will be considered starting March 15. The people working at the OECD are around 90% university graduates and often inherit a PhD. The OECD has a young professional program (http://www.oecd.org/careers/oecdyoungprofessionalsprogramme.htm), which offers many opportunities for university graduates. However, these programs are very competitive since the OECD is a favored employer. It is a desirable place to work due to the international working environment and the advantages of working for an international organization. Moreover, for you to become member of the OECD staff you have to be a national from one of the member countries of the OECD.