Accumulation of Arrears

Many contemporary researchers argue that there exists a special form of dealing with budget deficit that in essence aims to hide it. In practice, the part of government spending gets deferred through the accumulation of arrears and is supposed to be disbursed later in coming fiscal years.

Government expenditure arrears, which indicate delays in government payments to suppliers or creditors, have become an important fiscal issue in many transition economies. Arrears can lead to underestimates of spending and of the size of the fiscal problem facing a country. Since arrears are a form of forced deficit financing, the government’s borrowing requirement is also understated, which leads to a distorted picture of the sources of credit expansion in the economy. While deficit financing can allow the government to absorb more of the economy’s resources than would otherwise be possible, this initial effect is offset as the rest of the economy responds by raising suppliers’ prices or holding back payments for taxes and fees. Unfortunately, expenditure arrears raise the cost of providing government services (Chu and Hemming, 1991).

Arrears may also adversely affect the private sector’s expectations about the future development of the economy. Economic agents may thus anticipate an increase in tax pressure, higher inflation, as well as overall deterioration of financial conditions. These negative expectations are likely to amplify the conventional “deficit-money-inflation” effects that we have already reviewed. Furthermore, the arrears accumulated in previous periods may pose a threat to be carried over to the future periods thus only postponing inflationary pressure.

Specific Theoretical Hypotheses

Date: 2015-02-28; view: 922