Implicit Liabilities

3 Key excerpts on "Implicit Liabilities"

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  eBook - ePub

  Ageing, Social Security and Affordability

  • Theodore. R Marmor, Philip. R De Jong(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Most government expenditures in respect of e.g. education, justice, police, national defence, public administration, health care, etc. create (revealed) liabilities. Note that these government expenditures are predominantly financed on a pay-as-you-go basis. Present tax payers are financing public provisions which are consumed at the same time by themselves and by others. It is hardly imaginable that a government could cancel one of the aforementioned categories of public spending abruptly, except in the case that the social and political commitment to these categories of government spending is much weaker than to future pension liabilities. Or, in other words (Brittan, 1993), ‘… the fallacy of such estimates (of pension estimates) is to treat pension commitments differently from other forms of public spending’. 1 Therefore, unless we have to do with a complete economic and social collapse an abrupt end to (one of) the aforementioned categories of public spending is highly unprobable. Once more the question arises whether the degree of political commitment to future pension payments is more robust than to other liabilities in that pension payment are more difficult to cut than other public outlays. This seems questionable. Rather, basic pension provisions are to be considered as just one category of public expenditures among others. When the tax and contribution burden is felt to be no longer sustainable, cuts in pension expenditures or reduced spending elsewhere have to be considered. Eventually this is a political and ethical question. Any judgement, therefore, about the sustainability of future pension payments, irrespective of whether they are of the basic type or supplementary type, depends on the productive resources available in the future to finance all hidden and revealed liabilities in respect of pension obligations and various other obligations of national interest. There is nothing inherently negative about pay-as-you-go financed pension liabilities

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  Contemporary Topics in Finance

  A Collection of Literature Surveys

  • Iris Claus, Leo Krippner, Iris Claus, Leo Krippner(Authors)
  • 2019(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  official views on the value of such guarantees in particular as they do not intend to provide such guarantees and wish to avoid taking measures or making assessments that might be interpreted as confirming the existence of such guarantees. For example, as a general rule, the value of implicit bank debt guarantees is not recognized in the government's fiscal budget and this situation makes it difficult to hold governments accountable for these guarantees. Transparency about not just actual but also contingent liabilities is, however, an important factor that facilitates accountability and sound decision making; in principle, knowing that the public is aware of the consequences of policy decisions should instil additional incentives on the part of policy makers to avoid making poor decisions.

  That said, several public authorities have produced estimates of the value of implicit bank debt guarantees or are aware of credible estimates of such values (for example, Noss and Sowerbutts, 2012; Deutsche Bundesbank, 2016). Discussions of the results of a survey of self-assessment among public authorities of the effects of bank regulatory reform on the value of implicit bank debt guarantees conducted by the Committee on Financial Markets of the OECD concluded (Schich and Aydin, 2014a):

  ‘Despite the measurement difficulties, there was consensus that a reasonably robust measure of implicit bank debt guarantees is a key input to assessing the success of regulatory reform, including changes in resolution methods, in reducing the perception that banks are too-big, too interconnected or otherwise important to be allowed to fail’.

  Such measures could be used, in principle, not only for monitoring bank regulatory and failure resolution reform progress, but also to calibrate an explicit premium in exchange for implicit bank debt guarantees. Such a ‘user fee’ would disincentive banks’ ‘usage’ of the guarantor of last resort function discussed in Section 2.1 . In fact, to limit the value of implicit guarantees, in principle, three policy options are available. First, to strengthen banks, for example, by requiring larger and better-quality capital and liquidity buffers and improved governance and risk management, so that the value of implicit guarantees declines. Second, to strengthen the capacity of public authorities to withdraw the implicit guarantees, in particular by making failure resolution more effective and credible. Third, to charge an explicit premium in exchange for the market perception of an implicit guarantee, thus incentivizing banks to reduce their ‘use’ of this guarantee and making themselves safer and more resolvable. Asked pointedly to what extent a mix of these three policy approaches describes their specific regulatory reforms, respondents to the above-mentioned OECD survey considered strengthening banks (first option) and withdrawing guarantees (second option) appropriate descriptions. Less so the third option, that is ‘charging a user fee’ (Figure 4 ). Moreover, a list of specific policy choices was offered in the survey, grouped by the three policy options mentioned above. Again, among the altogether 33 specific policies, respondents considered ‘producing estimates of the value of implicit bank debt guarantees and charging directly for them’ the least adequate description of their domestic policy (see Appendix A and Schich and Aydin, 2014b, figure 1 ). By contrast, more than three quarters of respondents considered appropriate to describe measures of their bank regulatory reform as indirectly charging by ‘imposing other costs such as extra capital charges that rise with measures of “systemicness” of bank’ so as to incentivize banks to reduce their use of implicit bank debt guarantees. This assessment is consistent with the discussion in Section 2.3

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  The International Handbook of Public Financial Management

  • Richard Allen, Richard Hemming, B. Potter, Richard Allen, Richard Hemming, B. Potter(Authors)
  • 2013(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  How to respond to the identification of significant implicit risks? Consider the case of industrial countries with large social insurance obligations. Accepting the view of the public sector accounting community – that only explicit debt should be included on the balance sheet, with other risks (i.e., most public pension or medical care obligations to active workers) placed in annex statements or described in memorandum items – leaves considerable scope for non-transparency and lack of clarity in gauging the constructive fiscal obligations of a government. Such a position also ignores the strength and character of the political economy obligations of a government.

  Yet policy analysts and decision makers also understand that when the scale of a government’s prospective obligations is fiscally unsustainable in terms of the implied level of debt or the required increase in tax rates, the numbers only reaffirm the need for urgent policy change. This may relate to the need for changes in legislative benefit parameters (e.g., in a reduced indexation formula or a phased-in delay in the retirement age or in the level of the replacement rate) or discretionary changes in nonparametric programs of government spending in a given sphere (e.g., the coverage and content of the medical care allowable under a state-run medical insurance program or the implied queues for discretionary medical procedures). The implication is that in assessing the spectrum of implicit debts and fiscal risks to which a government is exposed, the challenge ex ante, in coming to terms with their magnitude, is to gauge what fraction of these debts and exposures to risk are politically necessary for a government to honor.

  This implies that a critical issue for politicians and policymakers is to determine what might be a politically and economically viable

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