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Many Issues
• Asset-based reallocations is the balancing item; do we have good estimates of LCD? Public and private transfers?
• Values presented here include public and private asset based reallocations. What should public look like?
• Multi-generational households adds complexity– Are adult children accumulating assets within
extended households and establishing independent households only when asset threshold is reached?
– Lifecycle for extended households is very different than for nuclear households.
Many Issues
• Estimates of asset income accurately estimated?
• Asset transfers to the young not being captured?
• Others?
Public Asset-based Reallocations
Andrew MasonFifth NTA Workshop
Sungkyunkwan University November 5-6, 2007
Outline
• Public debt– Stylized facts– Illustration of public asset-based reallocations
• General principles for public asset-based reallocations.
• Public debt: who pays?
Data set 1: 1990–2002: Argentina, Brazil, Bulgaria, Chile, China, Colombia, Costa Rica, Côte d’Ivoire, Croatia, Ecuador, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Lebanon, Malaysia, Mexico, Morocco, Nigeria, Pakistan, Panama, Peru, the Philippines, Poland, Russia, South Africa, Thailand, Turkey, Ukraine, Uruguay, and Venezuela.
Data set 2: 1970–2002: Algeria, Argentina, Bangladesh, Benin, Bolivia, Botswana, Brazil, Burkina Faso, Burundi, Cameroon, Chile, China, Colombia, Costa Rica, Côte d’Ivoire, Czech Republic, Dominican Republic, Ecuador,Egypt, El Salvador, Gabon, Ghana, Guatemala, Haiti, Honduras, Hungary, India, Indonesia, Israel, Jamaica, Jordan, Korea, Malaysia, Mauritius, Mexico, Morocco, Niger, Nigeria, Pakistan, Papua New Guinea, Panama, Paraguay, Peru, the Philippines, Poland, Russia, Singapore, South Africa, Sri Lanka, Syrian Arab Republic, Tanzania, Togo, Thailand, Tunisia, Turkey, Ukraine, Uruguay, Venezuela, and Zimbabwe.
The industrial economies common to both data sets are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, the United Kingdom, and the United States.
Summary of Stylized Facts
• Public debt in emerging economies was approximately 70% of GDP
• If interest rates were 10% of GDP then public asset income was -7% of GDP.
• Between 1997 and 2002 public debt was increasing by about 2% of GDP per year.
• If GDP growth was 5%, then public saving was approximately 2% + 0.7 X 5% = 5.5%
Public Asset-based Reallocations(as a percent of GDP)
Total Domestic ROW
Total reallocations -1.5 -1.5 0
Asset income -7 -7 0
Less: Public saving
-5.5 -5.5 0
• Net outflow because taxpayers borrowed less than they paid in interest income.
• ROW is zero if ROW is bearing none of the cost of financing public debt, i.e., paying no public interest expense.
Private Asset-based Reallocations, Public Debt Counterparts
Total Domestic ROW
Total reallocations 1.5 1 0.5
Asset income 7 4 3
Less: Public saving
5.5 3 2.5
Flows to and from domestic and foreign investors (including foreign governments).
Public Asset Balance Sheet
Total Domestic ROW
Beginning of year -70 -70 0
Saving -2 -2 0
End of year -72 -72 0
End of year balance may differ from beginning year balance plus saving. Value of public debt may change, for example, because of currency fluctuations (if some debt is denominated in foreign currency).
Age Profiles
• Asset income – age profile of taxes• Assets beginning of year – age profile of
taxes during the year• Assets end of the year – age profile of
taxes during the next year• Saving – change in assets after netting out
other flows. Includes both the accumulation of aggregate debt and asset transfers across age groups or “bequests”.
Public Asset Transfers (Bequests)
• As the relative tax burden on older adults decline they transfer public debt to the next generation of tax payers.
• As the relative tax burden on children and younger adults increases they “inherit” public debt from older generations.
• Important: Public asset transfers generate age-specific saving and equal transfers. Cancel out, i.e., other flows are unaffected. Not included in the public transfers spreadsheet on the website.
Public Asset Transfers, Per Capita, South Korea, 2000
-1500000
-1000000
-500000
0
500000
1000000
1500000
2000000
2500000
0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90+
Public Credit
Public Capital
Public Asset-based reallocations, Aggregates, South Korea, 2000
-2000
-1500
-1000
-500
0
500
1000
1500
2000
0 7 14 21 28 35 42 49 56 63 70 77 84
Public asset-basedreallocations
Income on publicassets
Less: Public saving
Public Assets and Liabilities
• Non-Financial Assets– Fixed capital– Inventories– Valuables and non-produced assets
• Financial assets and liabilities– Currency and deposits– Securities– Loans– Other
• For more detailed information and definitions see IMF (2001) Government Financial Statistics Manual. [NTA website links]
Public Asset-based Flows
• Asset income and expense– Income from public fixed assets is zero in
SNA. – Non-produced assets yield income– Financial assets yield income– Public asset income may be negative
• Saving and dis-saving– Saving (dis-saving) in any form of public asset
is an outflow (inflow)
Issues and Assumptions
• Public or general government?
Public is a broader concept that includes state owned enterprise.
• Program-specific or consolidated account?
Consolidated is standard, but countries may want to construct program-specific accounts in some instances, e.g., public pension funds.
Public Debt: Basic Principles
• Assets and liabilities generate a stream of income or interest expense.
• If the rate of return on the asset (or liability) is r, then YA(t)=rA(t)
• The value of the asset must equal the present value of the stream of asset income. A(t) = PV(YA)
Public Debt: Principles
• In NTA (and GA) public debt is important because it is one component of the debt (or wealth) that current generations are shifting to future generations.
• Public discourse often treats public debt as though it is entirely the responsibility of future generations.
• Some of the costs of public debt fall on the current population.
• Flow accounts tells us the cost in a single year. A complete accounting is contingent on the debt policy in subsequent years.
Public Debt: Principles
• Let the current public debt be assigned to age groups in proportion to interest payments by taxpayers, i.e.
YA(a,t)=rA(a,t).• Current taxpayers do not have a
continuing responsibility to pay interest on public debt, because of asset transfers.
( ) (Asset transfers)xt xt xtPV YA A PV
Public Debt Flows and Stocks over the Lifecycle:
A Simple Illustration
Age AssetsAsset
transfersAsset
income
PV of asset
income
PV of asset
transfers
0 0 -100 0 -20.2 -20.2
1 -100 -100 -6 -21.4 +78.6
2 -200 100 -12 -16.7 +183.3
3 -100 100 -6 -5.7 +94.3
Public WealthA More Realistic Example
• Age Profile of Interest Payments: Thailand 2004 public outflows
• Mortality – Japan females 2000-2005
• Experiment– Aggregate public debt is constant– Estimate lifecycle of public wealth (debt) for a
synthetic cohort given interest payments profile and mortality rates.
Public Debt Measures
-400000
-300000
-200000
-100000
0
100000
200000
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Wea
lth
Current debt
PV of interestpayments
PV of debttransfers
Public Debt: Who Pays?
-400000
-350000
-300000
-250000
-200000
-150000
-100000
-50000
0
-60 -40 -20 0 20 40 60 80 100
Current debt
PV of interestpayments
Share of unborn:
9.4%
Share of children:
20.7%
Balance Sheet
Assets Liabilities and net worth
Non-financial Liabilities
Financial Net Worth
TotalTotal liabilities and net worth
Source: IMF Government Financial Statistics Manual 2001.