Audio transcript
I just want to say a few things about the topic because it might not be completely known to most of the people. The problem of contin- gent liabilities is a relatively new problem. It has probably always existed like most problems but we have become aware of it in the last 10 years.
The problem is that the government pursues objectives by using various instruments. One very important instrument is government spend- ing - the level and structure of government spending, taxes, various level of taxes, the struc- ture of taxes, tax expenditure, tax incentives. The government uses regulation for pursuing its objective, certification of some activity, mone- tary policy, exchange rate policy, industrial pol- icy and so forth. Well in recent years the accu- mulation of public debt, also the increasing fis- cal deficit, tax competition and tax evasion and the changing attitude vis-à-vis the role of the government has brought pressure on govern- ments to reduce and contain public spending. Public spending was very popular in the 60s and 70s when the government could without too many political problems increase spending and acquire popularity by doing so. This is no longer the case. Public spending is very much con- tained. So governments look at other options, they cannot go the debt option because debt in many countries is still quite high and there is a negative attitude towards it. So there has been a development which is relatively new: the devel- opment of contingent liabilities. The government encourages certain activities in the economy, activities pursued by the private sector, by as- suming itself responsibility for failure. So, in a way, this is a relatively new development, (it certainly always existed) but new on a larger scale.
There are several examples of contingent li- abilities. For example, after 11 September, vari- ous governments, also in Europe (eg. the Italian Government where I was a member at the time), took over the responsibility of the insurance of terrorist attacks against airlines. Airlines had great difficulties buying insurance at that time. Therefore the Government stepped in and said
that in case of a terrorist attack within the next 6 months it will cover the costs. This was one way of encouraging activities by assuming po- tential costs. The government assumption of failure in investment – in the past the govern- ment was responsible mainly for infrastructure, e.g. roads, canals and so forth were built by governments. In recent years, because of the scarcity of funds and the difficulties of increas- ing spending, there has been a development of public-private partnerships where the govern- ment encourages the private sector, private en- trepreneurs, to carry out certain large infrastruc- ture investments. For example, the channel be- tween England and France was built with private money. But the government takes over the re- sponsibility of guaranteeing a certain rate of re- turn to the investors. If the project fails, as often it happens, then the government lends itself with a large amount of money. You have the natural catastrophes as another example. The govern- ment very often steps in when there are floods, earthquakes, hurricanes. This encourages in a certain way private people to build in those areas where there is danger. It is a classic problem in the United States where the Government steps in when the Katrina happens etc. It encourages people to buy houses just along the Atlantic in places where hurricanes could happen at any moment. Another example is that of sub- national governments. There is great decentrali- zation today but sometimes the contracts be- tween the sub-national government and the cen- tral government is not very clear and there are implications that if the sub-national government spends more than it should and ends up with fiscal deficit, the central government steps in and covers them. You have liabilities in bank- ing crises. Banks can go broke and then what happens to those who have deposited the money. The government steps in sometimes at great cost. In the case of Mexico for example it cost about 15-16% of GDP. In other countries, it cost even more to take over this responsibility. And you have liability in loss making enterprises, the government implicitly when you have a national airline, where the airline loses money, the gov- ernment steps in to cover the cost. Finally, to mention one colossal one which could come in the future, is global warming. Suppose that
Unofficial and unedited compilation of presentations made during UNCTAD’s sixth Debt Management Conference
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global warming really takes place and suppose that many people are displaced from the places that they live, what are the responsibilities that the government has vis-à-vis this? I think that this is an area on which it would be very useful to have clear ideas before the problem happens. Otherwise, we are going to have huge problems. To finish, some of these contingent liabilities might be very, very large and cause possibilities of fiscal crises and so on. Unfortunately they cost nothing when you enter. The government makes a guarantee. As long as everything goes fine there is no cost. The cost does not appear in the budget. The fact that they do not appear in the budget, in a way this encourages govern- ments to engage in them.
What should be done about them? That is where the problems really come. There is a need to take into account the potential liabilities, but how to do it? Accountants have not been able to tell us how to do that. And we really don’t know what to put down in the budget. We economists usually encourage people to prepare their budget with a memorandum at the bottom. A footnote that says the government assumes this responsibility. But to put a precise amount in the budget; it would be necessary to make estimates about the probability that something would happen, the cost of that something happening, and this is very difficult. To conclude, this is a big developing problem that can put governments at risk.