Does accrual-based government financial information serve as an indicator of fiscal risks?

IMPACT

This paper provides empirical evidence for managers and policy-makers that a country's fiscal risks can be accurately measured through accrual-based government financial information. Evidence is provided that the international capital market recognizes the positive effects of the OECD’s accrual-based government accounting scheme on public financial management. The authors’ results suggest that accrual-based government financial information, especially government liabilities and fiscal balance, should be used for public financial management.

ABSTRACT

This paper shows accrual-based government financial information is an effective indicator of fiscal risk. The authors analysed the association of accrual-based government financial information (government liabilities and fiscal balance) with fiscal risks (proxied by sovereign credit ratings and sovereign bond yields). Analysing 24 OECD member states from 1997 to 2015, the authors found that the greater a government’s liabilities, the lower its sovereign credit rating and the higher its sovereign bond yields. In addition, the sounder a country’s fiscal balance, the higher its sovereign credit rating and the lower its sovereign bond yields.

KEYWORDS:

• Accrual-based accounting
• fiscal balance
• government liabilities
• public financial management
• sovereign bond yields
• sovereign credit ratings

Disclosure statement

No potential conflict of interest was reported by the author(s).