Economics
Implicit Liabilities
Implicit liabilities refer to the future obligations of a government or organization that are not explicitly stated in their financial statements. These obligations can include things like pension payments, healthcare costs, and other long-term commitments that will require significant financial resources in the future. Implicit liabilities can be difficult to measure and can have a significant impact on an organization's financial health.
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4 Key excerpts on "Implicit Liabilities"
- Richard Allen, Richard Hemming, B. Potter, Richard Allen, Richard Hemming, B. Potter, Richard Allen, Richard Hemming, B. Potter(Authors)
- 2013(Publication Date)
- Palgrave Macmillan(Publisher)
Indeed, a key objection to categorizing such future outlays as “implicit debt” is that the size of the implied obligations could be so large that any serious analyst would assume that a government would be forced to change the terms of the implicit promises that are outstanding, even if it would require blunt measures such as cutbacks, rationing, queues or higher co-payments. And indeed, this is what we are now observing in several European countries. Prices are being raised; long-standing promised services are being cutback; and possibly restrictions will be placed on eligibility for the coverage of given medical procedures. If the measure of the implicit debt is based on a presumption of spending levels that simply cannot be financed at remotely plausible tax rates, then a cutback in spending will have to take place. In such cases, the measure of implicit debt becomes a sign of its lack of credibility.It is equally disingenuous to assume complete disavowal by a government of its policy promises in the spheres of medical care, long-term care, pensions or, for that matter, other areas of expenditure for which a government has constructive budgetary obligations. Governments are under intense pressure to meet the expectations of their citizenry, formed from past standards of provision and current policies with respect to commitments on the financing of public services. To ignore these potential obligations would be equally questionable in terms of assessing the fiscal sustainability of a government. Estimating the magnitude of implicit debt for “acknowledged obligations” to such social insurance benefits as health and long-term care is thus in effect only the starting point for public policy analysis. The hard work, as we are now observing in various countries of the Eurozone, is the subsequent effort to achieve reconciliation and balancing of the fiscal accounts.The soft end of a government’s spectrum of non-debt liabilitiesThe discussion has moved from a focus on relatively hard obligations – in the pensions sphere – to obligations and fiscal risk exposures that are more qualitatively and quantitatively uncertain – such as is the case in medical care and other public services. There is one further category of potential obligations that depends on the nature of a government’s “social contract” with its citizens. During the twentieth century, industrial countries have, in practice, served as the “social insurer” of last resort or the ultimate reinsurance agent. In some cases, these obligations are formalized in legislation. But in most cases, the government’s response to adverse developments affecting its citizens simply reflects the need by politicians to respond to an emergency situation. Thus, most governments explicitly budget for contingencies – the expectation of a call on fiscal resources that cannot be specified ex ante.
- M. Cangiano, Barry Anderson, Max Alier, Murray Petrie, and Richard Hemming(Authors)
- 2006(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
- Guarantees are part of a broader set of obligations on a government that give rise to explicit contingent liabilities. In addition to the types of loan and financial guarantees already mentioned, explicit contingent liabilities arise mainly from government insurance schemes, including deposit, pension, war-risk, crop, and flood insurance. However, they can also result from warranties and indemnities provided by the government and from outstanding and potential legal actions against the government. It should be noted that pension and social security obligations of the government (as distinct from guaranteed minimum pensions under private pension schemes or government insurance of pension savings) are not contingent liabilities, because while these may be contingent for individuals given their uncertain life expectancies, aggregate pension and social security obligations can be measured with some precision based on known benefit formulas and fairly stable demographic patterns.
- Implicit contingent liabilities arise when there is an expectation that the government will take on an obligation despite the absence of a contractual or policy commitment to do so. Such an expectation is usually based on past or common government practices, such as providing relief in the event of uninsured natural disasters and bailing out public enterprises, public financial institutions, subnational governments, or strategically important private firms that get into financial difficulties. The government also may be expected to cover some costs that are extraordinary (e.g., those related to war reparations and national reconciliation and reunification).46
A defining characteristic of guarantees and other contingent liabilities is uncertainty about whether the government will have to pay and, if so, about the timing and amount of spending. It is this uncertainty that is the principal source of the problems guarantees and other contingent liabilities pose for accountants and statisticians, and for fiscal management. In this regard, they differ somewhat from government debt, for which interest and amortization payments are clearly specified. However, most government obligations have elements of uncertainty, including government debt that has floating rates or is denominated in foreign currency. Table 1 attempts to characterize the range of government obligations by reference to their degree of certainty and provides examples of different types of obligations.47 The more certain an obligation, the more likely it will meet recognition criteria established by accountants and followed by statisticians, and thus be recorded as a liability in the government’s budget documents, within-year fiscal reports, and end-year financial statements. Table 1
eBook - ePubContemporary 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
eBook - ePub- 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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