Despite concepts of transparency and accountability in public budgets as well as internal controls, there continue to be many legitimate and quasi-legitimate ways to hide public debts, deficit and future commitments. Hidden public debts are not exclusive to Europe. Allegations and accusations of hidden debt have been levied in every part of the world against governments. There is no standard definition of debt, let alone public debt; statisticians, business and government have different methods for determining financial liabilities (Tardos 2013).
The European System of Accounts 2010 is used by statisticians, and it states: “Liabilities are established when the debtor is obliged to provide a payment or a series of payments to the creditor” (Tardos 2013). The financial reporting definition according to International Financial Reporting Standards, the business reporting standard of firms around the world, defines a financial liability as any contractual obligation to deliver cash or asset to another, or exchange assets or liabilities (Tardos 2013). Here lies some of the problems which occur when discussing hidden public debt. That which is defined as such in one approach may be perfectly reasonable in another. That said, measurement approaches cannot change the real impacts of hidden public debt on economies. There are three types of hidden public debt across European countries of interest: public private partnerships, commercial debt and state owned enterprise debt.
Hidden public debt across European countries has been in the news since before the Eurozone crisis, triggered by American financial system collapse, revealed the extent of great hidden debts in several budgets of European governments. This is only the latest manifestation of hidden deficit, debt and liability, as government have likely been hiding public debt since the commencement of public budgets.
Following the most recent financial crisis, debts of many European nations soared. Many nations had to expend to bail out their banks and financial systems. Four European nations were the Troika, the nickname of bailout programs delivered by the European Commission, the European Central Bank and the International Monetary Fund. To what extent were these events related to hidden public debts in public private partnerships, commercial debt and state owned enterprise debt now and in the past?
The transfer of bailout funds was conditional and required implementing fiscal and structural reforms to ensure strengthened financial systems, but research has suggested that constraints do little to curb hidden deficits and debts, and can in fact increase the tendency when combined with restrictions on a state’s level of borrowing.
Public private partnerships or PPPs are a means of hiding debt in the open, with an added advantage that corporations do not have to present their budgets and spending to the public for review. Examples of the popular model for financing public infrastructure include roads, buildings and operations such as hospitals, and payment for delivery of services usually provided by the state. Eurostat allows for the exclusion of PPP projects in the public balance sheet providing that the private company or investor takes on both the construction risk and either availability or demand risk (Jurzyca & Goliaš 2014). User fees collected when in operation rarely cover the ongoing payments the government makes to the private company. The future commitment to make those payments and the gap between revenues sources from the project and payments represent the hidden public debt of the public private partnership. (Jurzyca & Goliaš 2014). Those Eurozone countries which required stability support, such as Portugal, are also those accused of making the most use of PPP projects (Jurzyca & Goliaš 2014).
Commercial public debts can become hidden debt bombs, as unpaid amounts to suppliers or other amounts owed are left unpaid. The Maastricht definition of government debt used by European nations does not include the unpaid bills of all levels of governments who owe suppliers. Were these arrears to suppliers included, government debts would exceed allowable limits under the Maastricht rules followed in the Eurozone (The Economist 2013).
In 2013 Italy’s public sector debt level to suppliers became a scandal. Building firms, state health-care services, and others selling products and services to the public sector in Italy have dealt with chronic late payments. It was reported that services provided by the construction sector waited nine months or more for payment (The Economist 2013). The Bank of Italy estimated the amount outstanding to companies by the Italian public sector as €91 billion (The Economist 2013). Italy is not the only country that has been publicly shamed for non-payment of suppliers. Spain, among others, is alleged to be hiding debts greater than €65 billion (Government of the United Kingdom 2014).
When the public sector chronically fails to pay bills to suppliers in a reasonable amount of time there are economic impacts as businesses find it increasingly difficult to manage the “involuntary loan” to governments.
How can citizens hold politicians accountable for seeking returns on their public investments when actual costs are hidden? Why are public debt indicators so weak? These problems are not new, nor are they hidden. Despite considerable research and study of the issue, hidden public debt remains a reality which impacts national and international financial flows and economics as well as the price of debt, which determines its sustainability (Tardos 2013).
- Jurzyca, Eugen, and Peter Goliaš. “Solutions to Public Debt Crises in the EU: Seek Returns on That Investment (Views from Slovakia).” PISM Strategic Files 39 (2014): 01-08.
- Government of the United Kingdom. Overseas Business Risk – Spain. Foreign and Commonwealth Office. (2014).
- The Economist. “An overdue move: What a decision by Italy’s caretaker government says about the euro crisis.” The Economist, Apr 13 (2013).
- The Economist. “State Capitalism in the Dock: The performance of state-owned enterprises has been shockingly bad.” The Economist, Nov 22. (2014).
- Tardos, Agnes. “The story told by debt indicators and the hidden truth.” IFC Bulletins chapters 36 (2013): 351-365.