Fiscal Risks Are Not Only in the Budget

The article demonstrates the importance of incorporating contingent liabilities into fiscal analysis. When explicit expenditures are shifted off budget or replaced by guarantees, achieved fiscal balance is an illusion. In the Czech Republic, fiscal adjustment may have been overstated by some three to four percent of annual GDP during the 1990's. A stabilization program accompanied by a build-up of contingent liabilities, particularly, state guarantees and obligations to cover liabilities emerging from directed credit and from the purchases of bad assets by state-sponsored agencies, may not be sustainable. The study concludes that the government of the Czech Republic should aim at reducing its overall fiscal vulnerability rather than the budget deficit, develop a more effective strategy to resolve the problem of hidden debt, and enhance the public-finance institutional framework to create adequate incentives for policy makers in dealing with contingent liabilities.