Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1698849288489.pdf (Singapore)
 81 Managing fiscal risks: Lessons from case studies of selected OECD countries Based on five case studies, this paper looks at the definition and classification of fiscal risks; sets out the components of a comprehensive fiscal risks framework; and examines how to operationalise such a framework.
It then summarises challenges and key lessons to be considered by countries that wish to implement OECD recommendations in this area to increase the resilience of their public finances in the wake of the COVID-19 outbreak.

This paper was written by Delphine Moretti of the OECD Directorate for Public Governance.

Discussions and advice from colleagues are gratefully acknowledged, and in particular Andrew Blazey, Brian Finn, Klas Klass and Scherie Nicol.
Research for case studies was completed by Damien Boucher and Flavia Giannini.

The case studies benefited greatly from comments from officials from Australia’s Department of Finance, the Finnish and Dutch Ministries of Finance, the United Kingdom’s HM Treasury and Office for Budget Responsibility, as well as Dirk Kraan (former OECD official, Netherlands).
JEL codes: H50, H61 Keywords: fiscal risks, stress, shocks, public finance, contingent liabilities, COVID-19, macroeconomic risks OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 82  Introduction Recent months have shown that global crises such as the COVID-19 pandemic create pressures on public finances that are difficult to anticipate and prepare for.
Across OECD countries, most governments have decided to play the role of “insurer of last resort” for firms and households well beyond what they had done a little more than a decade ago, when the world economy was hit by the 2008 global financial crisis.

Fiscal plans have derailed as large risks crystallised, despite the fiscal reforms of the last decade.
As the worst case scenario for public finances seems to have already materialised, should governments and Ministries of Finance still try to manage their fiscal risks?
This article takes the view that recent events should not discourage policy makers from building expertise and developing processes for managing fiscal risks, which will be all the more important in the coming years for several reasons:  With a highly uncertain economic environment, forecasting the economy and public finances will become increasingly challenging.
Having a clear understanding of existing and new risks to the fiscal forecast will be crucial for decision makers to draw realistic spending plans.

 With fiscal risks at an all-time high, managing them will be a core task of decision makers, e.g.

monitoring the stock of guarantees, credit risk on government loans, commercial value of equities held by the government, and taking timely and appropriate decisions in relation to the management of related risks.
 With unprecedented fragile public finances, fiscal responsibility and discipline in ministries, departments and agencies will involve not only meeting their expenditure targets, but also managing existing and emerging risks linked to the amplification of both on- and off-balance government assets and liabilities, in the form of debt, acquisition of equity in strategic firms, loans, guarantees, etc.
 With difficult budgetary trade-offs ahead, the legislature will need comprehensive information on fiscal risks and their management to exercise oversight and conduct an effective debate over budgetary decisions, including reserves and “space” in fiscal plans.
Therefore, although the identification and measurement of fiscal risks is challenging and Ministries of Finance know well that a fiscal risk may not always turn out as anticipated, this article aims to provide evidence that potential benefits in terms of awareness, anticipation and promotion of an informed debate about the resilience of public finances are likely to outweigh the time and resources required.
The starting point for this article is the OECD Best Practices for Budget Transparency (OECD, 2002[1]) and the Recommendation of the Council on Budgetary Governance (OECD, 2015[2]).
Based on five case studies including two pioneer countries in the management of fiscal risks (Australia and New Zealand) and three countries that developed their framework in the wake of the 2008 financial crisis (Finland, the Netherlands and the United Kingdom), this paper identifies practices to be considered by countries that wish to implement OECD recommendations in this area and strengthen their fiscal risks framework.
It emphasises that the objective of such frameworks should go beyond mere disclosure to include the active management of fiscal risks and consider them in the formulation of fiscal policy.
This paper does not aim to detail policy responses to specific risks, but rather makes the point that the starting point for resilient public finances is a smart definition of ever-changing and evolving fiscal risks (Section 2); a comprehensive framework for their identification, analysis and management (Section 3); and sound arrangements for operationalising the framework (Section 4).
Finally, it summarises challenges and key lessons, and identifies future directions of the OECD’s work to advise member countries on managing fiscal risks (Section 5).

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  83 Defining fiscal risks What is a fiscal risk?
Fiscal risks should be identified against fiscal forecasts The concept of fiscal risks is closely linked to the more general problem of the accuracy of fiscal forecasts that form the basis of medium-term expenditure frameworks.1 The 2008 financial crisis put an emphasis on better understanding uncertainty in forecasts.
This includes accompanying the outlook with a fan chart reflecting uncertainty with forecasts; including more variables in the sensitivity analysis; and identifying where significant deviations could come from and what this means for the government’s fiscal mandate and longer term fiscal sustainability.

Fiscal risks is the term used for describing these sources of potential large deviations from the fiscal forecast.
They are defined as “the probability of significant differences between actual and expected fiscal performance” (Kopits, 2014[3]) or “the possibility of deviations of fiscal outcomes from what was expected at the time of the budget or other forecast” (IMF, 2008[4]) As deviations from forecasts, fiscal risks are not the same as fiscal pressures, which are phenomena generally integrated in the forecasts (e.g.

ageing).
ageing).

The United Kingdom’s Office for Budget Responsibility (OBR) notes, for example, that “what constitutes a fiscal risk depends crucially on which potential developments in the public finances you choose to incorporate into the central projection and which you regard as potential deviations” (OBR, 2017[5]).

The definition of fiscal risks may go further by specifying criteria for including or not, certain parameters in the forecasts.
For example, in Australia, fiscal risks are defined as “matters not included in the fiscal forecasts because of uncertainty about their timing, magnitude or likelihood; and the realisation of contingent liabilities or assets” (Commonwealth of Australia, 2019[6]).

The nature and number of fiscal risks identified by a given country also depends on the forecast against which they are considered.

Risks over the short, medium and long term are not the same.
For example, today’s natural disaster risks will become tomorrow’s climate change risks.

In the United Kingdom, because fiscal risks are identified against both the medium-term and long-term fiscal forecasts, the last Fiscal Risks Report identified and discussed around 60 large risks to public finances.
Fiscal risks are virtually infinite and criteria are needed for their identification and disclosure Even within these boundaries, fiscal risks are potentially infinite and some countries explicitly acknowledge that within the definition and criteria for identifying fiscal risks, it may not be possible to cover all potential fiscal risks faced by governments in a single report.
The United Kingdom argues that any definition of fiscal risks should aim to cover significant potential developments in the public finances “that might require a policy response – either before or after the event” (OBR, 2017[5]).

New Zealand’s legislation states that fiscal risks should be disclosed “to the fullest extent possible” (Parliamentary Counsel Office, 2020[7]).
In other words, a definition of fiscal risks should not aim at comprehensive coverage of potentially infinite fiscal risks, but rather at supporting policy decision making and facilitating oversight and accountability.

In addition to the concept of fiscal risks, the terms “stress” or “shocks” is sometimes used.

Stress or shock can be defined as an event potentially triggering several risks at the same time or successively, and exerting the largest costs on public finances.
Typically, a large economic crisis, whatever its source (e.g.

financial crisis, trade war, natural resources shortage, etc.)

will trigger fiscal risks in the form of reduced government receipts and additional spending to support the economy and households.

Pandemics or large natural disasters are other events that could trigger shocks, with comparable spillover OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 84  effects from the economy to government revenue and spending.
The identification and measurement of these shocks is further discussed below.

How to classify fiscal risks?

Fiscal risks fall under four broad categories The OECD Recommendation of the Council on Budgetary Governance (OECD, 2015[2]) calls upon governments to “classify by type” their fiscal risks, with proposals formulated in the past on how such classification could be done, for example depending on the methodological approach to estimating them (Kopits, 2014[3]).
Such a classification is important because a long list of fiscal risks would not be easy to understand for decision making.

Case studies show that classification of fiscal risks is a shared feature of fiscal risks frameworks and classification by nature is the most common approach.
Beyond risks to the reliability of the forecasts linked to “technical errors” of forecasters, four main categories of risks can be identified in most countries, although the terms or detailed classifications used vary (see Table 1).

These categories are: 1.

Macroeconomic risks, which emanate from either cyclical or structural changes in the economy that would directly affect the government revenue forecast and potentially indirectly influence its spending forecast.
Risks in relation to macroeconomic variables include especially growth, natural resources prices, as well as the financial sector, which may, however, be identified separately from other macroeconomic risks.

2.

Government policy or programmes risks, which are risks that tax collection or spending controls won’t happen as planned, generating revenue losses or additional spending.
Spending and revenue risks are discussed, for example, in the United Kingdom’s Fiscal Risks Report, such as risks in relation to welfare or health spending.

Similarly, Finland identifies so-called internal risks, which are risks “associated with the implementation of the government programme”.

3.
3.

Uncertain budgetary claims (also called contingent liabilities) risks, which encompass all commitments that the government has formally entered into or obligations that the government would not be able to avoid but that are not included in the fiscal forecast because they are uncertain or impossible to measure.
In Australia, uncertain budgetary claims comprise guarantees (where one party promises to be responsible for the obligations of another party if that party defaults), indemnities (a legally binding promise whereby a party undertakes to accept the risk of loss or damage another party may suffer) or other types of claims (e.g.

legal claims, tax disputes, uncalled capital subscriptions).

4.
4.

Balance sheet risks, which are mainly risks associated with assets and liabilities owned by the government, such as equity shareholdings or loans.

New Zealand, for example, defines balance sheet risks as “risks affecting the Crown’s financial position through changes in the value of its assets or liabilities”.

Debt risks, which include interest and foreign exchange rates, may be presented as a separate category or included in one of the above categories.
Finally, some countries identify as fiscal risks expectations over government’s interventions or bailouts in case of a crisis, which are called implicit commitments or contingent liabilities risks.

Finland, for example, identifies “expenditure that the government may be socially or politically obliged to make if a particular event occurs”, such as a bailout of a bank or subnational government.
The identification – and indeed measurement and disclosure – of such risks is controversial in that it can crystallise or give ground to claims that have not been legally endorsed by the government and approved by parliament, and can lead to moral hazard.
Recent fiscal packages in the wake of the COVID-19 OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  85 outbreak, however, show the scale of such implicit liabilities and the need to have an understanding of them, in particular in the event of a large shock, as further discussed below.
Other key characteristics should be identified International institutions have proposed using more sophisticated classifications of risks, based on characteristics such as measurability; magnitude; probability of occurrence – i.e.

probable, possible or remote; government influence on the materialisation of fiscal risks – i.e.

endogenous or exogenous; and the nature of the government’s obligation – i.e.

explicit or implicit (Lindwall, 2013[8]; IMF, 2016[9]).
For example, Australia and the United Kingdom classify fiscal risks according to their likelihood to crystallise and their potential impact on public finances.

Ideally, when choosing a classification of fiscal risks, countries should consider their final objective in terms of fiscal risks management and which classification is the most suited to meeting that objective.
For example, Australia presents fiscal risks by department and agency, putting the emphasis on responsibilities and accountability for managing these risks.

The United Kingdom uses categories that differentiate between two types of risks.

The first category is risks over which the government has no control.
The second comprises risks over which it has “some varying degree of direct control, which helps appreciating fiscal risks that the government is creating for itself through its policies, as opposed to those that might be imposed on it by circumstances”.

The Netherlands differentiates between explicit and implicit risks for similar reasons.
Ultimately, it should be acknowledged that any classification of risks is necessarily imperfect, as risks are rarely isolated and often correlated, as evidenced in recent research (Schilperoort and Wierts, 2013[10]; IMF, 2016[9]).

One typical example of such correlations is the 2008 financial crisis, which via its impact on the economy, affected public spending and receipts, but also resulted in government guarantees being called upon.
It may still be too early to assess the full range of impacts of the COVID-19 outbreak, but it is already clear that the pandemic directly generated significant additional health spending, and also a fall in economic activity that affected public receipts and necessitated new policy measures to support firms and households.

Such correlations between risks can be explored using stress tests, as further discussed below.
Establishing a comprehensive framework What are the objectives of a fiscal risks framework?

The OECD Recommendation of the Council on Budgetary Governance calls for countries to establish mechanisms for identifying their fiscal risks; make explicit the mechanisms for managing them; and consider them in debates about the appropriate fiscal policy stance (OECD, 2015[2]).

Similar advice is provided by other international organisations (IMF, 2016[9]).
In Australia and New Zealand, fiscal risks are explicitly mentioned in primary legislation, which comprises detailed disclosure requirements and an obligation for government to manage fiscal risks prudently.

This approach entrenches fiscal risks disclosure and management as one of the pillars of transparent and sound fiscal policy and emphasises the need for clarity and accountability on government’s choices and trade-offs in this area.
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 86  Table 1.
Main categories of fiscal risks identified by countries in the case studies Macroeconomic risks Uncertain budgetary claims Australia Finland Real economy (GDP, trade, household consumption) Debt interest Real economy (GDP, trade, inflation, unemployment) Composition of government assets (real assets, financial assets, state holdings in listed companies) Netherlands Debt interest (interest rate, credit, liquidity and foreign exchange) New Zealand Real economy (GDP, trade, productivity) Confidence environment (biosecurity threats, volatility of government investments, business confidence) Debt interest Primary spending (claims, disputes against departments, indemnities, disaster recovery) Guarantees (contingent liabilities) Explicit liabilities (legally binding contingencies arising from government guarantee, callable capital in international institutions, climate or nuclear risks) Implicit liabilities (socially or politically obliging contingencies related to the banking sector, state-owned enterprises, local government or environmental damage) Explicit conditional risks (public guarantees and public costs for natural disasters and terrorist attacks) Implicit unconditional risks (old-age pensions, healthcare, climate mitigation) Implicit conditional risks (rescue of firms and institutions, medical and agrarian emergency measures, other private costs) Contingent liabilities (uncalled capital, guarantees, indemnities, legal proceeding and disputes) Contingent assets (legal proceedings and disputes) Significant events (natural disasters, international events leading to changes in the external environment) Programme and policy risks Primary spending (policy decisions) Revenue (tax base, tax policy) Guarantee schemes (credit risk from export and housing- related guarantees) Revenue (tax base) Balance sheet risks Government loans (contingent assets exposed to credit risk) Financial liabilities (one-off expenditures, debt-to-GDP) Financial assets (value of financial and real assets) Explicit unconditional risks (automatic stabilisers, i.e.
tax revenue and unemployment benefits; interest rate, excess cost of investment projects, technical and legal risks) Primary spending (policy changes) Cost pressures (associated with existing policies and risk of cost variances) Revenue (tax base, tax policy) N/A Change in the value of assets and liabilities (movement in market or business variables affecting financial assets or property owned by the government) Direct fiscal costs (actual costs incurred because of a shock) Indirect fiscal costs (changes to future government revenue and expenses consecutive to the economic impact of a shock) Balance sheet (value of financial assets, reclassification in or out public sector net debt) United Kingdom Macroeconomy (output growth, recession, composition of activities/GDP) Financial sector (bail-out cost, indirect fiscal costs, tax impact) Debt interest Primary spending (nuclear decommissioning, litigation: clinical and tax) Balance sheet (explicit and implicit guarantees) Primary spending (welfare, health and adult care, local government, spending control) Revenue (tax base, tax policy) Note: The main categories of risks identified in the most recent fiscal risks report or statement for each country are identified in bold.
Other countries studied have less binding and comprehensive approaches.

In Finland, extensive disclosure of fiscal risks is not a legal requirement, but a practice of successive governments.

The United Kingdom has detailed requirements for the disclosure of fiscal risks and a detailed management strategy, but both have been stated in government publications that have no permanent basis.

For both countries, current practices could therefore be deviated from in the future.
In the Netherlands, although OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  87 legislation requires that the Central Planning Bureau report fiscal risks, there is no obligation for the government to explain how these risks are managed, except for guarantees.

Table 2.
Table 2.

Legal basis for fiscal risks disclosure and management: Summary from the case studies Australia Finland Netherlands New Zealand United Kingdom Disclosure of fiscal risks The Charter of Budget Honesty Act requires that the budget economic and fiscal outlook report contain “a statement of the risks, quantified where feasible, that may have a material effect on the fiscal outlook”.

N/A.
N/A.

The Sustainable Public Finances Act requires that the Central Planning Bureau report biannually on public finances, including fiscal risks.

The Public Finance Act requires disclosing “all government decisions and all other circumstances that may have a material effect on the economic and fiscal outlook”.
The Charter for Budget Responsibility tasks the independent fiscal council with producing “a fiscal risks statement setting out the main risks to the public finances, including macroeconomic risks and specific fiscal risks … at least once every two years”.

Further, the government’s public strategy requires identifying the source, scale and likelihood of risks.

Management of fiscal risks The Charter of Budget Honesty Act requires the government to manage fiscal risks faced by the Commonwealth prudently.
N/A.

N/A.

The Public Finance Act lays out the principle of “responsible fiscal management”, comprising the prudent management of fiscal risks facing the government.

The Charter for Budget Responsibility requires that the government “formally respond to [the independent fiscal council] report” within a year.
Further, the government’s public strategy requires mitigating fiscal risk where cost-effective and consistent with broader policy objectives; provisioning for other risks where possible; accommodating residual risks when setting the overall fiscal policy stance.

How to identify and measure fiscal risks?


Approaches for identifying and measuring individual risks Because fiscal risks are different in nature and constantly evolving, establishing processes for identifying and monitoring them regularly is the basic component of any fiscal risks framework.

The case studies show that different approaches are used for identifying and measuring risks falling under each one of the broad categories of fiscal risks defined in Section 2.
Some common approaches in identifying and measuring fiscal risks identified in case studies are:  Concerning technical risks, the basic requirement is to evaluate, ideally publicly, the accuracy of previous fiscal forecasts and ensure that the sources of past errors are clearly identified.

Based on a “history repeats itself” assumption, key technical fiscal risks, such as model risks, are disclosed and explained alongside fiscal forecasts.
For example, Australia discloses the uncertainty surrounding key indicators underpinning the forecasts by graphically showing confidence intervals based on historical error margins.

 Concerning macroeconomic risks, identification and measurement is generally under the forecaster’s responsibility.

These risks depend indeed on macroeconomic developments, parameters and hypotheses that underlie the main or alternative macroeconomic scenarios.
They may include terms of global trade, household consumption growth, productivity, market yields, etc.

Macroeconomic alternative scenarios or risks may be measured by using sensitivity analyses and by evaluating how they improve or worsen key fiscal headlines of the country, as is the case in Finland.
 Concerning programme and policy risks and uncertain budgetary claims, sources of information are manifold and the collection and centralisation of information done by the Ministry of Finance is discussed in more detail in Section 4.

For guarantees, information is sometimes provided by the debt management office or required as part of the monthly budget reporting.
The nominal value of guarantees is the measurement method used in Australia, Finland, the OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 88  Netherlands and New Zealand.

Generally, departments and agencies are formally required to identify their programme and policy risks and provide their best estimate of potential additional funding requirement, as is done for example in Australia.

 Balance sheet risks are the risks related to assets and liabilities reported in the financial statements.
Responsibilities for identifying potential risks in relation to specific assets and liabilities may lie with different ministries and agencies, e.g.

risks in relation to recovery of loans might be identified by the debt management office while those in relation to the capital needs for state-owned enterprises might be monitored by the shareholding agency.

Other balance sheet risks may be identified.


For example, New Zealand measures potential costs associated with the reconstruction of crucial infrastructure in the event of a natural disaster.

 Debt risks are generally identified and monitored by the entity responsible for debt management.

The types of risks to be monitored may be laid out in the mandate of the entity responsible for debt management.

That is the case, for example, in the Netherlands.


The risks monitored by the countries studied are, for example, interest rate levels and credit, liquidity, and foreign exchange risks.

Concerning interest rate levels, measurement often consists of examining the change in interest expenses if the general interest rate were to rise permanently by one percentage point.

The case studies show, however, that not all fiscal risks can be measured.
When that is the case, virtually all countries consider that transparency requirements impose disclosing at least narrative information.

Australia, for example, specifically identifies fiscal risks that are “unquantifiable liabilities” in its statements of fiscal risks.

It may also be the case that identifying and quantifying a risk will create moral hazard for the government or harm its position in litigations or negotiations.
Need to avoid disadvantaging the country therefore calls for clearly defined and limited exemptions to providing an evaluation of certain fiscal risks or even disclosing them.
New Zealand, for example, exempts from disclosure information that is likely to prejudice substantial economic interests of the country; harm the security or defence of the country or the international relationships of its government; compromise the government in a material way in negotiation, litigation or commercial activity; or result in material loss of value to the government.

Fiscal stress tests As noted above, certain events – e.g.
economic crisis, pandemic – may trigger simultaneously several fiscal risks and generate a shock to public finances.

Shocks are of different nature (e.g.

transmission from the economy to public finances or vice versa, short-lived or long, etc.

), hence the different potential impacts on public finances that four of the countries studied try to measure using fiscal stress tests (Table 3).
The case studies show that, beyond the complex economic and fiscal modelling work underlying fiscal stress tests (Schilperoort and Wierts, 2013[10]), countries have to answer three questions when undertaking such exercises: 1) which shock scenarios will be tested; 2) which fiscal headlines will be scrutinised; and 3) how to factor in the results of the stress tests in decision making.
Concerning the scenarios’ selection, countries conduct stress tests of their public finances based on scenarios of likely shocks, such as a global economic downturn or financial crisis, or may focus on topics animating the economic and fiscal policy discussion at the time of the stress test, such as the stress test of a no-deal scenario by the OBR in 2019.
It is notable that, in two countries, shock scenarios are based on those developed by other institutions: for example, the United Kingdom’s OBR carried out a stress test in 2017 based on the Bank of England’s own annual stress test of the UK banking system.

Similarly, Finland’s first stress test in 2019 was based on a risk scenario used by the European Banking Authority for banks.
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  89 The OECD Recommendation of the Council on the Governance of Critical Risks underlines that governments should enhance efforts to minimise the impact that critical risks may have on public finances (OECD, 2014[11]).
Such a clear link between critical risks and stress tests of public finances is observable only in New Zealand, however, which has drawn its 2018 stress test scenarios from the national risk registers that support public risk management and planning processes.

The case studies show that objectives and fiscal headlines scrutinised by each country vary.
Objectives stated for the stress tests range from assessing impacts on the government’s capacity to meet its fiscal targets (Finland and the United Kingdom) to evaluating consequences on the country’s capacity to meet its financing needs (the Netherlands and New Zealand).

Stress tests and risk analyses in the Netherlands focused also on fluctuations in economic growth and interest rates.

Concerning fiscal headlines, net debt is scrutinised by most countries.
While net debt is not a government fiscal target, the choice for scrutinising this headline seems to be motivated by the assumption that, in the event of a shock, financial assets, even those earmarked for specific purposes, would remain liquid and therefore available for paying off gross debt.

Discussions held with officials as part of the preparation of this report show that questions remain on how fiscal stress tests can be used to facilitate or even inform fiscal policy.
As noted by the United Kingdom’s OBR, decision makers’ perception might be that “putting bad economic news into … fiscal models will simply generate bad fiscal news” (OBR, 2017[5]).

In addition, some fear that, in the wake of the COVID-19 outbreak, where previous stress tests have not comprised a pandemic scenario, the exercise could be considered useless for anticipating shocks to public finances and preparing for them.
Although these questions are legitimate, it is not possible to anticipate every risk that eventually may materialise and it does not undermine the importance of trying to be as comprehensive as possible in managing the public finances.
Furthermore, the case study of New Zealand highlights the value of fiscal stress tests in stretching decision makers to consider events that may only be remotely possible and to prepare, even imperfectly, for them: in 2006, New Zealand modelled the impact of a pandemic on the macroeconomy.2 This model was used as the basis for analysing the economic impact and Treasury preparedness during the 2009 H1N1 crisis.
In New Zealand also, fiscal stress tests have been explicitly used as one of the factors to consider for determining fiscal policy objectives, as described in more detail below.

Table 3.

Characteristics of fiscal stress tests: Evidence from the case studies Finland Netherlands New Zealand United Kingdom Scenarios 2018 and 2019: Global financial market disturbance leading to a macroeconomic shock.

2011: Financial crisis, a European debt crisis and global economic crisis.
2018: Severe Wellington earthquake; outbreak of foot-and-mouth disease and major international economic downturn.

2017: synchronised domestic and global economic and financial market stress (based on Bank of England scenario); 2019: no-deal Brexit (based on IMF scenario).

Fiscal headlines scrutinized Net debt and fiscal headlines of the European Union’s Stability and Growth Pact.

Fiscal headlines of the European Union’s Stability and Growth Pact.

Net debt and operating balance before gains and losses.
Net debt and net borrowing.

Frequency One stress test in the annual Fiscal Risks Report.

Ad hoc (2011, 2015, 2019).

At least every four years in the Investment Statement.

One stress test in each biennial Fiscal Risks Report.

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 90  How to manage fiscal risks?

Prevention and mitigation3 The case studies show that all five of the countries under study have developed approaches to prevent or mitigate certain fiscal risks to which they are exposed.
Of course, different types of fiscal risks call for different preventative or mitigation actions (e.g.

discouraging risky behaviour through regulations; encouraging actors to pool risk; placing limits on the extent of government exposure, etc.).

This paper does not aim to provide a summary of policy options for managing individual categories of fiscal risks, as governance, prevention, mitigation, etc.

will deeply vary depending on the risk considered.


However, a number of successful policies are mentioned in the case studies, for example how risks in relation to state-owned enterprises are prevented in New Zealand.

In addition, recent OECD reports have discussed in detail the management specific fiscal risks, e.g.

in relation to natural disasters (OECD/The World Bank, 2019[12]), subnational governments’ insolvency (Irwin and Moretti, 2020[13]) and government infrastructure (OECD, 2020[14]).
It is noteworthy that, in some countries, prevention and mitigation strategies involve that principles for taking on certain risks and recovering related costs be specified in the legislative framework.

That is the case, for example, in Finland and the Netherlands, where calling large guarantee schemes in the wake of the 2008 financial crisis and the subsequent impact on public finances have led to a tightening up of the legislation.
In the Netherlands, the government does not take on a new contingent liability unless an overriding reason is identified; an external opinion on the level of the premium to be charged to beneficiaries is legally required; and the policy is systematically assessed ex post (sunset clause).

In Finland, however, escape clauses have limited the efficiency of the new legislation.
The case study of the United Kingdom is of interest in that it shows how the systematic identification and measurement of fiscal risks since 2017 and definition by the government of a detailed management strategy have triggered decisions on mitigation approaches for a range of fiscal risks in only a few years.
They include, among others, the adoption of a framework for the approval of contingent liabilities; a new financial oversight framework for the Bank of England and a comprehensive bank resolution regime; the decision to end further sales of student loans; and steps to lower the costs of clinical negligence in the National Health Service.
The case study of the Netherlands highlights that defining prevention and mitigation strategies for certain fiscal risks also allows creating safeguards in the event of a crisis and “channelling” government interventions.

For example, in the Netherlands, ceilings of existing national government guarantee schemes have been increased as part of the COVID-19 crisis response, but no new schemes have been approved.
Principles concerning contingent liabilities mentioned above have continued applying, although where previously most guarantees were ex ante budget-neutral because of the risk premium, most COVID-19-related guarantees are expected to have a budgetary costs.

Provisions and reserves All countries studied with the exception of the Netherlands maintain a reserve, provision or “fiscal space” in their fiscal plans in case certain risks materialise.
Their value has, however, no link to evolutions of the stock of fiscal risks.

Where such provisions or reserves are included in the budget, Ministries of Finance aim to avoid any perception that overspend will be unconditionally funded.

They establish therefore strict criteria for accessing these funds and separate reserves can be established for new policies to be decided over the course of the budget execution vs. funding for unexpected events (Table 4).
Emphasis is also put on the responsibility of departments and agencies in monitoring and preventing their fiscal risks; allocating funding in their budget if it becomes probable that they will materialise; and finding resources in their own budget if a risk unexpectedly materialises before they can claim additional funds OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  91 from the general budget.4 For example, New Zealand details three different options available to departments in case of over-spend: 1) reprioritisation of funds; 2) using reserves for new expenditures included in the budget and multi-year framework; and 3) policy choices that will allow modulating the amount and timing of funding.
In the Netherlands, only the first of these options is available to ministers.

Annual reserves and provisions traditionally included in the budget are, however, too small to absorb large shocks such as the crisis generated by the COVID-19 pandemic.

In all of the countries studied, reallocation of funds and reserves were used to fund emergency spending during the first weeks of the crisis.
However, as the crisis unfolded and the crystallisation of further risks became probable, new reserves were very significantly increased in some countries with the approval of the legislature (Advance to the Finance Minister in Australia and Contingencies Fund in the United Kingdom) or supplementary budget laws were successively laid before parliament (Finland).
In New Zealand, fiscal policy response to past crises included drawing liquidities from the Natural Disaster Fund and suspending contributions to the Superannuation Fund.

Table 4.
Table 4.

Case studies: Provisions and reserves Australia Finland Netherlands New Zealand United Kingdom Provision/reserve for unexpected events The budget contains a provision used only in case of an erroneous omission or understatement in the budget or due to unforeseen expenditures realised after the last day it was practicable to provide for it in the budget.

The budget contains a reserve for unforeseen events (0.2% of total expenditure in 2020).

N/A.
N/A.

Contingencies may be included in departments’ budgets for amounts that are still subject to uncertainty at the time the budget is being finalised.

The budget contains a Contingencies Fund (2% of the government budget in the preceding year) and reserve for unforeseen expenditure and future costs that exceed the departmental expenditure limits (0.5% of departmental expenditure limits).
Provision/reserve for new policies or programmes The budget contains an allowance for anticipated events that cannot be assigned to individual programmes (so-called contingency reserve).

The budget contains a provision for new policies to be defined in the supplementary budget (0.6% of total expenditure in 2020).

N/A.

The budget comprises a general operating contingency that provides for operating proposals that arise between budgets (so-called Between-Budget Contingency).

N/A.

Other N/A.

N/A.

N/A.


New Zealand has two long-term reserve funds (the Natural Disaster Fund and the Superannuation Fund).

The Treasury maintains a headroom against fiscal rules to absorb modest near-term shocks.

Consideration of fiscal risks in the formulation of fiscal policy As already noted by the OECD (2019[15]), a group of countries place emphasis on adopting a prudent fiscal policy stance for accommodating large fiscal risks or shocks.
What is a “prudent enough” fiscal policy stance is not a settled debate, but Fall et al.

(2015[16]) have suggested that debt fiscal rules or targets should allow a buffer on top of what is considered a sustainable level of public debt, to facilitate responses to future shocks.

While it is obvious that fiscal risks analysis and fiscal stress tests can only be one of the many factors that inform fiscal policy decisions, they can help decision makers in defining fiscal targets or objectives.
In New Zealand, in recent years fiscal targets have been defined by adding a buffer measured with fiscal stress tests to the debt level considered sustainable over the long term, based on a clear and public framework of analysis (Makhlouf, 2019[17]).5 OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 92  In the United Kingdom, the government’s public strategy for fiscal risks management requires that the government accommodate fiscal risks that cannot be mitigated or provided for when setting the overall fiscal policy stance.
The 2018 government report on the management of the country’s fiscal risks did not discuss, however, how fiscal policy could potentially better accommodate existing fiscal risks (HM Treasury, 2018[18]).

How to be transparent and help promote an informed debate?

Disclosure of fiscal risks is now a common practice in the countries studied for this report.

However, the means for disclosing fiscal risks, as well as the breadth and depth of information published, is variable.
Disclosing information on fiscal risks in the budget documentation is the usual practice, but Finland and the United Kingdom publish stand-alone reports.

The report published by the United Kingdom’s Office for Budget Responsibly is particularly detailed compared to those of other countries.

Disclosure practices generally reflect the different nature of fiscal risks.
For example, in Australia and New Zealand, macroeconomic risks are discussed next to the macroeconomic and fiscal forecasts, shining a light on uncertainties surrounding the government outlook and impacts on key fiscal headlines.

Other fiscal risks in relation to the implementation of governments’ programmes, policies or guarantees are presented separately, with their nominal value disclosed where possible.

The United Kingdom’s practice of publishing two reports is unique amongst OECD countries.
The OBR’s report presents and analyses fiscal risks and “highlight issues” associated with them.

The government’s response is published in a separate report (Managing Fiscal Risks), which presents the fiscal risks management strategy and how “issues” are addressed.

This emphasises that the disclosure and management components of a fiscal risks framework are equally important.
In the Treasury’s own words, in doing so, the government aims to provide “a mechanism for parliament and the public to assess the adequacy of the government’s strategies for managing these risks and hold it to account for their implementation” (HM Treasury, 2018[18]).

Ultimately, a fiscal risks statement or report should be about providing a clear and legible addition to the material that is helping to promote an informed debate about the resilience of public finances.
A long narrative description of fiscal risks would be difficult to navigate and to use and do little to achieve this objective.

Therefore, the definition of fiscal risks, their classification, the choice of numerical thresholds for disclosure, discussed above, should aim to avoid information overload.

the understanding of key messages.


The improve Tables and visualisations can also help United Kingdom’s OBR provides a “risk matrix” differentiating existing and new risks and showing their potential financial impacts and probability of occurrence appears promising.

Australia identifies in a separate table of its statement of risks any new fiscal risk since the previous update.

Such practices are important in that they increase the understanding of how economic developments, government policies, etc.
have generated new risks for public finances.

Operationalising the framework As noted in Kopits (2014[3]), operationalising a fiscal risks framework that requires the collection and analysis of information on a wide variety of risks requires clear allocation of responsibilities among various actors, organisation and efficient information sharing within government.

Although the case studies highlight a variety of practices for operationalising fiscal risks frameworks – e.g.
depending on whether the Ministry of Finance or independent fiscal institution prepares the fiscal forecast, whether the budget system is centralised or decentralised, etc.

– this section discusses best examples of how to operationalise a fiscal risks framework.

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  93 Responsibilities of government As underlined in Section 3, responsibilities for identifying, measuring and managing risks vary depending on the type of risks considered.
The Ministry of Finance generally monitors and manages macroeconomic risks, while line ministries and agencies often have the responsibility to monitor and manage fiscal risks associated with their own activities.

Debt risks are typically a responsibility of the debt management office.

A typical example of this decentralised type of organisation is Australia.

The Ministry of Finance generally has a centralisation and oversight role in the fiscal risks framework.
According to the case studies, it usually carries some or all of the following responsibilities:  provision of guidance to other stakeholders on the identification, measurement, cost-benefit analysis, reporting, etc.
of fiscal risks  review and/or approval of fiscal risks generated by new policy or programme proposals from line ministries and other public entities  consolidation of information on fiscal risks reported by other public entities and monitoring of the flow and stocks of fiscal risks  analysis of fiscal risks, including potentially identifying interrelationships between different types of risks  definition of a management strategy  reporting to decision makers and the legislature on fiscal risks and how to manage them.
It is important to note that either the Ministry of Finance (Australia and New Zealand) or independent fiscal institution (the Netherlands and the United Kingdom) may be in charge of preparing the macroeconomic and fiscal forecasts and reporting fiscal risks.

Where this is a responsibility of the independent fiscal institution, the Ministry of Finance may remain responsible for reporting certain specific risks to the legislature and the management of fiscal risks.
For example, in the Netherlands, the independent fiscal institution also reports biannually, as well as at the start of each new government’s mandate, on the situation of public finances and fiscal risks, but the Ministry of Finance publishes a contingent liabilities statement with the budget.

Within the Ministry of Finance, line ministries and other public entities, the identification of fiscal risks should rely on a variety of professionals.
Economists, spending and tax analysts, finance professionals, etc.

can all contribute to the identification and management of risks, due to their complementary knowledge of specific policy areas or access to certain information.
For example, finance professionals that compile the balance sheet will have a good understanding of potential risks generated by the past activities of the government, by recording provisions in relation to litigations or assets depreciations, while economists and budget analysts will generally have a forward-looking approach to fiscal risks.
A success factor for comprehensive identification and management of fiscal risks is therefore to enhance the co-ordination of the actors involved in the fiscal risks framework, possibly through regular meetings.

This is, for example, the case in the United Kingdom, where a Fiscal Risks Group has been established within the Treasury.

The Fiscal Risks Group operates under the supervision of the Treasury Executive Board and, ultimately, the Chancellor.
It supervises work done by other specialised groups within the Treasury (spending risks, tax risks and balance sheet risks groups).

It meets monthly and reports to the Executive Management Board on a quarterly basis.
External oversight of the fiscal risks framework Independent fiscal institutions, through their forecasting and surveillance functions, may have the responsibility of identifying, measuring and reporting all or certain fiscal risks (the Netherlands and the United Kingdom) or expressing a view on fiscal risks reporting and analysis done by the government OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 94  (Finland).6 The value of giving a specific responsibility to the independent fiscal institutions in the fiscal risks management framework lies primarily in discouraging the government from refusing to acknowledge certain risks or avoiding measuring them for political reasons.
The case studies show that supreme audit institutions have an important role to play in the fiscal risks management framework.

For example, they review processes and channels for identifying certain risks or assess the quality of the financial reporting framework, which is one of the sources of information for fiscal risks identification and measurement.
The National Audit Office of Finland, for example, has realised a number of reviews in past years and formulated recommendations on how to improve the framework, both in terms of methodologies and reporting.

Supreme audit institutions also provide recommendations concerning the management of certain risks.
The United Kingdom’s National Audit Office produced a series of reports on the management of the public sector balance sheets, contributing to the identification and design of management approaches from certain types of risks.

Officials interviewed for the preparation of this report underlined that, for fiscal risks management to be fully part of the budgeting culture, it is important that the legislature exercise active oversight in this area.
This depends, among other factors, on the quality and legibility of the information provided by government, analytical support provided by the parliamentary budget office and supreme audit institution, but also ownership by parliamentary committees, which might be challenging due to the technical and sectoral nature of most fiscal risks.
Interviewees noted that ideally the legislature should be involved ex ante, concurrent and ex post:  Ex ante: the legislature may specify detailed transparency and management requirements for the government, define principles for the government formally taking over certain risks or set ceilings for certain contingent liabilities, in particular for guarantees, as is the case, for example, in the Netherlands.
 Concurrent and ex post: the legislature should monitor the evolution of the stock of fiscal risks and hold government accountable for its management strategy and implementation.

Such oversight is, of course, facilitated when the government publishes a full report on its management of fiscal risks, as is the case in the United Kingdom.

 Finally, the legislature could question the government on whether and how fiscal risks have been considered for setting the fiscal policy stance and objectives.
Tools and processes Establishing appropriate processes in relation to all aspects of the fiscal risks management framework and skills is crucial to the successful implementation of the framework.
These processes should ensure that:  identification and management of fiscal risks is done in all public entities in accordance with the government’s overall principles on fiscal risks disclosure and management  authorisation is systematically sought from the Ministry of Finance or other monitoring bodies where required by legislation or regulations  reporting on fiscal risks is comprehensive, reliable and timely.
A basic requirement is to make sure that the relevant actors in all public entities have appropriate knowledge of the concept of fiscal risks and understanding of the requirements for their disclosure and management, using shared methodologies and reporting tools.

For example, in Australia, a Risk Potential Assessment Tool is used across government to evaluate a range of risks for all new spending proposals.
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  95 The Risk Potential Assessment Tool requires an estimation of the “financial exposure” associated with the new spending proposal, with consideration of “any contingent liabilities that may accrue to government as a result of implementation”.

Managers are required to specify “whether the proposal is likely to require additional funding” and “whether all costs have been considered”.
The value of such an approach resides also in the fact that fiscal risks are considered systematically as part of the budget formulation process.

It also encourages entities to think of fiscal risks not only in terms of certain types of operations, such as guarantees, but more widely as part of their overall risk management framework.
Another example is the United Kingdom, where a comprehensive guidance was established in relation to contingent liabilities that aim at providing an overview to all public sector actors of the approval process and assisting officials in the application of this process by providing a number of tools, including checklists.
Concerning reporting, certain fiscal risks may be reported regularly in dedicated systems, as is the case in Finland for guarantees, or as part of the monthly financial reporting, as in New Zealand.

There is value in reporting certain fiscal risks as part of the “traditional” reporting cycle in that it conveys the message that a similar level of quality and reliability is applied to reporting fiscal risks as is applied to the financial statements.
In the area of reporting, interviews show that progress is still needed with, for example, limited use of cost accounting for consolidating all costs associated with the realisation of certain fiscal risks or shocks, such as natural disasters.
Although no country currently holds a comprehensive database of fiscal impacts from the realisation of fiscal risks, New Zealand’s government has committed to developing a mechanism for more systematic reporting of ex ante and ex post public spending on disaster risk management (OECD/The World Bank, 2019[12]).

Lessons from case studies, challenges and future directions What are the main lessons from this study?
Defining fiscal risks Fiscal risks are commonly defined as “potential deviations from the government forecasts”.

In addition, to have the potential to support a transparent identification of fiscal risks, the definition should: clarify against which fiscal outlooks they should be assessed, ideally both the medium- and long-term forecasts; specify criteria for scenario and events to be included or excluded from the forecasts; and define a threshold for disclosure.
The definition of fiscal risks should also specify broad categories for classifying fiscal risks.

These categories should include macroeconomic risks (including debt risks), balance sheet risks, uncertain budgetary claims (explicit and implicit), and government policy or programmes risks (Figure 1).
Further, the definition should require that other key characteristics of fiscal risks that will facilitate decision making on management approaches be identified, such as their potential magnitude and probability of occurrence.

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 96  Figure 1.

Taxonomy of fiscal risks Designing a comprehensive and effective framework The objectives of the fiscal risks framework should ideally be set out in legislation.
They should include the identification, measurement and disclosure of fiscal risks, as well as their management by the government.

The management strategy should be defined in a public document and comprise principles and/or requirements for taking over certain risks, guidelines on prevention and mitigation approaches, and an indication of how fiscal risks and fiscal stress tests will be considered in fiscal policy formulation.
Approaches for identifying and measuring fiscal risks vary depending on the category of risks considered.

To identify and measure risks comprehensively, information therefore should be collected from a variety of sources, both within and outside of the Ministry of Finance.

Circumstances in which fiscal risks cannot be measured should be identified and explained and should not deter countries from disclosing them.
Stress tests that analyse correlations between various fiscal risks and potential impacts of large shocks on public finances should be undertaken on a regular basis.

In doing so, countries should provide a rationale for which fiscal aggregates will be scrutinised, drawing lessons from the most recent shocks where balance sheet instruments such as loans and guarantees have been increasingly used as economic policy tools by governments.
Stress tests should also allow identifying the government’s potential, implicit contingent liabilities, which depend among other factors on the capacity the economy as a whole to absorb the shock in the first instance.

Selecting forward-thinking multidimensional shock scenarios is crucial for the credibility of stress test exercises.

There would be value, going forward, in defining and disclosing the approach for selecting shock scenarios.
Consideration should be given in particular to testing critical risks identified in national risks registers, e.g.

pandemic, large natural disaster, disruption of energy facilities, etc.

A consolidated view of fiscal risks and results of fiscal stress tests should be available to decision makers and the public.
To make this information legible and reader-friendly, visualisations should be used as much as possible to highlight key messages; for example, using clear classifications, showing new risks since the last update in a separate section or table, or preparing a risk matrix showing how fiscal risks compare in terms of their likeliness of occurrence and potential scale.

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 Macroeconomye.g.

global tradetermse.g.

marketyields….Balance sheete.g.


future pensionse.g.

equityshareholdings….Uncertainbudgetaryclaimse.g.

guaranteese.g.

implicitcontingent liabilities….Programmes and policiese.g.

mandatorybenefitse.g.

taxpolicy….


Beyond providing comprehensive information on fiscal risks and results of stress tests, transparency requirements should include disclosing the government’s strategy; information on actions taken for managing significant individual risks, ideally in a dedicated statement or report; as well as a discussion of potential fiscal policy implication.

Figure 2.
Figure 2.

Components of a fiscal risks management framework  97 Operationalising the framework There is no one-size-fits-all institutional organisation for fiscal risks management.

In particular, the identification and measurement of fiscal risks may fall under the responsibility of the Ministry of Finance or an independent fiscal institution, depending on which institution is in charge of preparing the fiscal forecasts.
In all cases, comprehensive identification, measurement and management of fiscal risks should involve a large range of professionals within government and be part of the regular budget cycle.

Specifically, economists, spending and tax analysts, finance professionals, risks managers, etc.

should all contribute with their complementary knowledge of specific policy areas, access to information and analytical skills.
The responsibility for successfully operationalising the fiscal risk management framework lies with government.

The mobilisation of a large range of professionals across government implies that clear and legible guidance and tools should be made available by the Ministry of Finance on how to identify, measure, report and eventually manage individual risks – e.g.

checklists for identifying fiscal risks arising from new policies or financial operations, IT solutions for regular reporting of risks, etc.
As underlined by a number of officials interviewed, successful operationalisation of a fiscal risks framework also involves centralisation of information and regular communications with ministers or, in other words, making sure that fiscal risks are not identified and measured just to be ignored but, on the contrary, to be managed.
Decision makers’ awareness of fiscal risks and issues with the resilience of public finances highlighted by fiscal stress tests is higher in particular when analysis of fiscal risks is done at a senior level of government (e.g.

a committee reporting directly to the Minister of Finance) and disclosure requirements are comprehensive, allowing oversight by the legislature and independent fiscal institution.
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 Identify and measure fiscal risksDisclose significant risks to forecastsSelect shock scenarios and realisestress testsConsider in fiscal policy decision makingDefine a strategy for fiscal risks managementReport management actionsSet disclosure and management objectives in legislation 98  Figure 3.
Institutional responsibilities for fiscal risks management Note: Responsibilities would not be similar in countries where the independent fiscal institution performs the forecast and the fiscal risks report.

What are the remaining challenges in managing fiscal risks?
Overall, the case studies prepared for this report show that fiscal risks frameworks – that is, the identification, analysis and management of fiscal risks – have the potential to support better budgetary management and fiscal policy, as well as to improve the transparency and accountability of a government’s decision making.

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 A. GovernmentB.

External Oversight  99 The case studies show obvious achievements in three areas: 1.
Disclosure of fiscal risks alongside fiscal forecasts has increased transparency on how the forecasts are prepared – that is, specifically, on what is excluded from them – thus decreasing the discretion of governments in this area and facilitating the external oversight of the legislature and fiscal watchdogs.

2.
2.

Reporting on fiscal risks has imposed greater rigor in the way managers elaborate their policy proposals and prepare their spending forecasts – that is, thinking not only of spending that is certain or likely, but also of what could go wrong in the course of the policy implementation, and preparing for it as best as possible as shown in particular by the case studies of Australia and New Zealand.

3.
3.

The management of fiscal risks has developed since the 2008 financial crisis, with the case studies highlighting actions taken in Finland, the Netherlands and the United Kingdom for better monitoring and preventing risks from contingent liabilities in particular.
However, challenges are equally obvious:  First, research conducted for the preparation of this report highlighted difficulties in making the management of fiscal risks a priority for decision makers working within a three- to five-year political mandate, considering that fiscal risks are uncertain, potentially long term, and costly to prevent or mitigate.
 Second, questions remain as to whether the impacts of large shocks on public finances can be measured reliably with fiscal stress tests and factored into fiscal policy decision making, considering that governments are increasingly acting as insurers of last resort for the economy.

 Third, the COVID-19 crisis highlighted the limits of existing mitigation strategies in the event of a large shock.
In all of the countries studied, fiscal packages largely exceeded the resources available through reallocations of appropriations and existing budget reserves.

Emergency budgetary legislation therefore had to be passed to allocate new resources to the government, including sometimes increasing provisions that allow the Ministry of Finance to take spending decisions without ex ante approval by parliament.
The question of the political cost vs. benefits of disclosing and managing fiscal risks is a legitimate one.

The 2008 financial crisis and the COVID-19 pandemic have shown, however, that fiscal risks do materialise and tomorrow’s risks, if ignored, are likely to become today’s problems.
The shock caused by the pandemic may be a tipping point in that comprehensive requirements and detailed strategies for managing fiscal risks, from being perceived as a constraint, may become one of the tools that decision makers will use to evidence how they are building up the resilience of public finances.
In other words, a fiscal risks framework could become a “safeguard” for decision makers, helping them to demonstrate how they handle existing fiscal risks and explain the choices and trade-offs to avoid creating new ones.

Concerning fiscal stress tests, it was mentioned during interviews conducted for the preparation of this report that more needs to be done in using stress tests for identifying and measuring potential implicit liabilities of governments.
Specifically, by assessing how the entire economy of a country, both households and businesses, would react to a given shock, stress tests should help measure if and how the government would be constrained to absorb the shock beyond any pre-existing legal guarantee or commitment (Schilperoort and Wierts, 2013[10]).

This, in turn, should allow anticipation and transparency; that is, assessing current policies and establishing principles or guidelines that could be referred to in an emergency situation.
The challenges mentioned above will have to be overcome if resilience becomes a policy priority for decision makers within government, as part of the effort to create a more shockproof global economy.7 We should therefore not be too quick to claim that the COVID-19 pandemic has sounded the death knell of fiscal risks management, as it actually makes their identification, analysis and management all the more important.
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 100  Conclusion: Future directions This report provides good practice examples on frameworks for fiscal risks management, which is a prerequisite for resilient public finances.

However, beyond the establishment of a sound framework, countries urgently need to define or scale-up policies to monitor and mitigate large fiscal risks generated by the COVID-19 crisis.
These risks include:  Macroeconomic risks: virtually all governments that published macroeconomic and fiscal forecasts during the last months have underlined significant uncertainties on a number of assumptions used in preparing these outlooks and these uncertainties will continue for a potentially long period.

Uncertainties include the continued effects of the COVID-19 pandemic on the global and national economies, unemployment levels, etc.
as well as risks of a resurgence of the pandemic in countries where it has slowed and a wide range of approaches that governments could consider in such a case.

Such uncertainties affect fiscal forecasts in many ways, including estimations of future tax revenue.

 Programme and policies risks: governments of OECD countries have implemented a wide range of policies to respond to the COVID-19 crisis (OECD, 2020[19]).
In most countries, if initial responses have focused on providing additional resources to the health sector, government responses have progressively included large packages of support measures targeting certain businesses and workers as well as vulnerable households, depending on national circumstances.
As the economic disruption from COVID-19 may still be in its early stages, uncertainties around the costs of these policies are significant and measures considered initially as temporary could be perpetuated.

 Uncertain budgetary claims risks: very large guarantee schemes have been established in most countries as part of the COVID-19 response, well beyond what had been done during the previous global crisis in 2008.
Risks that these guarantees will be triggered will create very significant uncertainties around expenditure forecasts in the future.

In addition, as COVID-19 further impacts a number of sectors in the economy, guarantees pre-existing to the COVID-19 crisis, such as export guarantees, may be called.

Finally, implicit contingent liabilities are likely significant and rising as governments are clearly expected to act (and have already acted in some cases) as insurers of last resort during this crisis.
 Balance sheet risks: in the wake of the global financial crisis, the government’s balance sheet had already become an important instrument of government policy in the form in particular of financial sector asset purchases and concessional loans to certain households and businesses (IMF, 2018[20]).
In most countries, similar instruments have been used as part of the COVID-19 crisis response and, although data are not available yet, it is likely that government balance sheet will balloon on a larger scale than what was experienced ten years ago.

Risks in relation to these assets and liabilities will be high in the coming years – e.g.

uncertainties over the repayment of loans provided to businesses and households and the value of government shareholdings in corporations hit by the crisis.
Concerning balance sheet instruments, the measurement of these assets and liabilities and their active management, which has been a regular topic for experience sharing at meetings of the OECD Network of Financial Management and Reporting, will become increasingly important.

After the COVID-19 crisis, governments cannot be mere users of financial instruments, but will have to be “investors” that actively monitor and manage their portfolio of assets and liabilities.
That is true in particular for such financial assets as loans and shareholding equities, which, if not managed, may become significant fiscal risks.

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 Annex 1.A.

Case studies on managing fiscal risks  101 Australia Context Australia has a relatively long history of managing fiscal risks and the requirement on government to manage fiscal risks was strengthened in the late 1990s with the adoption of the Charter of Budget Honesty Act (the “charter”).
The charter aims at medium-term sustainability of public finances and increasing budget transparency in Australia.

To do so, it states in general terms the principles of sound fiscal management, including a requirement that the government “manages fiscal risks faced by the Commonwealth prudently […] includ[ing] risks such as risks arising from erosion of the tax base; and risks arising from the management of assets and liabilities”.
Furthermore, the charter states that the “budget economic and fiscal outlook report” must contain “a statement of the risks, quantified where feasible, that may have a material effect on the fiscal outlook” (Australian Government, 1998[21]).

Overview of the fiscal risks management framework Australia’s fiscal risk management framework has two primary objectives, as mandated by law.
The first one is to identify the full range of factors that may influence the actual budget outcome in future years and to disclose comprehensively these factors to increase the transparency of the fiscal projections.

The second objective is to manage and mitigate where possible these risks, in accordance with the principle of sound fiscal management.

The main characteristics of the fiscal risks management framework are summarised in Table A.1.
A key characteristic of Australia’s framework is that the management of fiscal risks is fully integrated into the annual budget cycle and general requirements for Commonwealth entities’ corporate planning.

Specifically, the annual budget formulation is guided by the Budget Process Operational Rules, agreed each year by the Cabinet.
These rules reflect the government’s fiscal strategy and have a number of elements that contribute to risk assessment, including a requirement that Commonwealth entities submit an assessment of risks arising from new policy proposals to the Department of Finance (Department of Finance, 2016[22]).
A shared Risk Potential Assessment Tool (Department of Finance, 2016[22]) helps entities in assessing risks, by guiding them to consider questions such as whether the new policy is a strategic priority for the government, its financial impact, what risks are associated with the proposal (legal, financial and operational), the associated mitigation strategy and residual risk.8 OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 102  Table A.1.
Australia’s approach for fiscal risks management Fiscal forecasting and analysis of deviations The biannual and pre-election Economic and Fiscal Outlooks contain fiscal and economic forecasts, as well as analysis of past deviations from the forecasts used to calculate confidence intervals for key fiscal and economic aggregates.
Risks identification Risks measurement Disclosure Prevention/mitigation Provision or reserve Fiscal policy Commonwealth entities identify the fiscal risks in their area of responsibility and are required to provide information to the Department of Finance and the Treasury.

Commonwealth entities identify and assess risks when preparing their financial statements and risks are consolidated by the Department of Finance.
The Treasury performs sensitivity analysis of key fiscal aggregates to changes in the underlying key macroeconomic forecasts, projections and assumptions.

A statement of risks is included in the Budget Strategy and Outlook, the Mid-Year Economic and Fiscal Outlook, and the Pre-election Economic and Fiscal Outlook.

Departments and other entities prevent and mitigate the risks arising from their operations, contingent liabilities and assets.
A provision and Advance to the Finance Minister are included in the annual Appropriation Act that can be used in case a fiscal risk crystallises.

Fiscal risks are not formally considered for setting fiscal targets.

Fiscal strategy aims for fiscal sustainability and accordingly is set in recognition of broad fiscal risks.

Current political commitments aim for a balanced budget and the reduction of debt.
Stakeholders in fiscal risks management The government operates a highly devolved fiscal risks management framework.

The Department of Finance holds a central consolidation function for the preparation at least twice a year of a statement of risks (see below), which is included in the main budget documents, that is based on information communicated by departments and agencies.

This excludes macroeconomic risks, which are dealt with separately by the Department of the Treasury in the main budget documents.
The Department of Finance also holds an “advisory role” during budget preparation and works closely with other departments and agencies to discuss and analyse, among other things, the specific risks that fall under their areas of responsibility.
The statement of risks also includes is a statement regarding risks associated with unanticipated changes in economic circumstances prepared by the Department of the Treasury, largely focused on tax revenue risks, together with a description of several general risks that can affect tax collections.
Separate from the statement of risks, but also included in the main budget documents, is the Treasury’s analysis of fiscal risks associated with uncertainties around the economic outlook, with input by the Department of Finance on the impacts of variations in economic parameters on areas of government spending (see also further below).
Departments and agencies are responsible for identifying and measuring their fiscal risks, as well as their prevention and mitigation, based on guidance from the Department of Finance and the Treasury.9 They submit to the Department of Finance and Treasury requested information for the preparation of the Budget Strategy and Outlook, the Mid-Year Economic and Fiscal Outlook, and the Pre-election Economic and Fiscal Outlook (Australian Government, 1998[21]), as well as in-year and year-end financial statements, which include disclosures on contingent liabilities.
Definition and disclosure of fiscal risks The Charter of Budget Honesty Act 1998 requires that all factors that could affect fiscal outcomes be disclosed in a statement of risks in the Budget Strategy and Outlook, the Mid-Year Economic and Fiscal Outlook, and the Pre-election Economic and Fiscal Outlook.
To this purpose, fiscal risks are defined as “general developments or specific events that may affect the fiscal outlook” that are not included in the estimates because of the uncertainty surrounding their timing, magnitude or likelihood.

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  103 Fiscal risks are further categorised into general fiscal risks, specific contingent liabilities and specific contingent assets.
Specific contingent liabilities and assets are defined as “possible costs or gains to the Australian [g]overnment arising from past events or decisions which will be confirmed or otherwise by the outcome of future events that are not within the [g]overnment’s control” (Commonwealth of Australia, 2019[23]).10 Loans are also considered as fiscal risks, due to the credit risk that they will not be repaid in full.

The statement of risks is relatively short and uses a clear analytical presentation.
Beyond listing general fiscal risks, specific contingent liabilities and specific contingent assets, the document highlights variations from one statement to the next; that is, new risks that are identified, as well as modifications or removal of existing risks.

In addition, contingent liabilities and assets are categorised as “significant but remote”, “unquantifiable” or “quantifiable”.

Only quantifiable risks are measured.


As a rule, documentation on fiscal risks is prepared by departments and agencies before consolidation by the Department of Finance, putting the emphasis on sectoral responsibility and accountability for identifying, monitoring and managing these risks.
Macroeconomic risks are considered in the comprehensive economic outlook section of the main annual budget documentation, the Budget Strategy and Outlook, and the Mid-Year Economic and Fiscal Outlook, as well as in the Pre-election Economic and Fiscal Outlook.
This is complemented by consideration of fiscal risks associated with economic outlook uncertainties in the budget documents’ section on the historical performance of budget forecasts and the sensitivity of budget estimates to changes in the underlying key macroeconomic forecasts and projections.
Key policies for prevention or mitigation of fiscal risks Concerning prevention and mitigation strategies, although departments and agencies have the responsibility for managing their own risks, the government has overall “conservative strategies in place to reduce its potential exposure to contingent liabilities” (Commonwealth of Australia, 2019[24]).
In addition, the annual Budget and Appropriation Act includes resources that can be used in case a fiscal risk crystallises:  The Budget includes a contingency reserve, which principally reflects anticipated events that cannot be assigned to individual programmes in the preparation of the budget estimates and can include funding for “events or pressures that are reasonably expected to affect the budget estimates” (Commonwealth of Australia, 2019[24]).
 An Advance to the Finance Minister (AFM) can be used by the Finance Minister in case (s)he “is satisfied that there is an urgent need for expenditure, in the current year, that is not provided for, or is insufficiently provided for [...] because of an erroneous omission or understatement; or because the expenditure was unforeseen” (Australian Government, 2018[25]).
The AFM provides for funding as a last resort, and as such has been used sparingly in recent times – only five times in the period from 2013-14 to 2018-19.

To mitigate fiscal risks from economic uncertainties and economic shocks, the Australian government has for several years set a fiscal strategy aimed at achieving budget surpluses, on average, over the course of the economic cycle.
This underlines the government’s setting of medium-term fiscal policy while allowing for flexibility in response to changing economic conditions.
The policy elements underlying the strategy have included fiscal discipline by controlling government expenditure – including, until the expectation in the December 2019 Mid-Year Economic and Fiscal Outlook (Commonwealth of Australia, 2019[24]) of a return to budget surplus in 2019-20, reducing expenditure as a share of gross domestic product (GDP) – and a cap on tax revenue as a share of GDP.
The fiscal strategy is set by the government in accordance with the legislated principles of sound fiscal management and the requirements on the content of fiscal strategy statements under the Charter of Budget OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 104  Honesty Act.

A key element of the government’s fiscal strategy in 2019 was to focus on strengthening the balance sheet through public debt reduction to ensure the longer term sustainability of the budget.
Paying down public debt ensures that the government is better equipped to deal with future challenges and reduces the burden of debt on future generations (Commonwealth of Australia, 2019[24]).11 COVID-19 crisis Since March 2020, the Australian parliament has passed a series of additional standing appropriations and 2019-20 Appropriation Bills to fund COVID-19 response measures.
In addition to funding agreed measures, the additional 2019-20 Appropriation Bills increased the AFM provisions – now totalling AUD 42 billion compared to a previous amount of AUD 380 million in Appropriation Bill No.

2 (Parliament of Australia, 2019[26]).

Additionally, the government decided to delay the 2020-21 Budget from 12 May 2020 to 6 October 2020.
This was due to the very high level of uncertainty over macroeconomic and fiscal forecasts and related challenges in formulating a new fiscal strategy post-COVID-19.

Finally, following the government’s decision to delay the 2020-21 Budget from 12 May 2020 to 6 October 2020, the Australian parliament passed 2020-21 Supply Acts.
The Supply Acts provide broadly seven-twelfths of the 2020-21 annual appropriations to support the ongoing business of government in the new financial year, which commences on 1 July 2020.

For entities and activities that are expected to have higher expenditure early in the 2020-21 financial year, in particular where this is driven by COVID-19 impacts, additional appropriations were provided for in the Supply Acts.
The Supply Acts also extend the operation of AUD 40 billion of the AFM provisions into the 2020-21 financial year.

In response to the COVID-19 pandemic, the AFM dollar thresholds have been increased for 2019-20 and 2020-21 in order to manage evolving financial risks.

The increased demand on the AFM due to the COVID-19 pandemic has resulted in the AFM being used seven times between March 2020 and August 2020.
At an operational level within Australian government entities, existing processes and controls have not been changed during the crisis.

COVID-19 policy proposals have been subject to the usual level of scrutiny, including in relation to the risks they create, although analyses have been done within a shorter time frame.

Existing controls have not been identified as an impediment or delay to response implementation.
Rather, there is an awareness of the heightened risk of fraud in the current operating environment and the need for appropriate controls to mitigate this risk.
Finland Context Finland’s budget system is characterised by a binding medium-term budget framework (General Government Fiscal Plan) anchored to a budget balance fiscal target (now established at -0.5% of GDP) and multiannual spending limits for central government (central government spending limits) that allow setting a clear course for fiscal policy and maintaining fiscal discipline.
This sound budget system was put under stress in 2008, when the financial crisis dramatically hit the Finish economy, generating in turn a sharp increase of the public deficit and debt and increasing the use of guarantees to support households and the economy.
In the wake of the crisis, the National Audit Office of Finland (National Audit Office of Finland, 2011[27]) and the International Monetary Fund (IMF, 2015[28]) both recommended improvements for reporting and managing government risks and liabilities.
These recommendations were endorsed by the Ministry of Finance, whose own analyses conducted in 2015 concluded that Finland’s ability to withstand new OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  105 economic shocks was materially lower than before and established new guidelines for monitoring the growth of government liabilities, including contingent liabilities (Ministry of Finance of Finland, 2015[29]).
Overview of the fiscal risks management framework Building on the existing budget system, the rationale for establishing a fiscal risks management framework in Finland was to increase transparency on fiscal risks, in particular the stock of guarantees and other off-budget liabilities, and better inform fiscal policy decisions.
For this purpose, since 2016, the government has published an Overview of Central Government Risks and Liabilities report which discloses consolidated information on the central government’s fiscal risks.

The Ministry of Finance publishes this report on a voluntary basis.
The main characteristics of the fiscal risks management framework in Finland are summarised in Table A.2 The Ministry of Finance is the key stakeholder in the framework and produces the Overview of Central Government Risks and Liabilities.
For this purpose, the Ministry of Finance monitors and measures directly fiscal risks associated with macroeconomic factors, with tax flows and with a number of liabilities relative, for example, to the European Financial Stability Facility, to export-financing activities or to state-owned enterprises.
The Ministry of Finance also relies on information provided by other ministries and agencies, which are required to report government guarantees and collaterals following guidance from the Ministry of Finance.

This information is collected in a centralised management system (called KoTa) developed by the State Treasury (Ministry of Finance of Finland, 2016[30]) on a monthly basis for housing-related guarantees and biannually for export-related guarantees and student loans.
As part of the budget preparation, information about state guarantees, warranties and off-budget assets shall be appended to the final accounts.

Each ministry shall also submit to the Ministry of Finance a description of the performance of its activities that includes “a review of the most important changes and risks in the operating environment of the sector” (Ministry of Finance of Finland, 1992[31]).
However, the information contained in this review is not used in the preparation of the Overview of Central Government Risks and Liabilities.

Following its 2011 report, the National Audit Office of Finland plays an important role in identifying potential improvements to the framework through its frequent recommendations.
For example, it noted that each agency and ministry is in charge of measuring risks although “assessment requirements have not been clearly determined” (National Audit Office of Finland, 2018[32]) at the central level.

More generally, in 2018, the National Audit Office underlined challenges in reporting certain fiscal risks and integrating their analysis into fiscal policy decision making (National Audit Office of Finland, 2018[32]).
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 106  Table A.2.

Finland’s approach for fiscal risks management Fiscal forecasting and analysis of deviations Risks identification Risks measurement Disclosure Prevention/mitigation Provision or reserve Fiscal policy The Overview of Central Government Risks and Liabilities discusses past deviations from the forecast of GDP, which is the primary factor underpinning the fiscal forecast.
Each entity within central government is responsible for identifying its risks, describing and monitoring them.

Ministries and funds report government guarantees and collaterals in a centralised management system (KoTa).

Measurement of government guarantees is at nominal value.

Other risks are not systematically measured.

The annual General Government Fiscal Plan includes a brief description of general risks associated with the fiscal forecast.
The Overview of Central Government Risks and Liabilities, published on a voluntary basis, provides a more comprehensive view of fiscal risks threatening public finances.

Each public entity is expected to prevent or mitigate its own risks.

Concerning guarantees, the general rule is that fees (one-off and annual) should be charged to beneficiaries.

The Budget contains an unallocated reserve for unforeseen events and a provision for new policies to be included in any supplementary budget.
Fiscal risks are not formally considered for setting fiscal targets.

Current fiscal targets are a central government deficit of -0.5% of GDP for 2023 and general government debt-to-GDP ratio below 60% of GDP (Ministry of Finance of Finland, 2019[33]).

Definition and disclosure of fiscal risks Table A.3 presents the classification of fiscal risks used in Finland.
Within general risks, internal risks are defined as pressures unaccounted for in the forecasts “associated with the implementation of the Government Programme”.

External risks are defined as risks associated with general economic development” (Ministry of Finance of Finland, 2019[33]).
Off-budget liabilities risks are associated with government policies that may generate additional spending when certain events happen, of which state guarantees or loans are a typical example (Ministry of Finance of Finland, 2020[34]).

Balance sheet risks are not formally defined, but can be understood as risks that the commercial value of government assets and liabilities may unexpectedly change (Ministry of Finance of Finland, 2020[34]).

Table A.3.
Table A.3.

Finland’s categories and nature of fiscal risks Category General risks Nature of risk Internal risks External risks Off-budget liabilities risks Open contingent liabilities Implicit contingent liabilities Balance sheet risks Financial assets Financial liabilities Description Pressures associated with the implementation of the government programme (e.g.

one-off expenditure).

Pressures closely linked to general economic development (e.g.

growth slower than expected).


Expenditure that the government is legally bound to make if a particular event occurs (e.g.

government guarantee).

Expenditure that the government may be socially or politically obliged to make if a particular event occurs (e.g.

bailout of the banking sector and local government).

Decrease of the valuation of central government financial assets (e.g.

decrease of the equity value of state-owned enterprises).

Increase of central government liabilities (e.g.

pensions).
pensions).

Sources: Ministry of Finance of Finland (2019[33]; 2020[34]).

The Overview of Central Government Risks and Liabilities is the main source of information on fiscal risks, although information on general risks is also provided in the General Government Fiscal Plan.
The report, first published in 2015, has been developed regularly, with, in particular, the inclusion of increasingly detailed information on financial assets and liabilities in successive reports and a stress test of public finances disclosed in the 2019 report (Ministry of Finance of Finland, 2020[34]).12 The Overview of Central Government Risks and Liabilities lists and analyses all categories of fiscal risks in a mostly qualitative way; however, nominal value of government guarantees is provided in the report.
The analysis of risks associated with balance sheet and off-budget liabilities is particularly developed.

A OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  107 notable feature of the report is an analysis of government implicit liabilities, in relation to local government, state-owned enterprises, environmental damage and the banking sector (Ministry of Finance of Finland, 2020[34]).
Although implicit contingent liabilities relative to the banking sector are analysed in a general manner, more quantitative data are provided about municipal loan stock and municipal guarantees.

The comprehensive analysis of implicit liabilities is motivated primarily by the large size of the banking sector relative to the Finnish economy and by the rapid growth of local governments’ loans and guarantees over the past ten years (Ministry of Finance of Finland, 2020[34]).
In case of a crisis, it is expected from the central government to ensure the continuity of the banks’ operations even though no explicit legal obligation exists, which poses an implicit risk to central government finances.

In addition, a chapter within the General Government Fiscal Plan outlines the key findings of the Overview of Central Government Risks and Liabilities (Ministry of Finance of Finland, 2019[33]).
Fiscal stress tests For the first time, the 2018 Overview of Central Government Risks and Liabilities included a stress test of general government finances.

The stress test quantifies the direct impacts on general government finances caused by weaker overall growth and several of its components such as reduced corporate tax and income tax revenue and higher expenditure linked to unemployment benefits.
It also estimates the government’s exposure to expenditures related to contingent liabilities, especially to export and housing guarantees, and the sensitivity of the value of government financial and real assets.

In 2019, the stress test additionally measured the impact of a hypothetical shock on the general government balance sheet, i.e.

changes in the value of government assets and evolution of the debt-to- GDP ratio, including due to the calling of government guarantees.
It concluded that in 2021, government debt and net debt would respectively reach almost 70% and 20% of GDP consecutive to the hypothetical shock, versus 58% and 11% in the baseline scenario (Ministry of Finance of Finland, 2020[34]).

The stress tests realised in 2018 and 2019 were based on the scenario used by the European Banking Authority for the stress test of the banking sector.
First, the impact on Finnish GDP is estimated using the Ministry of Finance’s forecasts as a baseline and the Ministry of Finance’s estimates for several components of growth that were not explicitly mentioned in the European Banking Authority’s scenario.

The impacts of the shock on general government finances are then estimated by comparing the previous forecasts made by the Ministry of Finance with the results of the general government scenario model developed by the Ministry of Finance.
Nevertheless, the results of the stress test analysis have not yet triggered specific policy measures aiming at decreasing the exposure of public finances or limiting the volume of off-budget liabilities.

Key policies for prevention or mitigation of fiscal risks In Finland, the fiscal risks management framework is primarily aimed at the identification and reporting of risks, as a means for raising decision makers’ awareness.
There are no mandatory guidelines concerning strategies for the prevention and mitigation of fiscal risks.

However, the 2019 Overview of Central Government Risks and Liabilities discusses certain prevention and mitigation actions or policies, e.g.

in relation to interest rate risk associated with central government debt or credit risk arising from export-related guarantees.

Government guarantees and collaterals have been a particular concern of the Ministry of Finance.
To improve the monitoring of the stock and flows, the ministry developed a centralised management system (KoTa) to collect the information from ministries and government funds.
The Act on State Lending and State Guarantees defines the default rules that apply to government guarantees authorised by parliament: OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 108  the standard fee structure for guarantees comprises a one-off fee of at least 0.25% of the capital and an annual fee of at least 0.5% of the capital.
However, guarantee fees can be waived by the government for special reasons and the Ministry of Finance acknowledges that, in practice, “the government has deemed special reasons to apply to almost all guarantees […], effectively turning what was intended as an exception into a rule” (Ministry of Finance of Finland, 2018[35]).

Concerning mitigation, to offset the impact of certain small risks materialising (e.g.
calling of a guarantee), the yearly budget contains an unallocated reserve for unforeseen events and a provision for new policies to be included in any supplementary budget (Ministry of Finance of Finland, 2019[33]).

Their total amount represents approximately 0.8% of the yearly expenditure ceiling defined for 2020.

COVID-19 crisis The General Government Fiscal Plan for 2021-2024 was released on 16 April 2020.
Having invoked the exceptional circumstances clause set out in the EU’s Stability and Growth Pact, the General Government Fiscal Plan only presented a medium-term projection for general government finances based on an independent forecast and did not include the Stability Programme usually provided to the European Commission at that time of the year.
The Finnish government submitted three supplementary budget proposals to the parliament, referring successively to prevention and preparation measures related to COVID-19, easing the financial situation of Finnish companies, fixed-term and targeted measures to combat the health and economic effects of COVID-19, etc.

The government also proposed a large state guarantees scheme, on which fees have been waived, as has been the case for some other guarantees schemes in the past.
Netherlands Context Since the 1990s, the Netherlands has used a budget framework based on multiannual expenditure ceilings, which is based on the current government’s independently costed pre-election programme.

This system is generally considered an efficient tool for delivering national fiscal objectives that have traditionally aimed at keeping public debt at sustainable levels over the long term, in the context of an ageing population and decreasing natural resources rent.
Another important component of the framework is that all fiscal and budget plans are based on independent macroeconomic and fiscal forecasts (Vierke and Masselink, 2017[36]).

In the wake of the 2008 financial crisis, the Dutch government explored how to better shield the country’s public finances against future shocks, beyond existing budgetary tools.
The Study Group on Fiscal Space was commissioned to analyse the risks to Dutch public finances and published a report providing a number of recommendations for better handling these risks (Study Group on Fiscal Space, 2010[37]).13 The Dutch government responded with its own report in September 2011, The Government Finances Stress Test: A Risk Analysis of Dutch Public Finances.
Following this initial work, the Dutch government set up a Risk Commission comprising representatives of the Ministry of Finance, line ministries and the central bank to review all its existing loans, guarantees and financial sector support and provide proposals to limit a further increase in such contingent liabilities.
The Risk Commission’s work led to the adoption of a new framework that introduced a ceiling for the overall level of contingent liabilities, criteria for taking on new contingent liabilities and strengthened transparency requirements vis-à-vis the parliament (Hofmans and van den Coevering, 2014[38]).
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  109 Overview of the fiscal risks management framework The Dutch fiscal policy framework can be said to have three broad objectives: 1) the sustainability of public finances, with sound fiscal and budgetary management, including after the 2013 reforms in relation to the EU-wide fiscal framework, including the two and six pack reforms;2 2) the effective use of tax money; and 3) macroeconomic stabilisation.14 The main characteristics of the framework for managing fiscal risks are described in Table A.4 Table A.4.
The Netherlands’ approach for fiscal risks management Fiscal forecasting and analysis of deviations Risks identification Risks measurement Disclosure Prevention/mitigation Provision or reserve Fiscal policy Fiscal forecasts are published twice a year in the Central Economic Plan and Macro Economic Outlook, along with two shorter and adjusted projections.
The identification of fiscal risks is the responsibility of a range of actors responsible for identifying and monitoring risks that fall under their competency.

Macroeconomic and financial risks are measured through alternative scenario analysis under unchanged policy and stress tests.

Information on fiscal risks is provided with the medium-term projections and the annual Budget (especially guarantee- related risks).
The risk management policy for contingent liabilities includes a ceiling and prevents the government from taking on new contingent liabilities except in the case of overriding reasons.

The Netherlands does not have provisions or reserves.

Unforeseen expenditures shall be funded by the reallocation of existing resources.

Fiscal risks are not formally considered for setting fiscal targets.
The government follows a trend-based fiscal policy, setting expenditure ceilings for the central government, social contributions and healthcare, and a revenue ceiling to control the total tax burden (OECD, 2019[39]).
Stakeholders in fiscal risks management An independent fiscal council, the Netherlands Bureau for Economic Policy Analysis (CPB), is responsible for producing independent macroeconomic and fiscal forecasting, before any general election and as part of the annual budget cycle.15 Alongside the fiscal forecast, the CPB identifies risks that could cause deviations, in relation to macroeconomic developments in particular.
A range of actors, such as ad hoc commissions and permanent independent organisations, are responsible for identifying and managing specific fiscal risks on which they are competent.

For example, the Netherlands Environmental Assessment Agency (PBL) evaluates environmental and spatial policies and identifies connected risks.

Financial sector risks are identified and managed through supervision by the Dutch Authority for the Financial Market.

The Ministry of Finance monitors a number of specific risks.
For example, the Dutch State Treasury Agency is responsible for debt management and funding, in particular for risks related to the interest rate, credit, liquidity and foreign exchange.

The Ministry of Finance is also in charge of producing a consolidated statement of government contingent liabilities (direct and indirect guarantees), which is published yearly alongside the budget.
Definition and disclosure of fiscal risks The Study Group on Fiscal Space’s report provides a detailed taxonomy of fiscal risks threatening Dutch public finances, including in case of a severe shock to the economy such as a large natural disaster or a terrorist attack (Table A.5).
The report identifies a number of key characteristics for individual risks: each 2 Within the EU fiscal framework, the six pack reform refers to a set of rules put in place in 2011 to reduce macroeconomic imbalances and improve the viability of public finances of member states.

The two pack reform, introduced in 2013, builds upon the six pack to improve budgetary co-ordination among member states.
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 110  risk can be explicit or implicit and conditional or unconditional, as shown in Table A.5.

The report makes the point that fiscal risks shall be managed using different tools depending on these characteristics.
The CPB discusses potential risks to its short-term (published biannually), medium-term (covering the next 4 years and published biennially) and long-term projections (in Ageing Reports covering the next 40 years and published every 4 years) in the relevant reports.

The risks identified range from international economic and political developments (such as trade conflicts, the consequences of Brexit and the current coronavirus crisis) to domestic sources (i.e.
the housing and labour market and the pension sector).

The CPB also publishes an annual report outlining the risks in relation to the financial sector (CPB, 2019[40]).

Table A.5.
The Netherlands’ taxonomy of fiscal risks Explict risk (ex ante obligation) Implict risk (no ex ante obligation, but high chance that risks will still be borne by government ex post) Unconditional (costs are incurred but size is uncertain) – Automatic stabilisers (tax revenue, unemployment benefits) – Interest rate risk – Excess costs (infrastructure) investment projects – Technical and legal fiscal risks – Mortgage interest risk (via mortgage deduction) – Old age pensions – Care (health and long term) – Climate mitigation Conditional (cost are incurred only if uncertain event occurs) – Financial sector: public guarantees, public backing of private guarantees – Public costs of infrastructure to counter natural disasters and terrorist attacks – Financial sector: rescue of firms and institutional units which are “too big to fail” – Medical emergency measures (including pandemics) – Agrarian emergency measures (animal diseases) – Private costs of natural disasters and terrorist attacks Source: Study Group on Fiscal Space (2010[37]).
The Budget Memorandum, presented on the Budget Day in September to the House of Representatives along with the national Budget and the tax plan, describes the financial and economic situation of the Netherlands, explaining the Cabinet’s plans for the coming year and the associated spending plans.

The Budget Memorandum contains an annex (Annex 12 in the 2020 Budget) that provides a list and short analysis of the government’s contingent liabilities – i.e.
the government’s direct guarantee schemes and indirect ones.

Indirect guarantee schemes are those provided by public entities that the government could be obliged to take over (Government of the Netherlands, 2019[41]).

In 2019, the government deepened its analysis of explicit and implicit contingent liabilities using the International Monetary Fund’s (IMF) guidance and methodology.

Fiscal stress tests The CPB conducted risk analyses in 2011 and 2015.
A number of economic scenarios were identified and the effects on the Dutch economy and public finances were examined.

The Dutch government responded to the Study Group on Fiscal Space with its own report in September 2011, The Government Finances Stress Test: A Risk Analysis of Dutch Public Finances.

The report discusses risks emanating directly from developments in the economy as well as risks resulting from guarantees and other government interventions in the event of a crisis.
The report also analyses a number of scenarios of major shocks (a financial crisis, a European debt crisis and a global economic crisis) and correlations between risks, and emphasised the need to better prevent these risks going forward, as such shocks would lead to a substantial deterioration of Dutch public finances (Dutch Ministry of Finance, 2011[42]).

The Ministry of Finance recently conducted additional fiscal stress tests, including measuring the government’s implicit contingent liabilities.
They were published in the Budget Memorandum 2019.16 Fluctuations in economic growth and interest rates were at the centre of those analyses and fiscal stress OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  111 tests.

In addition, the 2020 Stability Programme included sensitivity analyses with respect to growth and interest rates.
Key policies for prevention or mitigation of fiscal risks In 2015, the Dutch government adopted a new policy for loans, financial interventions, guarantees and other contingent liabilities (Hofmans and van den Coevering, 2014[38]).

In compliance with the so-called “no, unless” policy, the government does not take on new contingent liabilities (including indirect guarantees, loans and participation in financial interventions) unless there is an overriding reason to do so.
In addition, a sunset clause obliges the government to assess policies involving contingent liabilities five years after the start of their implementation.

A ceiling sets annually a maximum level for contingent liabilities, in particular guarantees.

Finally, an external opinion on the level of the premium to be charged to beneficiaries of government guarantees is requested in case of large and complex risks.

Prevention and mitigation strategies exist for other fiscal risks.
Natural disasters risks, for example, are an area of focus in the Netherlands, as the country is particularly exposed to flooding.

Accordingly, the Delta Programme was developed to protect the Netherlands against flooding.

It is presented every year by the Delta Programme Commissioner and is financed by the Delta Fund, a separate item on the central government budget which provides resources for flood protection in the future and for ensuring freshwater supply.
In 2015, the Netherlands adopted a risk-based approach for the flood risk management policy: protection levels are based on the probability and impact of flooding.

The focus is thus on prevention rather than insurance.

Importantly, in 2018, the Water Crises Control in Security Regions (WAVE2020) Programme was launched, with the aim to set a new contingency plan to control the impact of a flood disaster (Delta Programme Commissioner, 2019[43]).
Concerning those fiscal risks that cannot be prevented or accommodated, the policy, as shown in Table A.5, is to fund additional spending by a reallocation of resources across budget lines or budget chapters.

Large shocks to the economy are accommodated by running a prudent fiscal policy that, by declining public debt, is expected to provide sizeable fiscal space to be used by decision makers in times of stress for the economy (National Academy for Finance and Economics, 2013[44]).
COVID-19 crisis On 17 March 2020, the government decided a package of emergency measures to deal with the economic consequences of the coronavirus.

Various additional emergency measures were decided upon in the weeks that followed.
Given the exceptional situation, in addition to reallocations of resources across budget chapters, the government decided to adjust the expenditure ceiling of EUR 20 billion to allow for the extra expenditure (specifically, the “regular” expenditure ceiling will not apply to the expenditures from the emergency package).

Emergency measures will also generate less income from taxes and contributions in the short term (deferral of taxes).
Guarantees have been granted as part of the economic support measures and stocks of government guarantees will consequently increase sharply.

Ceilings of existing national government guarantee schemes have been increased as part of the COVID-19 crisis response, but no new schemes have been approved.

The channelling of new government interventions into existing schemes has allowed usual processes and safeguards to be maintained.
The principle of “no, unless” remains in place, although its implementation has shifted from correcting market failure to providing direct support to the economy.

Where previously most guarantees were ex ante budget-neutral because of the risk premium, most crisis-related guarantees have estimated budgetary costs, which are submitted to parliament in supplementary budgets.
The CPB carried out a study public on 26 March 2020 containing four scenarios outlining the possible impact of the COVID-19 pandemic on the economy and fiscal position in 2020/21 according to the length OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 112  and scope of disruption to normal economic activity, taking into account the support measures already announced by the government.
New Zealand Context In the late 1980s, New Zealand adopted the Public Finance Act (New Zealand Treasury, 1989[45]), the core legislative framework within which New Zealand’s government can borrow or spend public money.

In 1994, the Fiscal Responsibility Act (New Zealand Government, 1994[46]) clarified some of the principles of the Public Finance Act, and strengthened disclosure requirements in order to increase the transparency and scrutiny of the budget process.
The two laws were merged in 2004, to form the current version of the Public Finance Act (New Zealand Treasury, 2020[47]).

The Public Finance Act’s objectives include providing a long-term focus to budgeting, facilitating parliamentary scrutiny of economic and fiscal plans, and increasing transparency.
Increased transparency shall be achieved mainly by disclosing the government’s intentions and objectives concerning fiscal policy and producing regular economic and fiscal updates against the stated intentions and objectives.

The Public Finance Act also lays out the principles of “responsible fiscal management”.
They comprise reducing and maintaining debt at “prudent levels”; achieving positive net worth for government; ensuring predictability and stability in tax rates; and the prudent management of fiscal risks facing the government (New Zealand Treasury, 2020[47]).

The government can depart from these principles, but has to provide detailed explanations to parliament in such cases.
Overview of the fiscal risks management framework Legislation requires that fiscal risks facing the Crown be both managed “prudently” and “disclosed to the fullest extent possible” (New Zealand Treasury, 2020[47]).

To achieve these objectives, New Zealand has established a comprehensive and detailed framework (Table A.6), including guidelines for preventing and mitigating fiscal risks.
For those risks that cannot be prevented or mitigated, the government’s approach consists of maintaining debt at prudent levels and holding a healthy level of net worth, to increase the Crown’s resilience to shocks (New Zealand Ministry of Finance, 2018[48]).

Table A.6.
Table A.6.

New Zealand’s approach for fiscal risks management Fiscal forecasting and analysis of deviations Risks identification Risks measurement Disclosure Prevention/mitigation Provision or reserve Fiscal policy The Economic and Fiscal Updates contain economic and fiscal forecasts.

Analysis of deviations is performed in a separate report as part of the Analysis of the Treasury’s Macroeconomic and Tax Forecast Accuracy.
The Treasury relies on four main avenues for fiscal risks identification: 1) its own fiscal risks monitoring system; 2) the review of previous risks; 3) consultations with agencies; and 4) review of the minutes for budget negotiations.

Each agency measures its specific fiscal risks under the Treasury’s guidance and monitoring.

The Treasury measures general and balance sheet risks.

The biannual and pre-election Economic and Fiscal Updates disclose general, specific and balance sheet fiscal risks.
Each department prevents and mitigates specific fiscal risks through reprioritisation of funds, budget allowances or policy choices.

The Debt Management Office manages risks to the government’s overall balance sheet.

The Between-Budget Contingency provides for urgent funding.

Contingencies at the level of departments can also be used to finance known cost pressures whose amount are subject to uncertainty at the time of the finalisation of the budget.
In addition, New Zealand has two long-term reserve funds: the Natural Disaster Fund and the Superannuation Fund that aims at mitigating the long-term effect of the ageing population.

New Zealand does not have legislated numerical fiscal rules, but the government is legally required to state its fiscal strategy.

Results of fiscal stress tests were formally considered to determine the country’s most recent fiscal target.
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  113 Stakeholders in fiscal risks management Reporting entities participating in fiscal forecasting include departments (such as ministries or customs service), offices of parliament (such as the controller and auditor-general), the New Zealand Superannuation Fund, the Reserve Bank of New Zealand, state-owned enterprises (that report quarterly to shareholding ministries), and other Crown entities (such as the Accident Compensation Corporation) (New Zealand Treasury, 2019[49]).
These reporting entities are responsible for identifying their specific fiscal risks, as well as managing prudently as required by legislation.

The Treasury centralises information on specific fiscal risks and their management by reporting entity.

These fiscal risks are reported by all entities within central government on a monthly basis in the integrated financial management information system operated by the Treasury.
In addition, the Treasury identifies, measures and manages certain specific risks, such as those coming from state-owned enterprises, and general risks stemming from the government’s decisions, or macroeconomic circumstances.

A specific unit within the Treasury, the Debt Management Office, is in charge of aggregating information on assets and liabilities across the government and manages risks to the government’s overall balance sheet.
Definition and disclosure of fiscal risks Legislation defines fiscal risks as “all government decisions and other circumstances known to the government that may have a material effect on the fiscal outlook, but that are not certain enough in timing or amount to include in the fiscal forecasts” (New Zealand Treasury, 2019[49]).

This definition includes risks that are subject to written reports to responsible ministers as well as decisions that have been deferred (Warren, 2004[50]).
Treasury guidance further specifies the disclosure requirements for fiscal risks as opposed to the inclusion of the fiscal impacts of decisions in agencies’ forecasts (New Zealand Treasury, 2018[51]).
The Treasury further classifies fiscal risks into three broad categories and types (Table A.7): 4. so-called “specific fiscal risks”, which are risks in relation to government decisions falling under the portfolio of activities of individual ministries and agencies 5. balance sheet risks, which are risks affecting the Crown’s financial position through changes in the value of its assets or liabilities 6. general risks, which are global risks to the economy or public finances.

Table A.7.
New Zealand’s categories and nature of fiscal risks Category Specific fiscal risks Type Policy changes Balance sheet risks Cost pressures associated with existing policies and risk of cost variances Contingent liabilities and assets Change in the value of assets and liabilities Direct fiscal costs Indirect fiscal costs General risks Deviation from key assumptions and judgements Other uncertain events Description Potential decisions likely to be taken by the government related to both new policy and existing policy settings.
Changes in demand or pricing that impact the cost of delivering services under existing policy settings.

Potential costs or income that depend on whether particular events occur.

Movement in market or business variables affecting financial assets or property owned by the government.

Actual costs incurred because of a shock (e.g.

cost to rebuild infrastructure).

Changes to future government revenue and expenses consecutive to the economic impact of a shock.
Any deviations from the key assumptions and judgements used for the economic and fiscal forecasts that have flow-on impacts for the fiscal forecasts.

Significant events relating to changes in the external environment (e.g.

natural disasters, international events).

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 114  Source: Adapted from New Zealand Treasury (2019[49]).

Fiscal risks are discussed alongside the economic and fiscal forecasts in the Economic and Fiscal Updates.
Disclosures provide information about risks at a greater frequency than the annual budget because they are released biannually and ahead of elections as the Budget Economic and Fiscal Update, the Half Year Economic and Fiscal Update, and the Pre-Election Economic and Fiscal Update.
General and balance sheet fiscal risks are described in the chapter on risks and scenarios, which also comprises a description of uncertainties for the economic and fiscal outlooks, as well as the alternative scenarios for the economic outlook.

General risks, which are measured and can be presented in graphs, include changes to economic assumptions (implied by major adjustments in international financial markets, weaker trading partners’ growth, migration, etc.
), natural disasters, biosecurity threats or volatility of the government’s investments given the business environment.

Balance sheet risks include risks in relation to financial assets and liabilities, including debt, and are described in a qualitative manner (New Zealand Treasury, 2019[49]) A full separate chapter is dedicated to specific fiscal risks in the Economic and Fiscal Updates.

Disclosure of specific risks is required only above a materiality thresholds of NZD 100 million.
Specific fiscal risks are presented by ministerial portfolio.

They are classified by nature and their status compared to the previous Economic and Fiscal Update is specified (unchanged, changed or new).

Their impact on revenue, expenses or capital expenditures is briefly described and quantitatively assessed when possible.

As for the contingent liabilities and assets, which are among specific fiscal risks, they are further categorised as quantifiable or unquantifiable.
Contingent liabilities considered to be remote (less than a 10% chance of occurring) are excluded from the reporting.

Moreover, only contingencies involving amounts of over NZD 100 million are separately disclosed and detailed, the rest being aggregated in the “other” category (Table A.8).

Table A.8.
Table A.8.

New Zealand’s contingent liabilities categories Type Uncalled capital Guarantees and indemnities Legal proceedings and disputes Other Indemnities Legal claims and proceedings Other Category of contingent liabilities Quantifiable Unquantifiable Source: New Zealand Treasury.

Fiscal stress tests Balance sheet risks are further analysed with stress test scenarios in the Investment Statement, published by the Treasury at least every four years (New Zealand Treasury, 2018[52]).
It aims at testing the medium- term fiscal resilience of the government balance sheet by accounting for the impact on net debt of the government, the potential change of value of government assets and liabilities, as well as for direct and indirect fiscal costs such as direct cost to rebuild infrastructure or changes of future government revenue.

Three separate scenarios were analysed in 2018: 1) a severe Wellington earthquake; 2) an agricultural disease outbreak; and 3) an international economic downturn.
These scenarios were selected to cover a broad range of shocks that could affect New Zealand over the medium term and were drawn from risk OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  115 registers prepared to support public risk management and planning processes (New Zealand Treasury, 2018[52]).
Finally, research carried out for preparing this report included looking at whether the case study countries had identified pandemic as one of their fiscal risks and put in place prevention or mitigation strategies.
That is the case in New Zealand: in 2006, in the context of the H5N1 epidemic, the Treasury of New Zealand published a paper modelling the potential economic impact of a severe pandemic in New Zealand and discussing consequences in relation to the public debt target and role of prevention policies (New Zealand Treasury, 2006[53]).
This paper was followed by other reports in 2009 related to the H1N1 epidemic that discussed the impact on budget forecasts and the Treasury preparedness (New Zealand Treasury, 2009[54]; 2009[55]).

In 2011, the Treasury of New Zealand listed pandemics and health emergencies as one of the major economic shocks that have the potential to disrupt government finances (New Zealand Treasury, 2011[56]).
Key policies for prevention or mitigation of fiscal risks As noted above, each entity within central government is expected to monitor and prevent, where possible, fiscal risks from crystallising.

An example of such policies is the State-Owned Enterprises Continuous Disclosure Rules, which obliges state-owned enterprises to continuously report on any matter that may affect their commercial value (New Zealand Treasury, 2015[57]).
Further, the Budget Economic and Fiscal Update (New Zealand Treasury, 2019[49]) details three different options for each ministry to manage their risks: 1) reprioritisation of funds; 2) using budget allowances for new expenditures included in the budget and multi-year framework; and 3) policy choices that will allow modulating the amount and timing of funding.
For residual risks, the strategy stated in the Economic and Fiscal Update is to maintain net debt at prudent levels and hold a healthy level of net worth.

What constitutes a prudent level of net debt is determined based on a framework which determines the “upper limit of debt” and the additional buffer needed for a “prudent level of debt” (Falli et al., 2015[58]).
Results of fiscal stress tests were formally considered to determine the country’s fiscal target before the COVID-19 pandemic hit the global economy (New Zealand Government, 2019[59]).17 Specifically, under the three stress tests scenarios done in 2018, the Treasury estimated that net debt would rise by between 5% and 15% of GDP in case of a crisis and as high as 20% in case of a major shock.
These estimates led to a view that “a net debt buffer of at least 20 percent of GDP below [the] upper net core Crown debt limit of 50 to 60 percent of GDP would be reasonable based on the current state of the evidence” (Makhlouf, 2019[60]).

The Treasury further notes that “a strong balance sheet helps by absorbing the impact from risks so that the wider economy does not need to adjust immediately, at a greater economic cost.
A strong balance sheet also provides the government with fiscal space and choices about how it can respond to shocks” (New Zealand Treasury, 2019[49]).

During the most recent shocks faced by the country, the balance sheet was used as part of the fiscal policy response, e.g.

the Natural Disaster Fund was drawn on and contributions to the Super Fund suspended (Makhlouf, 2019[60]).
COVID-19 crisis Besides Budget legislation, the Imprest Supply Act 2020 (passed on 25 March 2020), which authorised the government to spend up to NZD 52 billion, and Section 25 of the Public Finance Act 1989 (permanent legislative authority for emergencies) have provided the government with parliamentary authority to incur COVID-19-related expenditure.18,19 Consequently, expenses relating to COVID-19 have been classified into three categories and handled accordingly: OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 116  1. reprioritisation of baselines: if the expenditure could be met from existing baselines, approval was granted by joint ministers or the Cabinet 2. expenses incurred in emergencies: when Section 25 of the Public Finance Act was invoked (subject to certain criteria), the Minister of Finance approved expenses to meet this emergency 3. expenses approved by Cabinet: if approval is required to incur expenses but it is not within scope of Section 25 of the Public Finance Act, Cabinet approval was required.
United Kingdom Context The United Kingdom’s current framework for fiscal policy and budgeting comes from the Budget Responsibility and National Audit Act, adopted in 2008 in the wake of the financial crisis.

This act was an effort to increase the credibility of the government’s fiscal forecasts and clarity of its fiscal targets.
It provides for the government to publish a Charter for Budget Responsibility explaining its “formulation and implementation of fiscal policy and policy for the management of the national debt.” The act also sets up an independent fiscal council, the Office for Budget Responsibility (OBR), to prepare economic and fiscal forecasts underlying the government budget and assess whether its fiscal objectives are being met.20 In 2016, following an assessment of the United Kingdom’s fiscal transparency practices (IMF, 2016[61]) noting that reporting on fiscal risks was incomplete and fragmented, the Charter for Budget Responsibility was updated to task the OBR with producing “a fiscal risks statement setting out the main risks to the public finances, including macroeconomic risks and specific fiscal risks (…) at least once every two years”.
Interestingly, the charter specified that the government would “formally respond to this report” within a year (HM Treasury, 2017[62]).

The OBR also produces a Fiscal Sustainability Report, in which it analyses the fiscal consequences of both past and future government activity, setting out long-term projections for spending, revenues and financial transactions and assessing their implications for public debt.

The Fiscal Risk Report and the Fiscal Sustainability Report are published in alternating years.
Overview of the fiscal risks management framework Within the broad requirements of the Budget Responsibility and National Audit Act and the Charter for Budget Responsibility, the framework for fiscal risks management in the United Kingdom has been designed in a collaborative manner by the OBR and the Treasury, including through consultations with experts and international institutions.21 The main characteristics of the fiscal risks management framework are summarised in Table A.9.
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  117 Table A.9.

The United Kingdom’s approach for fiscal risks management Fiscal forecasting and analysis of deviations Risks identification Risks measurement Disclosure Prevention/mitigation Provision or reserve Fiscal policy The Office for Budget Responsibility (OBR) produces fiscal and economic forecasts twice a year in its Economic and Fiscal Outlooks, which are used as official forecasts.
Long-term projections are published in the Fiscal Sustainability Report.

The OBR assesses its own forecasting performance in an annual Forecast Evaluation Report, in which it compares past forecasts against outturn data, explaining any deviations and errors.

A Fiscal Risks Group within the Treasury was created in the mid-2000s to identify and assess risks related to the government’s fiscal objectives.
The Treasury co-ordinates its work with the other bodies competent for sector-specific risks (see below).

The OBR assesses the likelihood of the risk and its potential impact on both stock and flow measures of the public finances, focusing particularly on macroeconomic risks (emanating from either cyclical or structural changes in the economy) and specific risks (stemming from particular sources, such as government guarantees).
Fiscal risks are mainly and comprehensively disclosed in the OBR’s Fiscal Risk Report.

Some risks to medium-term forecasts are also mentioned in the Economic and Fiscal Outlooks and sensitivity analysis on long-term projections are presented in the Fiscal Sustainability Report.
The government’s strategy to manage fiscal risks follows five steps: 1) identify the source, scale and likelihood of the risk; 2) disclose the risk; 3) mitigate the risk; 4) provision for risks that cannot be mitigated but with relatively certain size and timing; and 5) accommodate residual risks (HM Treasury, 2018[63]).
The budget contains a Contingencies Fund (2% of the previous year’s budget) and a reserve to deal with unforeseen expenditure and future costs exceeding the so-called departmental expenditure limits (0.5% of departmental expenditure limits).

On certain occasions, a so-called special reserve was created (e.g.

military operations in Afghanistan or the 2013-14 winter floods).

Fiscal risks are not formally considered for setting fiscal targets.
At Spring Budget 2020, it was announced that the Treasury will review the fiscal framework to ensure it remains appropriate for the macroeconomic context, while ensuring the sustainability of the public finances (HM Treasury, 2020[64]).

Stakeholders in fiscal risks management The OBR is responsible for producing a fiscal risks report at least once every two years, which identifies and measures fiscal risks in an objective, transparent and impartial way.
The Treasury is responsible for the management of fiscal risks, although the identification and disclosure of certain specific risks may fall under its responsibility if required by law.

The working relationship among the OBR, HM Treasury and other bodies involved in fiscal risks management is stated in a memorandum of understanding, which clarifies each institution’s responsibility, the co-ordination of the forecast process and information sharing (OBR, 2017[65]).
A Fiscal Risk Liaison Group, chaired by the OBR and comprising Treasury representatives, sets the timetable for the departments’ contributions on which the OBR’s Fiscal Risks Report is based.

Within the Treasury, three sub-committees supervised by the Treasury’s Executive Management Board identify and analyse specifically economic, fiscal and operational risks (Figure A.1).
In particular, the Fiscal Risk Group co-ordinates the work on the identification of fiscal risks, assesses their likelihood and potential impact, and proposes mitigation strategies.

The Fiscal Risk Group meets once a month to collect the analysis of the Treasury’s risk management groups on sector-specific risks, then reports to the Executive Management Board with quarterly reports.
It is to be noted that, in 2016, a Balance Sheet Group was established to report to the Fiscal Risk Group on risks to the government’s holding of assets and liabilities.

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 118  Figure A.1.

The United Kingdom’s institutional responsibilities for fiscal risks management organisation Source: HM Treasury (2018[63]).
Responsibility for the identification and management of specific risks lies with relevant departments or agencies, which are expected to carry out “active surveillance of fiscal risks” and report to the Treasury (HM Treasury, 2018[63]).22 Fiscal risks surveillance should be done as part of the management of operational risks, for which guidance is provided in the government’s Orange Book.23 The National Audit Office also plays a role in assessing risks faced by departments, making recommendations on how to improve the use of public money through value-for-money assessments presented to parliament.
In 2016, the National Audit Office published a report examining provisions, contingent liabilities and guarantees in the whole of government accounts, shedding light on the risks and benefits to the public finances and discussing the management strategy concerning assets and liabilities adopted by the government (UK National Audit Office, 2016[66]).
Definition and disclosure of fiscal risks Fiscal risks are defined as “a potential deviation from the 5-year-ahead central forecasts for public sector spending, receipts, borrowing and debt contained in the Economic and Fiscal Outlooks and from the corresponding 50-year-ahead projections in the Fiscal Sustainability Report” (OBR, 2017[67]).
The OBR also considers the fiscal risks arising from pressures on spending (such as ageing and health costs) which may have an impact on fiscal sustainability, independently of whether they are recognised in the forecasts.
The OBR’s Fiscal Risks Report represents the most comprehensive disclosure effort on fiscal risks within OECD countries: the two reports published in 2017 and 2019 identify around 60 fiscal risks for the United Kingdom’s public finances over the medium to long term, measure them with few exceptions, and present them in broad categories as follows: macroeconomic and financial sector, revenue and spending, balance sheet, and debt interest.
The reports go further by classifying the risks in a detailed matrix by size (low, medium or high impact) and likelihood (from very low to very high probability of crystallisation).

The report includes several visualisations providing contextual information and facilitating the understanding of the scale and evolution of key fiscal risks.

The most recent Fiscal Risks Report includes new sections on fiscal risks stemming from the shadow banking system, the setting of fiscal policy and climate change.
In trying to assess and quantify climate- related fiscal risks, the OBR used the framework developed by the Bank of England, which started to OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 HM TreasuryExecutiveBoardEconomicRisks GroupFiscal Risks GroupOperating CommitteeTaxRisks GroupSpendingdirectorsBalance SheetGroupHM TreasuryspendingteamsDepartmentsHM TreasurySheetUnitAgents (Bank of England, DebtManagmentOffice, NS&I)HM TreasurytaxteamsHR Revenue and Customs  119 evaluate climate-related risks to financial stability in 2015.
Climate-related fiscal risks include, among others, spending increases for climate change adaptation and mitigation strategies and legal challenges generating future costs.

The level of disclosure on fiscal risks management in the United Kingdom is unique in that HM Treasury is required to formally respond to the Fiscal Risks Report produced by the OBR within a year.
By HM Treasury’s own words, the report “provides a mechanism for parliament and the public to assess the adequacy of the government’s strategies for managing [these] risks and hold it to account for their implementation”.
The last report published in 2018, called Managing Fiscal Risks, outlines the government’s frameworks for managing fiscal risks (further described below), describes the actions that government is taking to manage individual risks and outlines further actions the government is taking to strengthen its framework.

A complete fiscal risk register with the corresponding responsible department is also included.
The report does not discuss the appropriateness of the fiscal policy course and objectives in light of fiscal risks identified by the OBR (HM Treasury, 2018[63]).

Fiscal stress tests The OBR’s Fiscal Risks Reports include chapters showing the effects of a stress test, based on a bespoke stress scenario in each report: a synchronised global and domestic economic and financial shock in 2017 and a no-deal Brexit scenario in 2019.
Stress tests are based on macroeconomic scenarios prepared by other independent international and national institutions such as the Bank of England (for the 2017 macroeconomic shock stress test) and the IMF (for the no-deal Brexit stress test in 2019).

Impacts of the shock scenarios are assessed for the following fiscal aggregates: public sector receipts, expenditures, net borrowing and net debt.
Key policies for prevention and mitigation of fiscal risks Traditionally, the budget comprises a Contingencies Fund regulated by the Miscellaneous Financial Provisions Act 1946 and held by the Treasury.

It may be used for emergencies or expenditures that were not included in the budget.

The Contingencies Fund Act 1974 sets the size of the fund as 2% of the amount of the government budget in the preceding year.
Beyond this Contingencies Fund, the government’s strategy to manage fiscal risks follows five steps: 4.

“Identify the source of risk, the scale of fiscal exposure, and the likelihood of crystallisation.

(…).

5.

Disclose the fiscal risk to parliament and the public to raise awareness and ensure accountability for management of potential threats to public funds.

(…).

6.

Mitigate fiscal risks where this can be done cost-effectively and without detracting from wider policy objectives.
Risk mitigation tools can include discouraging risky behaviour (e.g.

through financial regulation), encouraging actors to pool risk (e.g.

through institutions like the Pension Protection Fund), or placing limits on the extent of government exposure (e.g.

through limits on the issuance of export guarantees).

7.

Provision for risks that cannot be mitigated but whose size and timing is relatively certain.

(…).

8.
(…).

8.

Accommodate those risks whose size or timing is too uncertain to explicitly provision for in advance.

(…)” (HM Treasury, 2018[63]) Since the publication of the first Fiscal Risks Report, the government considers that it has enhanced its capacity to monitor and manage fiscal risks, including more transparent reporting on the balance sheet and better management of contingent liabilities with a new approval regime for contingent liabilities.
For example, in March 2020, the Treasury published a report in which it outlines how the government, acting as insurer of last resort, manages contingent liabilities with the objective to reduce the associated risk and OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 120  how it can improve this role.

The four typologies of contingent liabilities identified are financial guarantees, explicit government insurance, legal cases and purchaser protections.
The first two categories are covered by the government’s insurer of last resort function (HM Treasury, 2020[68]).

In April 2020, the Treasury updated and published the Green Book, which provides guidance on how to appraise and evaluate policies, projects and programmes.

Other key risk management reforms included a new financial oversight framework for the Bank of England and a comprehensive bank resolution regime.
In 2017, the Treasury launched the Balance Sheet Review to assess the government’s management of assets and liabilities and identify opportunities to reduce balance sheet risks.

The government also decided to end public finance initiative schemes and the sale of student loans, and took steps to lower the costs of clinical negligence in the National Health Service; tackle tax avoidance, evasion and non-compliance; and reduce the issuance of inflation-linked government debt (HM Treasury, 2018[63]).
COVID-19 crisis The Contingencies Fund Act 2020 allowed the Contingencies Fund to be topped up with a further 48% of 2019-20 spending so that the UK government could make immediate payments from it.

The government’s proposal for the Finance Bill 2019-21, which included an increase in public spending and a GBP 12 billion emergency fiscal stimulus to counter the shock of the COVID-19 pandemic, became a law on 22 July 2020.
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[37] [66] [36] [50] OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021  127 Notes 1 Most OECD countries use a medium-term expenditure framework, with only three countries reporting that they do not make use of this tool (Belgium, Mexico and Norway).

2 The Netherlands’ taxonomy of fiscal risks, dating back to 2011, also identifies pandemics as one of the potential large shocks to the Dutch economy and public finances.
3 Prevention should be understood as policies to decrease the likelihood that a risk will materialise while mitigation policies aim at reducing the financial impact of a fiscal risk materialising.

4 When there is more than one provision or reserve, one is for funding unexpected events while the other is for funding new programmes or policies over the course of the budget execution.
5 According to the Treasury, net debt would rise by between 5% and 15% of GDP under the three stress test scenarios done in 2018 and would go as high as 20% in the case of a major shock.

These estimates have led to a view that “a net debt buffer of at least 20 percent of GDP below [the] upper net core Crown debt limit of 50 to 60 percent of GDP would be reasonable based on the current state of the evidence”.
6 In the former case, it will identify certain risks, such as macroeconomic risks, based on its own analyses, but may have to rely on government for information on certain categories of fiscal risks.

7 https://www.oecd.org/naec/events/systemic-linkages/building-resilient-systems-in-21st-century.htm.
8 The Risk Potential Assessment Tool requires in particular that contingent liabilities such as warranties, guarantees and indemnities; personal injury or property damage arising from implementation; or a highly litigious stakeholder group be identified.

9 The Department of Finance and the Treasury are also in charge of monitoring a range of specific risks falling under their respective areas of responsibility.
10 Contingent liabilities are either guarantees (one party promises to be responsible for the obligations of another party if that party defaults), indemnities (legally binding promise whereby a party undertakes to accept the risk of loss or damage another party may suffer) or other types of contingent liabilities (e.g.

legal claims, tax disputes, uncalled capital subscription).
11 The government specified that “A strong balance sheet provides the government with flexibility to respond to unanticipated events, such as financial crises or economic shocks.

There are a range of measures of the government’s financial position.
All are expected to improve over the forward estimates period and medium term.” 12 In 2015, the report only briefly analysed risks other than those arising from liabilities with dedicated chapters about risks associated with macroeconomic development and with the composition of government assets (real assets vs. financial assets).

In 2016, an additional section described broadly the risks affecting general government revenue, expense and balance sheet.
The description of risks related to liabilities was further improved in the 2017 with a classification of liabilities as either “direct” or “contingent” to analyse the different kinds of risk incurred.

Changes made to the 2018 report included more details about risks related to government assets and the addition of a new section about stress test scenario to analyse the impact of a potential shock on government finances.
The structure of the 2019 report remained unchanged compared to 2018, but integrated the results of a balance sheet stress test.

OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021 128  13 The Study Group on Fiscal Space was established in 1971 and is composed of senior civil servants from ministries, the CPB and the central bank.

the See 14 https://www.rijksoverheid.nl/documenten/kamerstukken/2017/11/03/bijlage-1-bij-startnota-%E2%80%93- begrotingsregels-2018-2022.
budgetary adopted Cabinet current rules the by at: 15 The CPB has a more comprehensive role than comparable institutions in other OECD countries.
This includes, for example, providing the official estimates on economic growth and purchasing power, analysis of the sustainability of Dutch public finance, cost-benefit analysis of major infrastructure projects, analysis of the economic effects of the election plans of Dutch political parties, and all kinds of analyses on the Dutch economy and the role of the government.

16 https://www.rijksoverheid.nl/documenten/begrotingen/2018/09/18/bijlagen-miljoenennota-2019.

Memorandum appendices pp.


387-393 Budget 2019, See at: 17 The last stress test realised in 2018 concludes that “the stress testing presented in this statement be broadly tolerant to large but plausible adverse shocks, in the form of a major earthquake, a widespread agricultural disease outbreak, or an international economic downturn” (New Zealand Treasury, 2018[52]).
18 Imprest supply is an approval from parliament to incur expenditure in advance of a subsequent appropriation, when the executive will make the full details of the spending available for parliament’s scrutiny.

Cabinet, or in some specified cases, joint ministers, must approve expenditure that is to be incurred under imprest supply.

The process for doing so is set out in the Cabinet Office Circular – Proposals with Financial Implications and Financial Authorities.
19 Separate from the imprest supply authority, the Minister of Finance may approve expenditure to meet an emergency or disaster, whether or not there is any other authority available for the purpose, under Section 25 of the Public Finance Act 1989.

A state of national emergency was declared on 25 March 2020 and, on 27 March, the government exercised its ability to use Section 25.
Although parliament does not specify the amount or type of expenditure that can be incurred under this provision, it may be used only to meet the emergency.

Given the nature of this authority, the Treasury (and the audit office) expect it to be used only as a last resort for emergency expenditure needed immediately (that is, when government departments cannot wait for Cabinet approval to use imprest supply).
20 The 2011 Budget Responsibility and National Audit Act specifies that “the Treasury may from time to time modify the charter (…).

When the charter is modified the Treasury must lay the modified charter before parliament.” 21 The OBR published a discussion paper in 2016 entitled “What should our Fiscal Risks Report cover?” that sought answers on a number of key questions in relation to existing and good practices on fiscal risks definition, classification, etc.
Before publishing its own first response to the OBR’s report, the Treasury conveyed round tables of experts, including from national fiscal institutes, the IMF and the OECD.

22 For example, risks around infrastructure and major projects are addressed and monitored by the recently established Infrastructure and Projects Authority.
The Ministry for Housing, Communities and Local Government follows a framework to manage risks associated with its financial portfolio, in particular the credit risks associated to loan, guarantee and equity products.

The Debt Management Office analyses risks in relation to interest rate, refinancing, inflation, liquidity and executive risks.

23 The Orange Book was last updated and published in February 2020 and is available at: https://www.gov.uk/government/publications/orange-book.
OECD JOURNAL ON BUDGETING, VOLUME 2021 ISSUE 1 © OECD 2021