The Central Bank says the methodology to calculate the budget deficit as a percentage of GDP in yesterday’s lead story ‘Budget deficit 17.6 percent of GDP up to Sept 09’ was technically unsound, misleading and not in keeping with accepted national accounting practices although not incorrect.

A senior official of the Central Bank told the Island Financial Review that the methods used to calculate the budget deficit had some technical deficiencies.

"The first problem is that the GDP figure for the first nine months of 2009 is at 2002 constant prices. What we need is GDP at current prices because government finances are at current prices. The second problem is in the area of application.

"The accepted practice in National Accounting world-over is to use annualised figures when calculating budget deficit/GDP data. It is not only necessary to have GDP data at current prices but you need an estimate for the whole year. The budget deficit likewise has to be estimated for the whole year," the official told the Island Financial Review.

He said GDP was not spread evenly throughout a given year, like wise government expenditure and revenue. "This is why we need to use annualised figures and this is the challenge, you may be able to have an estimate for GDP but government finances are difficult to estimate."

The Central Bank has made various estimates. The deficit to GDP target for 2009 is 7 percent and for the first nine months of that year the target was 6.5 percent. "We have calculated the deficit/GDP ratios at various stages and at different fiscal scenarios but this is for the Treasury’s purview alone," the Central Bank official said.

"What the Island Financial Review did is not wrong but it is not in keeping with accepted practices of national accounting either," the official said.

The Island Financial Review notes that accepted practices, like accounting standards, must be respected and no matter how ‘sound’ calculations maybe they would be ineffectual if proper standards are not used. The Central Bank’s annual report is due in April and until then we would have to see where government finances really stand. We also note that the Treasury for some reason has withheld data on monthly government finances but the Central Bank said these data would be released soon.