June 15, 2010

Budget Gimmicks or the Destructive Art of Creative Accounting

Key materials
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Economists argue that a key ingredient to fiscally responsible governmental policy is the setting of an explicit target for publicly held debt, such as the 60 percent of debt-to-GDP ratio and the 3 percent of GDP deficit targets set by the Treaty on European Union

However, there is more to fiscal responsibility than setting spending limits. For every
attempt to cap spending by regulation or statute, lawmakers seem to find new and
creative accounting techniques that allow them to continue spending recklessly.

In fact, there is evidence that creative bookkeeping is at the center of many countries’
financial troubles. Take Greece, for example. As a member of the European Union (and
particularly as a member of the Eurozone), it is supposed to meet a 60-percent-of-debt-to-GDP target and 3 percent of GDP deficit target set by the European Growth and Stability Pact. However, according to The New York Times, with the help of Goldman Sachs, JP Morgan Chase, and a wide range of other banks, Greece managed to skirt the debt limits for years by using various accounting tricks.