Government contingent liabilities: Hidden debt and fiscal risk

Abstract

As ideas of economic management have developed, governments around the globe have taken an increasingly large role in their domestic economies. Leaders have faced increasing pressure to simultaneously decrease annual deficits, offer more services, and maintain economic growth. As a result, many leaders have intentionally and unintentionally turned to contingent liabilities. Contingent liabilities, often unrecorded or recorded insufficiently on the balance sheet, allow the offering of services or subsidies through the creation of off-balance sheet obligations – effectively allowing a governing party to provide more to citizens without having to deal with the political consequences of deficits or a growing national debt. As the topic of contingent liabilities has become an area of focus for scholars, it has become clear that while contingent liabilities do not cause fiscal crises, their propensity to occur at the same time create a more fragile fiscal state than traditional debt indicators such as gross debt show. This literature review compiles and represents the major sources within the field showing the causes, impacts, and solutions for government contingent liabilities.