Nicola Benigni

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Bonus graph

and my findings contribute to solving a recently raised public debt valuation puzzle for UK historical debt, where the market value of bonds is larger than the model-implied present value of primary surpluses.

Either way, if we ignore arrears in the assessment of a country's fiscal backing, we underestimate its sustainability. My findings provide a new rationale for the existence of arrears that institutional consensus attributes primarily to bureaucratic inefficiency...

What about suppliers? from which the government borrows unilaterally through arrears? They are either compensated by surcharging the government on its public procurement contracts, or they are financially repressed. In my framework I don't need to take a stance on that.

How much more valuable? I find that arrears have a risk-adjusted present value of 13% of GDP, meaning that by using arrears, the government can increase its fiscal backing, i.e. the amount of marketable debt it can issue, by 13% of GDP.

What do I find? Outstanging arrears are on average 4% of GDP. They are used in counter-cyclical ways to finance the government in bad times. By freeing up resources from suppliers, the government insures bondholders, thus making bonds a more valuable asset.

Lack of reliable data on arrears has limited our understanding of arrears. I use an unexplored historical dataset from the UK to systematically study arrears as a financing tool and hidden liability.

They provide a discretionary financing source for governments, avoiding the need to issue bonds, raise taxes, or cut expenditure. At the same time, arrears add to total public debt, ultimately requiring repayment through additional future primary surpluses.

Domestic arrears are overdue payments by the government to its domestic suppliers. They can be quite substantial: in some OECD countries, they reach up to 9% of GDP.

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Public debt levels and interest rates have been rising, raising concerns about debt sustainability. In my JMP, I consider an overlooked component of public debt and its role in stabilising government debt: domestic arrears.