Question

Governments often receive interest on the temporary investment of capital debt proceeds. Some believe that governments are inconsistent in the way they report interest and other earnings on investments compared to interest on their debt. Explain this comment. Do you believe in reporting this incosistent?

Answer 1

Capital debt are usually borrowed to carry out any capital intensive/infrastructure/developmental work. Such work take a long time to start and longer to finish. Hence the funds borrowed are lying unutilized during this period with the government. The interest cost on such borrowings is still payable. Hence in order to reduce the interest cost burden the governments invest such unutilized funds on temporary basis.

Whereas other investments the main reason of which are getting return on investments, the intention is different as compared to investing capital debt temporarily. Other investments are for generating higher investment value over the period of time and for gaining regular income.

Hence other investment income are shown as Income for the government. Whereas income on temporary capital debt investments are either reduced from the borrowing cost or shown as income from temporary investments. Since the purpose of both are different, it would not be vise to say that the reporting is inconsistent.