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A Guide to the Public Finance Act (2005)

Statement of financial performance (or operating statement)

The statement of financial performance reports the Government’s income (revenue and gains) and expenses.

The Government’s main source of revenue is income tax and other taxes obtained from the use of sovereign powers. Other sources of revenue are investment income and revenue from the sale of goods and services.

A significant amount of the Government’s expenses is in respect of non-exchange transactions, such as welfare benefits. The statement of financial performance provides a breakdown of the Government’s expenses by function, for example, health, education and social security and welfare.

Because there is no direct link between the resources that the Government receives and the services it provides, the overall surplus or deficit (also referred to as the operating balance) is not a measure of financial efficiency.[10]

In addition to the level of the surplus or deficit, users are often interested in the ability of the Government to continue to provide existing services and meet the demand for new services in the medium to long-term. Financial forecasts are more useful for providing this type of information than the annual financial statements. However, the annual financial statements can provide information on the cost of current services and the current infrastructure in place for the provision of services.

The statement of financial performance helps users considering the following questions:

  • Is the government operating at a sustainable level (for example, are the costs of government being met by revenue or are they being deferred to the future)?
  • How has the government allocated resources to various policy areas (for example, health, education or transport)?
  • What budgetary measures might be needed to achieve the government’s fiscal objectives?

In analysing revenue and expenses a number of factors, such as volatility, controllability and duration need to be considered as explained below.

  • Volatility: Some revenues may be more volatile than others (for example, company tax revenues are linked to changes in corporate profitability and are likely to fluctuate more than source deductions that are linked to salaries and wages).
  • Controllability: Some factors that determine the level of government expenses may be largely outside the control of the Government (for example, exchange rate movements).
  • Duration: Expenses or revenue may have a one-off or a continuing effect. For example, a change in a tax rate is likely to have a continuing effect on revenue, whilst an organisational restructuring may have a one-off effect on costs.

As a general rule, trends over a period of time provide better information than information based on a single point in time. The financial statements of the Government usually contain a five-year trend analysis for major items. The disclosure of expenses by functional classification (for example, health or education) is useful for readers seeking to analyse trends in government spending.


  • [10]A related fiscal indicator is the operating balance excluding revaluations and accounting policy changes (OBERAC). This indicator removes the impact of revaluation movements and accounting policy changes from the operating balance and is therefore less volatile than the operating surplus. However, it does not isolate aspects of changes in the operating balance (such as changes in tax revenue and unemployment benefits) that arise from cyclical factors.
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