By Ramil Abbasov (04/28/2025)

In recent years, governments across the globe have come under growing pressure to deliver more with less: more infrastructure, more climate resilience, more public services—often with constrained revenues and mounting debt. Faced with these challenges, many turn to a fiscal sleight of hand: off-budget expenditures.

These shadow transactions don’t show up in official budget documents or debt statistics, but they are no less real. They finance major public projects, subsidize failing enterprises, and bankroll politically sensitive programs—all without the visibility or accountability that typically accompanies government spending.

But there’s a problem. The longer governments rely on off-budget tools to hide the true cost of public finance, the more they compromise what economists call fiscal sustainability—a country’s ability to maintain current policies without debt spiraling out of control. In plain terms, today’s shadow spending becomes tomorrow’s fiscal crisis.

What Are Off-Budget Expenditures, and Why Should We Care?

Off-budget expenditures are public financial commitments made outside the official, legislatively approved budget. These can include extra-budgetary funds (like social security schemes that don’t report to the Ministry of Finance), sovereign wealth funds used for special projects or guarantees on loans for state-owned enterprises. They also include so-called quasi-fiscal activities, like a government ordering utility to sell power below cost, with the central bank quietly covering the losses.

To the public and many legislators, these costs are invisible. But they are deeply consequential.

They distort fiscal reporting, erode trust in government statistics, and often lead to uncontrolled debt accumulation. And when economic downturns hit or financial markets demand clarity, these hidden liabilities surface—with devastating results.

Lessons from Around the World

Countries rich and poor have suffered the consequences of off-budget excesses.

In Argentina, decades of off-budget pension manipulation and central bank financing contributed to recurring defaults and inflationary spirals. In Greece, off-the-books borrowing arrangements helped obscure the country’s real deficit, a deception that fueled the Eurozone’s most severe debt crisis. And in China, trillions in local government borrowing through opaque “financing vehicles” have created a shadow debt problem that keeps global investors awake at night.

The Fiscal Illusion Trap

Why do governments resort to off-budget methods? One word: politics.

Politicians often want to spend without appearing to borrow. By moving expenditures off-budget, they avoid increasing the official deficit. This can help them meet fiscal targets, win elections, or appease markets—at least temporarily.

But it’s a dangerous illusion. The costs haven’t disappeared; they’ve just been hidden. Eventually, these commitments show up as contingent liabilities or unexpected debt, crowding out vital public services like education and healthcare.

As I argued in a recent article in iBusiness, fiscal sustainability isn’t just about balance sheets—it’s about building systems that serve people, equitably and efficiently, over time. Off-budget spending erodes that foundation.

Who Pays the Price?

The burden of off-budget expenditures falls hardest on the most vulnerable. When governments are forced into sudden fiscal adjustments—often to service debts they didn’t acknowledge—social spending is usually the first to go.

Cuts in health, education, and welfare programs can set back development by years. Worse, because these cuts often follow years of opaque spending, they arrive with little public understanding or trust. The result is not just economic pain, but political backlash.

In my analysis of budget cuts in welfare states, I found that such austerity, when triggered by hidden liabilities, has far more damaging effects than well-communicated, transparent fiscal reforms.

What Needs to Change

We need a reset—one that embraces fiscal honesty and rejects convenient accounting fictions. To achieve this, several urgent reforms must be implemented. First, governments must bring it all on-budget by expanding the scope of official budgets to include all spending, whether it’s managed through state-owned enterprises (SOEs), sovereign wealth funds, or externally funded climate programs. No more loopholes. Second, they must disclose fiscal risks by including clear statements in national budgets that account for contingent liabilities and potential exposures—from public-private partnership guarantees to subnational borrowing. Surprises are what destroy credibility. Third, it is critical to integrate climate and development spending. As climate finance becomes a larger part of public expenditure, governments should track and report these investments transparently. Fragmented and off-budget financing only weakens coordination and impact. Fourth, governments must strengthen oversight institutions. Independent audit offices and fiscal councils should be empowered—not just nominally established—to investigate and report on off-budget activities. Lastly, it is essential to engage citizens in the process. Participatory budgeting offers a powerful mechanism to restore public trust and ensure that fiscal decisions reflect real community needs. However, this tool only works when all spending—on- and off-budget—is fully visible and accessible.

From Shadows to Sustainability

Fiscal policy doesn’t have to be opaque. With the right reforms, governments can balance flexibility with accountability. Off-budget expenditures may never disappear completely—nor should they, in all cases. Some flexibility is essential in emergencies or for long-term investment.

But when shadow spending becomes the norm, not the exception, fiscal responsibility becomes impossible. The price is paid not in accounting terms, but in broken trust, missed opportunities, and lost decades of development.

As global shocks—from pandemics to climate crises—test the resilience of public finance, transparency is not a luxury. It is the cornerstone of sustainable governance.

It’s time we brought the full fiscal picture into the light.

Ramil Abbasov is a climate change and sustainability expert with over 14 years of experience in public finance management, climate finance, greenhouse gas emissions accounting, policy research, and economic analysis. He has worked closely with international organizations—including the United Nations Development Programme and the Asian Development Bank—to integrate climate risk assessments and mitigation strategies into financial governance frameworks.

Currently, Ramil serves as a Research Assistant at George Mason University, contributing to the NSF-funded Community-Responsive Electrified and Adaptive Transit Ecosystem (CREATE) project through quantitative data analysis and stakeholder engagement initiatives. Previously, he held key roles at the Asian Development Bank in Baku, Azerbaijan, where he excelled as both the National Green Budget Economy Expert and the National Public Finance Management Expert, driving efforts in climate budget tagging, green economy analysis, and sustainable development policy integration.

In addition to his work with multilateral institutions, Ramil is the CEO and Founder of “Spektr” Center for Research and Development, a research organization focused on advancing climate finance, energy transition, and sustainable economic policies. His earlier career includes leadership positions such as Director at ZE-Tronics CJSC and managerial roles in the banking sector with AccessBank CJSC and retail management with Third Eye Communications in the USA.