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The Sustainability of Fiscal Policy: New Answers to An Old Question
Abstract
The early 1980s were a time of large budget deficits and increasing ratios of government debt to GNP for many of the OECD countries (Table 1), prompting concerns that the fiscal policies which led to such outcomes were not only unwise, but also unsustainable. Assessing wisdom is not easy, however, and surely not an exercise which can or should be reduced to the construction and examination of a few indicators. Assessing sustainability, on the other hand, is a much less ambitious task and one for which indicators are well suited. The purpose of this paper is to derive, construct and examine the behaviour of such indicators for the recent past and for the present.
... It can also accurately predict future debt levels and better plan debt-servicing activities. Meanwhile, it provides confidence to creditors and investors, reduces borrowing costs, and maintains a stable and Sustainability 2024, 16, 10512 4 of 24 healthy fiscal situation. Therefore, time series stationarity is an important indicator of the sustainability of government debt. ...
... The second method is the composite indicator approach, which uses various indicators to approximate debt sustainability. This includes Buiter's [7] "fundamental gap" indicator, Blanchard's [16] "taxation gap" indicator, and Giammarioli's [17] "financing gap" indicator. These indicators consider the interactions of different factors within the economy. ...
... (1) By conducting a more comprehensive and in-depth analysis of the impact of the BRI on government debt sustainability, this research enriches the existing literature Sustainability 2024, 16, 10512 ...
The Belt and Road Initiative (BRI) has opened new financing channels, promoting sustainable debt management and high-quality economic growth in China and BRI-participating countries. This paper, using sample data from 64 BRI-participating countries and 40 non-BRI countries from 2002–2021, employs the difference-in-differences (DiD) method to examine BRI impacts on government debt sustainability. Empirical results passing robustness tests reveal heterogeneous effects. Findings indicate: first, the BRI enhances government debt sustainability in participating countries; second, government spending, foreign direct investment, and international trade moderate economic development; third, the BRI exhibits heterogeneity by income, debt levels, and growth rates. The study demonstrates the BRI alleviates “debt anxiety” and injects new momentum into global economic governance system improvement and innovation, ensuring stable macroeconomic operation and high-quality economic growth.
... According to Perotti [15] and Blanchard et al. [16], one must also consider the initial State of public finances. For a low initial tax rate, the disincentive effect of taxation on economic activity will be weak (an expected tax increase will discourage economic activity less), leading to a Keynesian regime. ...
... Similarly, Sutherland [14], supports Perotti [15] and Blanchard's [16] reasoning by considering the initial level of public debt. Suppose the anticipated public debt is lower than a specific threshold value, known as the psychological threshold of public debt. ...
This study employs a nonlinear modelling approach to examine the relationship between fiscal policy and economic growth in Morocco from 1960 to 2022. Traditional linear models often assume a linear relationship between fiscal variables and economic growth, disregarding potential non-linearities. We use a Discrete Threshold Regression (TR) model, which describes a simple form of nonlinear regression featuring piecewise linear specifications and regime switching that occurs when an observed variable crosses unknown thresholds. Threshold modelling fixes these thresholds at 7.8% for the fiscal deficit and 70.9% for public debt. Below these thresholds, fiscal austerity in Morocco is recessionary (Keynesian regime). Above them, austerity becomes expansionary (classical regime). Our main policy implication is that when the debt-to-GDP ratio reaches 70.9% and /or the fiscal deficit hits 7.8%, rebuilding fiscal buffers should be a priority for the economy. Fiscal austerity will not only help restore sustainable debt levels but also stimulate economic growth. On the other hand, in countries where debt is under control, governments should not hesitate to implement fiscal stimulus measures. In the case of Morocco, it was found that when the public debt rate is below 70.9%, a 1 percentage point decrease in taxes is associated with a 0.1 percentage point increase in economic growth, although this result is not statistically significant. On the expenditure side, it was observed that a 1 percentage point increase in public spending is correlated with a 0.4 percentage point rise in economic growth. This study strengthens and complements existing literature that examines the relationship between fiscal policy and growth. Its scientific novelty lies in the use of a nonlinear approach.
... La sostenibilidad fiscal se define como la solvencia y liquidez suficientes del gobierno para gestionar la deuda pública sin afectar significativamente el déficit fiscal, subrayando que la capacidad del gobierno para cumplir con sus obligaciones financieras es clave para la estabilidad (Mendoza, 2018;Escolano, 2010). Por su parte, se refleja el balance primario necesario para estabilizar la relación entre deuda pública y PIB, ya que debe cubrir los intereses efectivos de la deuda, y mantener la deuda como proporción del PIB en un nivel objetivo (Blanchard et al., 1991;Horne, 1991). Además, se alcanza cuando una política fiscal puede implementarse sin necesidad de intervenciones tributarias frecuentes (Krejdl, 2006). ...
... Además, se alcanza cuando una política fiscal puede implementarse sin necesidad de intervenciones tributarias frecuentes (Krejdl, 2006). También, mediante la reducción tanto del déficit fiscal como de la deuda pública, y el uso de reglas fiscales como un mecanismo para asegurar este objetivo (Schmidt-Hebbel, 2022;Blanchard et al.,1991). Incluso, implica que los ingresos fiscales sean suficientes para cubrir el costo de la deuda pública emitida, asegurando la estabilidad financiera a largo plazo (Afonso y Rault, 2010). ...
Este estudio examina el perjuicio económico extrapolado y su relación con el gasto no financiero total, el déficit fiscal y la deuda pública en el Perú entre 2014-2019 y 2021-2023. Se explora la relación conceptual y empírica entre la corrupción pública y la sostenibilidad fiscal. Posteriormente, se detalla el cálculo del perjuicio económico extrapolado en el Gobierno Nacional que permite medir las pérdidas económicas causadas por la corrupción, proporcionando una cifra aproximada del daño en términos de patrimonio público afectado. Seguidamente, se realizará el análisis de la relación del gasto no financiero total, el déficit fiscal y la deuda pública con el perjuicio económico extrapolado en Perú durante 2014-2019 y 2021-2023, que se desglosa en tres aspectos principales: i) la relación entre el gasto no financiero total del gobierno y el perjuicio económico extrapolado durante dicho periodo; ii) la relación entre el resultado económico de las operaciones del sector público no financiero y el perjuicio económico extrapolado; iii) la relación del saldo de la deuda del sector público no financiero en relación con el perjuicio económico extrapolado. Estos indicios resaltan la complejidad inherente a la dinámica fiscal, exigiendo la inclusión de un conjunto más amplio de variables y una mayor precisión en los datos para capturar plenamente los efectos multifacéticos de la corrupción pública en la sostenibilidad fiscal. Ello se alinea con la evidencia empírica que sugiere que ha influido, pero se subraya el imperativo de enfoques analíticos más rigurosos y matizados para dilucidar mejor la interacción.
... The high levels of inflation, unemployment, and budget deficits faced by many developing economies have proposed a dilemma for policymakers, in which they need to develop more sustainable fiscal and monetary policies to treat such macroeconomic imbalances and allow for overall economic well-being (Saleh et al., 2023). Fiscal policy sustainability, as defined by Blanchard et al. (1991), is a policy implementation that considers the debt-to-GDP ratio conversion to its initial level. Essentially, it ensures the sustainability of budget deficits and public debt (Saleh et al. 2023). ...
Fiscal and monetary independence have long been debated since their early establishment in classic theory and empirical studies. Therefore, studying the policy coordination framework and policy dominance in inflation control in the Egyptian economy is vital to mitigating these structural problems and controlling inflation in Egypt. Sustainability in this context refers to both economic sustainability, ensuring policies can be maintained over the long term, and the United Nations Sustainable Development Goals aligning with broader goals such as SDG 8 for decent work and economic growth. Since 2014, Egypt has undertaken extensive reform policies, including the devaluation of the Egyptian pound, austerity measures to reduce the budget deficit, and initiatives to boost investment. Recently, implementing IMF economic conditions has posed significant challenges for Egyptian policymakers, notably causing a sharp increase in inflation due to currency devaluation. This situation makes studying the Egyptian economy particularly relevant and insightful. The methodology applied has not been implemented in the Egyptian economy before. We apply a two-step analysis to investigate the coordination framework between both policies and the impact of each policy on macroeconomic stabilising variables. First, the extent of coordination between monetary and fiscal policies is examined using Arby and Hanif's (2010) methodology, which has been shown to provide an effective quantification of policy coordination. Second, a Vector Autoregressive Error Correction Model is applied to detect the dynamic impact of these policies on macroeconomic stability. The findings of this study indicate that policy coordination among Egyptian authorities is relatively weak. This finding highlights that exchange rates significantly influence inflation, implying that inflation is driven primarily by monetary factors. Consequently, monetary policy adjustments are necessary to effectively manage inflation. This study presents several policy implications to enhance the degree of coordination between Egypt's monetary and fiscal policy authorities in controlling inflation and its spillover effects on the Egyptian economy.
... Authors Jensen and Søren opined that, for intergenerational equity to exist, in periods when there is a significant labour force governments must focus on reducing the government debt so that, in times when the ageing population requires financial support, there is not a large burden on workers contributing to the social insurance fund. The two authors carry out an analysis regarding the sustainability of public finances and the possibilities of adjusting the tax rate, starting from the study of Blanchard, Chouraqui, Hagemann and Sartor (1990), in which the current tax rate is compared with the permanent one (calculated in such a way as to ensure the sustainability of public finances, the government debt to tend to 0, or at least at the time of projection to be lower than the current one). Under normal circumstances, a current tax rate that exceeds the permanent tax rate allows tax reduction, and vice versa. ...
... where the variables +1 and +1 represent the real interest rate and the growth rate, respectively. To complete the theoretical framework presented by (Blanchard, Chouraqui, Hagemann, & Sartor, 1991) and other complex sustainability frameworks, Bohn introduced a new approach to assess the sustainability of fiscal policy. This approach involves analyzing the relationship between the primary balance and the debt level, with the option to incorporate additional control variables. ...
This study estimated the fiscal reaction function to evaluate the sustainability of fiscal policy in Algeria from 1990 Q1 to 2022 using a nonlinear ARDL model. The results indicate that high debt levels adversely affect the budget balance during positive shocks, highlighting the need for effective debt management. The negative impact of the spending gap during downturns reflects Algeria's reliance on government spending and the drawbacks of pro-cyclical fiscal policies. The output gap's consistent positive effect on the budget balance suggests effective fiscal management. Additionally, oil price shocks, trade openness, and demographic changes all play significant roles in influencing the budget balance. Overall, the study reveals that insufficient responses to primary budget balance shocks weaken fiscal sustainability, emphasizing the need for improved debt management, counter-cyclical policies, economic diversification, and strategic fiscal adjustments to enhance financial stability in Algeria.
This article deals with the issue of sustainable development concerning the current legal regulation of public finances in the Czech Republic. The Act on Budgetary Responsibility Rules imposes an obligation on the state and territorial self-governing units to ensure healthy and sustainable public finances. The aim of this article is to evaluate, through the analysis, how this "concern" for healthy and sustainable public finances is implemented in practice, whether these requests are genuinely being achieved, and if not, whether public authorities have effective enforcement tools to ensure compliance. Key requirements stem from the United Nations Sustainable Development Goals (SDGs), which provide essential guidance for formulating public policies and their subsequent evaluation. The sustainable development of public finances is significant not only from a theoretical perspective but also in practice, requiring a systematic approach to its resolution.
In this note, we study the relationship between tax evasion and economic growth in a model where public expenditure allows to improve private capital productivity, and it is financed by both taxes and public debt. Here, we define debt to be sustainable if the debt/GDP ratio resulting from agents optimization converges toward a finite equilibrium that is endogenous to the model. We show that: (i) the level of public expenditure which maximizes growth does not depend on audit parameters, (ii) evasion reduces the range of parameters for which the debt/GDP ratio is sustainable, and (iii) the debt/GDP ratio is sustainable if the total factor productivity is sufficiently high.
This paper discusses the prospects for the medium term fiscal adjustment in Brazil, based on the literature about the sustainability of fiscal policy. It shows that, from 2002 onwards, when the government will no more colect the windfall revenues from the CPMF and the concessions of public services, the primary surplus could fall significantly if compared with the surplus expected for the period 1999/2001. Exercises involving the dynamics of the public spending, based on the building of medium term scenarios for the public finances, motivate the proposal of reducing gradually the windfall revenues, instead of eliminating them abruptly in June 2002.
Objetivo: El objetivo de este estudio es investigar que una adecuada gestión de la deuda pública es esencial para el desarrollo económico sostenible de México, con el objetivo de examinar la relación entre la deuda pública y el crecimiento económico del país durante el período 2000-2022. Marco Teórico: En la presente investigación se abordan los conceptos fundamentales, comenzando con la deuda pública y su gestión; seguido de la importancia de la política fiscal; y, finalmente, se explora la sostenibilidad fiscal. Método: Se realizó una investigación cuantifica, descriptiva y correlacional, se emplearon datos secundarios de un periodo de 23 años, utilizando el indicador denominado la sustentabilidad de la deuda pública, con los indicadores del crecimiento económico siendo: la inflación, el tipo de cambio y los ingresos fiscales. Resultados: La información fue recopilada, procesada e interpreta por el SPSS versión 27, teniendo como principales resultados una relación relevante y negativa entre la deuda pública y el crecimiento económico de México, lo que sugiere que un incremento en la deuda pública puede tener un impacto negativo en el desarrollo económico sostenible del país, además de abordar la sustentabilidad de la deuda pública para garantizar un crecimiento económico sostenido y una estabilidad fiscal a largo plazo. Implicaciones de la investigación: los resultados obtenidos son relevantes para la formulación de políticas fiscales y económicas. Dentro de los hallazgos se suguiere un aumento en la deuda puede obstucalizar el desarrollo sostenible de un país, de ahí la importancia de una gesión rigurosa de la deuda públca desatacando la sostebibilidad. Originalidad/valor: Este estudio aporta un marco analítico útil para los responsables de la política fiscal, se evidencia indicadores claves para la estabilidad económica en México.
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