Fiscal Sustainability - Definition, Indicators and Assessment of Czech Public Finance Sustainability
The aim of this paper is to shed some light on what fiscal sustainability actually means. In doing so, it looks in the literature for a definition of fiscal sustainability that not only is theoretically sound, but can also be used for setting fiscal targets in practice. Sustainability is defined in a rather standard way - fiscal policy is said to be sustainable if the present value of future primary surpluses equals the current level of debt. This definition enables various sustainability indicators to be constructed. A good indicator of fiscal sustainability should signal, with a sufficient lead, excessive debt accumulation. The paper introduces several sustainability indicators varying in how closely they are related to the sustainability definition (the infinite and finite horizon gaps), whether they take account of the future evolution of spending (the primary gap and the tax gap) and what target value of debt is set at the end of a finite horizon. While the indicators can be used for different time horizons - from one year to an infinite horizon, the paper is by and large focused on long-term sustainability. When combined with long-term projections the indicators gauge the resilience of public finances to population ageing. The indicators are used to assess the sustainability of Czech fiscal policy. The sustainable revenue ratio, enabling the future surge in age-related spending to be financed, is estimated at 48% of GDP in the Czech Republic. It is some 7 percentage points higher than the current revenue-to-GDP ratio. The sustainable primary balance stands at 0.4% of GDP. By observing this primary surplus, governments would stabilise the debt ratio in the long run. However, compliance with this target would require immediately raising taxes or cutting spending by almost 3.0% of GDP and containing any future spending pressures (projected at 7.3% of GDP) either by systemic reforms preventing age-related spending from rising or by annual discretionary spending cuts and tax increases.
|Date of creation:||Oct 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 00420 2 2442 1111
Fax: 00420 2 2421 8522
Web page: http://www.cnb.cz/en/research/research_intro/Email:
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hamilton, James D & Flavin, Marjorie A, 1986.
"On the Limitations of Government Borrowing: A Framework for EmpiricalTesting,"
American Economic Review,
American Economic Association, vol. 76(4), pages 808-19, September.
- James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc.
- Thai-Thanh Dang & Pablo Antolín & Howard Oxley, 2001. "Fiscal Implications of Ageing: Projections of Age-Related Spending," OECD Economics Department Working Papers 305, OECD Publishing.
- Ales Bulir, 2004. "External and Fiscal Sustainability of the Czech Economy: A Quick Look Through the IMF's Night-Vision Goggles," Research and Policy Notes 2004/04, Czech National Bank, Research Department.
- Nigel Andrew Chalk & Richard Hemming, 2000. "Assessing Fiscal Sustainability in Theory and Practice," IMF Working Papers 00/81, International Monetary Fund.
- Olivier Jean Blanchard, 1990. "Suggestions for a New Set of Fiscal Indicators," OECD Economics Department Working Papers 79, OECD Publishing.
When requesting a correction, please mention this item's handle: RePEc:cnb:wpaper:2006/3. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jan Babecky)
If references are entirely missing, you can add them using this form.