Fiscal Sustainability and Transfer Payments

Are governments pursuing a sustainable fiscal policy? The high public debts of several countries, particularly as a result of the financial crisis since 2008, have drawn this question to the attention of academics and the general public. A new study shows that institutional framework conditions play an important role in the evaluation of fiscal sustainability. In federal states like the United States of America and Germany, transfer payments influence the budget planning of the federal states and/or Länder. A state’s budget improves if it receives transfer payments, and deteriorates if it has to make such payments. If tests do not take fiscal sustainability into consideration, the conclusions drawn from them can be distorted. The fiscal policy of a state that is really operating at a loss could be seen as sustainable due to the transfer payments. That is why transfer payments must be taken into consideration when evaluating the sustainability of fiscal policy in the US states and the German Länder. The results do not suggest that the American states and German Länder have pursued a sustainable fiscal policy if the discretionary fiscal policy without transfer payments is considered. States with rates high debt ratios received more transfer payments, which thus implicitly subsidised their debts.