How to evaluate the long-term sustainability of public finances?

The sustainability of public finances is a complex concept that needs to be analyzed through different angles. The Council for Budget Responsibility has decided to analyze long-term trends from four spects: (1) solvency, (2) intergenerational equity (fairness), (3) growth, and (4) stability. In its reports, the CBR will present its views on both stock values and flow values. The ‘net worth’ features prominently among stock values in that it captures both the past and future effects. At the same time, it serves as a benchmark for public finance transparency. The summary long-term sustainability indicator will quantify the permanent changes in taxes or expenditures that are necessary to keep the public debt in the next 50 years below the upper limit set by the law. The indicator will be quantified based on the baseline scenario which simulates long-term trends without changes in the existing policies. The other useful analyses include, in particular, generational accounts, models of the links between fiscal and macroeconomic performance, and sensitivity analyses. A comprehensive picture of the condition of public finances can also be derived from various models of convergence of the Slovak economy, the cost-of-delay indicators, or more detailed analyses of contingent liabilities. CBR’s long-term sustainability reports should bring useful information to both the expert community and public at large, and become a default basis for decisions on areas such as the budget, pension system and healthcare.