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Fiscal sustainability and low interest rates: what an indicator can(’t) tell

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  • Martin Werding

    (Ruhr-Universität Bochum)

Abstract

The indicator that is commonly used to assess the long-term fiscal sustainability of public finances in EU member states (“S2”) is also defined if government borrowing rates are assumed to be permanently lower than the growth rate of GDP. Under these circumstances, however, it no longer provides a reliable orientation for fiscal policy. I illustrate these findings based on simulations prepared for the Fifth Sustainability Report published by the German Federal Ministry of Finance. In addition, I discuss the interpretation of the indicator in a low-interest environment and the assumption that relevant interest rates may continue to be low if there are substantial challenges for fiscal sustainability, e.g., through demographic ageing.

Suggested Citation

  • Martin Werding, 2022. "Fiscal sustainability and low interest rates: what an indicator can(’t) tell," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(4), pages 991-1008, November.
    • Handle: RePEc:kap:empiri:v:49:y:2022:i:4:d:10.1007_s10663-021-09531-8
    DOI: 10.1007/s10663-021-09531-8
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    References listed on IDEAS

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    Cited by:

    1. Werding, Martin & Läpple, Benjamin, 2022. "Finanzrisiken für den Bund durch die demographische Entwicklung in der Sozialversicherung: Reformszenarien," FiFo Reports - FiFo-Berichte 31, University of Cologne, FiFo Institute for Public Economics.

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    More about this item

    Keywords

    Public budget; Public debt; Fiscal sustainability; Interest rates;
    All these keywords.

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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