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Measuring fiscal sustainability: A novel multidimensional index from a developed country perspective

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  • Susantha Dissanayake
  • Priyantha Mudalige
  • Nam Hoang
  • Shawn Leu

Abstract

Persistent fiscal risks in advanced economies highlight the need for comprehensive tools to assess fiscal sustainability. We develop a multidimensional Fiscal Sustainability Index (FSI) comprising nine key fiscal and macroeconomic indicators, including government expenditure, external debt, government revenue, and real GDP growth rate, to evaluate fiscal sustainability across 37 OECD countries from 1995 to 2023. Using principal components analysis, the FSI captures the complex, dynamic interactions among fiscal flows, debt accumulation, and growth performance, offering a more comprehensive and timely assessment than conventional single-ratio indicators. Our results reveal substantial fiscal deterioration during the Global Financial Crisis and even greater vulnerabilities during the COVID-19 pandemic, especially in economies with high external debt. The FSI's multidimensional framework also captures feedback mechanisms and evolving fiscal pressures, enabling policymakers to monitor fiscal resilience effectively and formulate responsive macroeconomic policies amid global shocks. This study advances fiscal surveillance by highlighting the multifaceted nature of fiscal sustainability and providing insights to support adaptive fiscal strategies in advanced economies.

Suggested Citation

  • Susantha Dissanayake & Priyantha Mudalige & Nam Hoang & Shawn Leu, 2026. "Measuring fiscal sustainability: A novel multidimensional index from a developed country perspective," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 26(3).
    • Handle: RePEc:tcb:cebare:v:26:y:2026:i:3:article:100270
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