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Fiscal Sustainability - Definition, Indicators and Assessment of Czech Public Finance Sustainability

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  • Ales Krejdl

Abstract

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.

Suggested Citation

  • Ales Krejdl, 2006. "Fiscal Sustainability - Definition, Indicators and Assessment of Czech Public Finance Sustainability," Working Papers 2006/3, Czech National Bank, Research Department.
  • Handle: RePEc:cnb:wpaper:2006/3
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    File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2006_03.pdf
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    References listed on IDEAS

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    1. 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 808-819, September.
    2. Nigel A Chalk & Richard Hemming, 2000. "Assessing Fiscal Sustainability in Theory and Practice," IMF Working Papers 00/81, International Monetary Fund.
    3. 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.
    4. 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.
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    Cited by:

    1. Abderrahim Chibi & Sidi Mohamed Chekouri & Mohamed Benbouziane, 2015. "Assessing Fiscal Sustainability in Algeria: a Nonlinear Approach," Working Papers 962, Economic Research Forum, revised Oct 2015.
    2. Sergey Vlasov, 2011. "Russian Fiscal Framework Past, Present and Future.Do we Need a Change?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(64), pages 35-81, October -.

    More about this item

    Keywords

    . Fiscal sustainability; population ageing; primary gap; sustainability indicators; tax gap.;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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