From Stocks to Flows: Debt Service and Fiscal Sustainability

We revisit fiscal sustainability through the lens of the government’s budget constraint. What constrains fiscal policy is not the stock of outstanding liabilities per se, but the fiscal cost of servicing debt. Using two centuries of U.S. fiscal data (1800–2023) and a long-run panel of advanced economies, we show that primary surpluses are systematically more closely associated with debt-service burdens, while debt ratios lose explanatory power when debt service is taken into account. Fiscal responses intensify when financing conditions deteriorate, specifically when the interest-growth differential is positive. We rationalize these findings using a simple flow-based framework in which debt stabilization depends on the responsiveness of fiscal surpluses to financing pressures. The results suggest that fiscal sustainability depends less on debt thresholds than on financing regimes and governments’ ability to absorb debt-service burdens.