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Debt stability under entitlement spending

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  • Floriana, Cerniglia
  • Enzo, Dia
  • Andrew, Hughes Hallett

Abstract

Economists have traditionally used a simple rule that restricts primary deficits to less than a threshold given by the interest rate-growth rate differential and existing debt level to judge fiscal sustainability. This rule derives from a single period application of the government's budget constraint. It does not allow for the predictable dynamic effects of spending liabilities, such as entitlement spending. In this paper, we derive the equivalent dynamic rule for this case. It still depends on the interest-growth rate differential, but now includes a restriction on spending growth in relation to income growth. Several new results emerge. Debt remains stable; but the rate of convergence to stability varies with different parameters. And the growth in spending has to be less than a damping factor that controls convergence. This puts a limit on spending growth. To penalize the use of unpopular taxes further limits debt and the incentive to use debt finance.

Suggested Citation

  • Floriana, Cerniglia & Enzo, Dia & Andrew, Hughes Hallett, 2016. "Debt stability under entitlement spending," Working Papers 351, University of Milano-Bicocca, Department of Economics, revised 07 Oct 2016.
    • Handle: RePEc:mib:wpaper:351
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    References listed on IDEAS

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    1. Fabrizio Coricelli & Riccardo Fiorito, 2013. "Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure," Documents de travail du Centre d'Economie de la Sorbonne 13033, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    2. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
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    Cited by:

    1. Casalin, Fabrizio & Dia, Enzo & Hughes Hallett, Andrew, 2020. "Public debt dynamics with tax revenue constraints," Economic Modelling, Elsevier, vol. 90(C), pages 501-515.
    2. Floriana Cerniglia & Enzo Dia & Andrew Hughes Hallett, 2019. "Tax vs. Debt Management Under Entitlement Spending: a Multicountry Study," Open Economies Review, Springer, vol. 30(3), pages 425-443, July.

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    More about this item

    Keywords

    Sustainable public debt; primary de cit rules; scal space.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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