Algeria: A three‐sector macrofiscal model for debt sustainability and growth policy analysis

Abstract

AbstractIn this paper, we present a dynamic general equilibrium (DGE) model to address the macrofiscal vulnerabilities and the effects of fiscal policy on growth and employment in Algeria. We first discuss the baseline scenario over the period 2021–2040. According to our baseline results, without fundamental changes in fiscal policies, even relatively high growth will not be sufficient to put public debt on a sustainable path. We then conduct four experiments and assess their impact on fiscal accounts, growth, and unemployment: an increase in the efficiency of public spending on infrastructure investment, a gradual reduction in the share of noninterest government spending in GDP, the same gradual reduction in spending combined with a permanent increase in the share of investment in infrastructure in total noninterest government expenditure, and a composite fiscal reform program that combines these individual policies, respectively. The results suggest that public debt sustainability can be achieved, and growth and employment can be promoted, as long as an ambitious fiscal reform program involving tax, spending, and governance reforms is implemented. Importantly, our quantitative analysis shows that, with a well‐designed fiscal program, there may be no trade‐off between fiscal consolidation and economic growth.