Abstract
Fiscal vulnerability, like a contagion, poses a threat to financial sector stability, which can lead towards sovereign default. This study aimed to assess fiscal vulnerability to crisis by investigating the Australian economy’s gross public debt, net public debt, and net financial liabilities. We used a threshold regression model and compared results with the baseline deficit–debt framework of analysis. The results of the base model suggested that the economy is fiscally sustainable, and that the primary surplus remains unaffected by increasing levels of public debt. In contrast, the threshold regression model indicated that the increasing level of debt has eroded primary surplus below the threshold level of 30.89% of public debt to GDP. These results need further investigation. Therefore, we modified our basic threshold model to capture budget deficit and surplus as a threshold in response to changes in public debt. The results from the sequential threshold regression model using the debt to GDP ratio and primary budget surplus identifying the periods of 1991, 1992, 2008, 2009, 2011 and 2019 as times of likely vulnerability to fiscal crisis. The overall results confirmed that the primary surplus remained sustainable over the estimated threshold level of public debt in all other sample periods and these findings persisted across alternative measures of public debt.
Highlights
Fiscal vulnerability, like a contagion, poses a threat to financial sector stability, which can lead towards sovereign default
Ratio and primary budget surplus along with other alternative measures, at which the economy is likely to be vulnerable to fiscal crisis in the case of Australia
The Australian economy is likely to be vulnerable to fiscal crisis at a threshold level of debt to GDP or at a threshold level of primary budget surplus in which the primary surplus decreases with an increasing debt to GDP ratio
Summary
Like a contagion, poses a threat to financial sector stability, which can lead towards sovereign default. The threshold regression model indicated that the increasing level of debt has eroded primary surplus below the threshold level of 30.89% of public debt to GDP The results from the sequential threshold regression model using the debt to GDP ratio and primary budget surplus identifying the periods of 1991, 1992, 2008, 2009, 2011 and 2019 as times of likely vulnerability to fiscal crisis. The GFC in 2007–2009, the bushfires, and the COVID-19 pandemic in 2020 have had a substantial impact on the fiscal position of Australia, causing the budget to remain in deficit These impacts to the budget were further enhanced by a dwindling economy that slipped into recession in 2019–2020. This study (a) provides early warning signals to policymakers about rollover obstacles, (b) allows policymakers to adjust policies to maintain sustainable growth, and (c) offers information on episodes of fiscal deficits which may lead to extreme fiscal stress events
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