Challenges of Public Finance Sustainability in the European Union

Abstract

Abstract The deterioration of the global fiscal sustainability emphasized the interest of academics and policy makers for this topic. Thus, in this article, the aim is to highlight the need for analysis of fiscal sustainability challenges through the evaluation path, identification of benchmark tax burden indicators, shocks definition and their transmission mechanism, trajectory analysis of the benchmark indicators under a baseline and alternative scenarios given the macroeconomic risks that may arise in terms of applied monetary and fiscal policies. The entire analysis will start from the debt evaluation by three criteria: solvency, liquidity and realistic adjustment criteria. The first one implies compliance with the intertemporal budget constraint, government's ability to pay the debt without renegotiation or default and that the tax burden indicators are designed either to stabilize or reduce both under a baseline scenario or alternative scenarios. The second one considers that there is sufficient funding and liquid assets to meet obligations when due, that the level and trajectory of tax burden indicators continuously facilitate market access, the debt roll over risk is low and the debt profile is balanced in terms of maturity, currency composition and investment base. The last one is based on realistic assumptions and projections in terms of macroeconomic adjustment in the primary balance, meaning that the adjustment is economically and politically feasible.