Long-term Fiscal Sustainability Research Articles

Fiscal regimes and debt sustainability in Colombia

ABSTRACT This paper evaluates Colombia’s debt sustainability for the period 1980–2021, using a nonlinear fiscal reaction function approach. We employ a Markov-Switching model with annual data to identify sustainable and unsustainable fiscal regimes. According to this model, we identified an unsustainable fiscal regime during three periods with an average duration of six years − 1980–1985, 1993–1999, and 2015–2021 – while the other periods are identified as a sustainable regime. Although we find evidence of asymmetric behaviour in fiscal responses and the presence of pro-cyclical fiscal policy, Colombia’s long-term fiscal sustainability is verified based on a globally-based fiscal sustainability test. In this context, the government reacts appropriately to increases in debt only in the sustainable regime, but the fiscal response is sufficiently robust to stabilise public debt throughout the entire period. Finally, we also highlight concerns regarding the current state of the global economy, particularly due to an inflationary trend and escalating interest rates, which can compromise long-term fiscal sustainability.

Efficacy of Fiscal Policy in Stimulating Economic Growth During Recession in China

Fiscal policy involves decisions related to government expenditures on public goods and services, as well as the collection of revenue through taxes and other sources. The government can use fiscal policies to adjust its spending and taxation levels to stimulate or restrain economic activity, influence consumer and business behavior, and achieve desired macroeconomic outcomes. A recession is characterized by a contraction in output, income, employment, and trade, usually accompanied by a general decline in business activity and a decline in consumer spending. During recessions, when economic activity declines, policymakers often turn to fiscal policy as a tool to boost aggregate demand, create jobs, and promote recovery. The study noted that China has experienced various economic downturns and has implemented fiscal policies to address them. Like during the global financial crisis in 2008-2009, China implemented a massive fiscal stimulus package to counter the economic downturn. Structural reforms, such as improving market competition, reducing administrative burdens, and enhancing the business environment, can amplify the impact of fiscal policy measures. Combining fiscal policy with structural reforms had a more significant effect on stimulating economic growth in China. In conclusion, timely and targeted fiscal interventions can have a positive impact on economic growth during recessions. Large-scale infrastructure projects, when implemented efficiently, have the potential to boost employment, drive domestic demand, and contribute to long-term economic development. The study recommended that policymakers should carefully identify and target sectors with high multiplier effects, such as infrastructure, innovation, and technology, to maximize the impact on economic growth. To maintain long-term fiscal sustainability, China should carefully manage public debt levels and ensure responsible fiscal practices. Continuous evaluation and monitoring of fiscal policy measures are essential to assess their effectiveness and make necessary adjustments. Keywords: Fiscal Policy, Economic Growth, Recession, China

Does the child support grant incentivise childbirth in South Africa?

This paper considers the perverse incentive that can be created for poor households that are benefitting from the South African Child Support Grant (CSG). We acknowledge the fact that the CSG has been successful in improving child outcomes. However, if caregivers see the CSG as a livelihood strategy and respond with multiple births, this will jeopardise the long-term fiscal sustainability of the grant. Such an incentive may also perpetuate poverty and inequality , which will defeat the very purpose the CSG is meant to achieve. To examine if the Child Support Grant incentivise childbirth in South Africa, we estimate the relationship between CSG receipt and birth attempts over the last decade in the National Income Dynamic Study (NIDS) sample. In our analysis we make use of a number of econometric approaches including the instrumental variable estimator with possession of the South African identity card as an instrumental variable to control for selection. We argue that while possession of the identity card is a necessary condition for CSG, this variable is not driven by the outcome of child births and cannot be influenced by individual mothers because possession of identity card depends on government administrative rules and bureaucracy. Our result shows that those who benefit from the CSG have made more birth attempts within the last decade compared to non-beneficiaries. We find that this result is robust to the choice of econometric technique. We argue that there is a need to consider structuring welfare grants in a way that will incentivise behaviour that will align with the developmental goals of the nation. An unconditional, but targeted basic income grant, for example, is likely to offer fewer perverse incentives.

Fiscal sustainability and low interest rates: what an indicator can(’t) tell

The indicator that is commonly used to assess the long-term fiscal sustainability of public finances in EU member states (“S2”) is also defined if government borrowing rates are assumed to be permanently lower than the growth rate of GDP. Under these circumstances, however, it no longer provides a reliable orientation for fiscal policy. I illustrate these findings based on simulations prepared for the Fifth Sustainability Report published by the German Federal Ministry of Finance. In addition, I discuss the interpretation of the indicator in a low-interest environment and the assumption that relevant interest rates may continue to be low if there are substantial challenges for fiscal sustainability, e.g., through demographic ageing.

Formation of Long-Term Fiscal Sustainability of Kazakhstan Using the Rule Structural Budget Balance

The purpose of the study is to substantiate the potential of using the results of modeling potential GDP and estimating the output gap to comply with fiscal rules that are adequate for the corresponding economic cycle of the economy of Kazakhstan. The methods of economic, statistical, graphical, system, functional analysis, economic and mathematical modeling are applied. To achieve this goal, the analysis of Kazakhstan’s fiscal stability was carried out based on the assessment of Kazakhstan’s potential GDP and the calculation of output gaps, which were carried out based on the dynamic series method of the reported real GDP in 2005 prices for 1991-2019 using the Hodrick-Prescott filter (CP) using the EViews 10 econometric package. The current mechanism for using the output gap indicator in Kazakhstan’s fiscal policy does not have sufficient flexibility. For a timely response of the budget system to changes in the economic situation in the country or abroad, considering the output gap, it is important to introduce an automatic adjustment system that can eliminate contradictions and inconsistencies when making macroeconomic policy decisions by the main regulator and the government of the country. To do this, there is a need to revise the existing fiscal policy based on building a system of new budget rules on countercyclical principles. The proposed alternative fiscal model with the introduction of the rule on the structural balance of the budget is aimed at ensuring long-term fiscal stability, which does not allow for a pro-cyclical policy.

Fiscal Sustainability in Poland: How Did the Public Policy Shift of 2016–2019 Impact the Country’s Long-Term Sustainability?

In 2016–2019 Poland experienced a major social and fiscal policy shift: new government decreased the statutory retirement age and launched several new social programs, including the sweeping Family 500+ program under which social expenditure on family and children support increased suddenly from 1.5% to nearly 3% of GDP. Moreover, VAT gap reduction policies have been implemented swiftly. The new policy move became highly controversial. Many economists argued that overall it would lead to a significant deterioration of long-term fiscal sustainability. The government argued in turn that the new program was well financed by a complementary policy of VAT gap reduction and saw no risk to country’s fiscal sustainability. This paper provides one of the first evidence of the adverse effect of the policy shift on long-term fiscal sustainability. The analysis reveals that fiscal sustainability parameters have deteriorated significantly after 2016. Overall, the estimations presented in the paper show that in the period of 2016–2019 fiscal sustainability parameters may have been the lowest since Poland joined the EU in 2004. While these results should be treated with caution as they draw on very recent time series, the deterioration of Poland’s fiscal sustainability raises a pertinent policy question related to country’s capacity to respond to the COVID-19 pandemic, in particular in terms of the ability to use standard and non-standard fiscal policy instruments and monetary policy tools in response to the shock.

Fiscal Sustainability and Low Interest Rates: A Note

In this paper, I demonstrate that an indicator which is commonly used to assess the long-term fiscal sustainability of public finances in EU member states (“S2”) is also defined if government borrowing rates are assumed to be permanently lower than the growth rate of GDP. I illustrate this finding based on simulations prepared for the Fifth Sustainability Report published by the German Federal Ministry of Finance. In addition, I discuss the interpretation of the indicator in a low-interest environment and the assumption that relevant interest rates continue to be low if there are substantial challenges for fiscal sustainability, e.g., through demographic ageing.

Fiscal regimes and fiscal sustainability in Sri Lanka

ABSTRACT This paper employs the regime-switching model-based fiscal sustainability test which relaxes the linear fiscal reaction function approach. There is evidence of a regime-switching fiscal rule in Sri Lanka for the period 1961–2017. Non-sustainable fiscal regime is identified only in two periods – 1978-1983 and 1986-1990 – while the other periods are defined by sustainable regimes. By considering the regime-specific feedback coefficients of the fiscal policy rule and the average durations of fiscal regimes, we find that Sri Lanka’s fiscal policy satisfies the No-Ponzi game condition. Nevertheless, the country’s long-term fiscal sustainability is in question given that the stricter debt-stabilizing condition is violated. Our results pose concerns for the credibility of adopting an inflation targeting framework in the absence of long-term fiscal sustainability.

Ageing population, physical activity, and long-term fiscal sustainability: Evidence from Poland

Our study estimates potential fiscal savings from increased physical activity among older people. This is the first study directly assessing the possible impact of higher physical activity on long-term fiscal sustainability. The study focuses on Poland, where ageing costs are mostly associated with an increase in public spending on healthcare and long-term care. Our results suggest that physical activity has the potential to significantly decrease healthcare and long-term care expenditures. Converting these results into long-term fiscal sustainability, we calculate the S2 indicator, used by the European Commission for the assessment of fiscal sustainability in the long horizon. The long-term component of the indicator, related to ageing costs, is lower by almost 0.7 in comparison with the baseline case, 0.5 of which can be attributed to the reduction in long-term care and 0.2 to the reduction in healthcare. Our results confirm that increased physical activity among older people may lead to a reduction in expenditures related to population ageing and may significantly improve long-term fiscal sustainability.

Federal Budget for 2021-2023: Development Targets Prevail Over Fiscal Balance

The draft of the federal budget for the coming three years has clear features of the budget for development: it is aimed both at ongoing financing of anti-crisis measures and at the implementation of long-term national projects. Proactive fiscal policy amidst the decrease in tax and non-tax revenues forces implementation of fiscal consolidation measures coupled with slightly raising tax burden on certain sectors of the economy and the wealthy as well improving the “unprotected” expenditure items. It will not be enough to ensure fiscal balance with only these measures and the budget will be in deficit. The government plans to cover the budget gap through internal borrowings. As a result, debt servicing will go up 2-fold in nominal terms. This fact in itself is not critical for maintaining long-term fiscal sustainability, however as long as low oil prices and low economic rates persist possibilities of the state in the implementation of active fiscal policy will be falling.

The financial evolution of endovascular aneurysm repair delivery in contemporary practice

ObjectiveThe fiscal impact of endovascular repair (EVR) of aortic aneurysms and the requisite device costs have previously highlighted the tenuous long-term financial sustainability among Medicare beneficiaries. The Centers for Medicare & Medicaid Services have since reclassified EVR remuneration paradigms with new Medicare Severity Diagnosis-Related Groups (MS-DRGs) intended to better address the procedure's cost profile. The impact of this change remains unknown. The purpose of this analysis was to compare EVR-specific costs and revenue among Medicare beneficiaries both before and after this change. MethodsAll infrarenal EVRs performed in fiscal years (FYs) 2014 and 2015, before the MS-DRG change, and those performed in FYs 2017 and 2018, after the MS-DRG change, were identified using the DRG codes 238 (n = 108) and 269 (n = 84), respectively. We then identified those who were treated according to the instructions for use guidelines with a single manufacturer's device and billed to Medicare (n = 23 in FY14-15; n = 22 in FY17-18). From these cohorts, we determined total procedure technical costs, technical revenue, and net technical margin in conjunction with the hospital finance department. Results were then compared between these two groups. ResultsThe two cohorts demonstrated similar demographic profiles (FY14-15 vs FY17-18 cohort: age, 78 years vs 74 years; median length of stay, 1.0 day vs 1.0 day). Mean total technical costs were slightly higher in the FY17-18 group ($24,511 in FY14-15 vs $26,445 in FY17-18). Graft implants continued to account for a significant portion of the total cost, with the device cost accounting for 56% of the total procedure costs in both cohorts. Net revenue was greater in the FY17-18 group by $5800 ($30,698 in FY14-15 vs $36,498 in FY17-18), resulting in an increased overall margin in the FY17-18 group compared with the FY14-15 group ($6188 in FY14-15 vs $10,053 in FY17-18). ConclusionsDevice costs remain the single greatest cost driver associated with EVR delivery. DRG reclassification of EVR to address total procedure and implant costs appears to better address the requisite associated procedure costs and may thereby better support long-term fiscal sustainability of this procedure for hospitals and health systems alike.

Can Fiscal Paths Be Sustainable? Evidence from Poland

ABSTRACT This article investigates the degree of long-term fiscal sustainability in Poland through two hypotheses: (I) an inability to generate primary surpluses and a significant grow of public debt volumes have hindered past attainment of fiscal sustainability and (II) the recurring problems with generating primary surpluses will block future fiscal sustainability. The research period covers yearly observations between 1999–2017, as well as forecasts for 2018–2028, which include estimations for different possible fiscal paths in Poland. The analysis are based on two different methods, both deriving from the idea of intertemporal budget constraint: primary gap indicator and Ponzi scheme estimations.

Decision Time: The Alberta Shadow Budget 2019

In its upcoming budget, Alberta’s government has a once-in-a-generation opportunity to correct the province’s fiscal course. This Shadow Budget demonstrates how Alberta could return to budget balance by 2022-23 and plot a sustainable path for balanced budgets over the long-term horizon. The Shadow Budget illustrates that, by careful spending restraint and restructuring of its revenues, Alberta could move to saving resource revenues and increasing investment income for future generations. This vision contrasts with a status quo where budgetary headwinds from an aging population would drag Alberta back into mounting deficits – along with a downward spiral of debt service costs – in the coming decades. But long-term fiscal sustainability will require near-term measures to restore Alberta’s budget balance and then sustain surpluses. Building on the recent MacKinnon Report, this Shadow Budget shows that a four-year freeze is advisable to bring Alberta’s program spending in line with per capita levels in other provinces. This report goes further to outline a set of reductions in inflation-adjusted per capita spending across program areas to achieve this top-line spending freeze. This Shadow Budget recommends specific reductions in inflation-adjusted spending in health and education through a revamp in funding for hospitals, wages for nurses, fee-for-service rates for physicians, administration costs in education, salaries for teachers, increased class sizes, and per student funding for universities and colleges. Significant restraint for inflation-adjusted spending will also be required for social services and spending by government departments – particularly through grants and external procurement. While a freeze might be achieved in other ways, this Shadow Budget provides specific targets for spending restraint based on nationwide benchmarking, observing that Alberta out-spends counterpart provinces without demonstrably better service levels or outcomes. In order to moderate new debt for capital outlays, this Shadow Budget also proposes a substantial down-sizing of Alberta’s capital plan, highlighting Alberta’s comparatively high per capita stock of public infrastructure assets and capital grants to municipalities. Nonetheless, even with rigorous spending restraint, this report also shows that rebalancing revenues will be critical for Alberta to reduce distortionary corporate and personal income taxes while sustaining surpluses over the long term. Even after return to balance, ongoing surpluses are necessary in order to save resource revenues. Drawing on widely accepted economic principles, this Shadow Budget argues that resource revenues should be saved. This is because these represent a one-time conversion of Alberta’s natural capital in which future generations of Albertans should also share through sustainable returns on investments from Alberta’s Heritage Fund. Therefore, following the projected return to balance in 2022-23, this Shadow Budget proposes to reduce the marginal rate for the lowest personal income tax bracket and implement a consumption tax (recognizing this requires an affirmative result in a province-wide referendum). This Shadow Budget shows how this reduction of personal income tax rates would enhance Alberta’s attractiveness to middle-income workers. The establishment of a 3 percent consumption tax (harmonized with the federal Goods and Services Tax) would replace reduced revenues from more distortionary corporate and personal income taxes while allowing Alberta to save for a sustainable fiscal future.

Brunei Darussalam

Brunei Darussalam’s economy has been adjusting to the lower oil and gas (O&G) prices since 2014, with the authorities undertaking wide-ranging reforms. The reforms aim to ensure long-term fiscal sustainability and intergenerational equity, and to foster economic diversification. Growth is expected to pick up in 2019, with the outlook improving further over the medium term, driven by expansion in the O&G sector and large investment projects. Nonetheless, lower-than-expected O&G prices or production would reduce fiscal revenues and exports, with significant spillovers to the non-O&G sector.

Norway’s public sector balance sheet

ABSTRACTAn intertemporal public sector balance sheet is the most comprehensive way to evaluate long-term fiscal sustainability. But data constraints imply that it is still seldomly used. In this article, we illustrate the considerable value added of such an analysis over standard debt sustainability analyses, using the example of Norway and find surprising results: The immense wealth in its oil fund is insufficient to address future aging pressures, including because nonoil fiscal deficits have already grown large.

Budget Safety as the Level of Budgetary Potential of the State

Budget safety, as a component of financial security, depends on the results of the implementation of an effective state financial and economic policy as the basis for the achievement of national interests. Effective using of the budget, namely, effective management of the state's cash flows, should ensure the regulation of economic and social processes in the interests of society, and create stable conditions for economic development of the country. Budget policy is an integral part of the state's financial policy and as one of the driving forces of Ukraine's development implies further stabilization of public finances, ensuring economic growth and raising standards of living for the maintenance of balanced development of the state. In today's conditions of development, the state faces the task of ensuring the balance and stability of the state budget against adverse external influences, establishing effective management of the country's cash flows, establishing effective budget and monetary policy, as well as long-term fiscal sustainability and stability. In recent years, to overcome this task, control over the activities of financial institutions has intensified, as a result they guided by the principles of responsible management of public finances, aimed at introducing the principles of medium-term financial planning, the availability of a system of forecasting budget parameters, ensuring the feasibility of economic forecasts, and creating and maintaining necessary financial reserves.

Fiscal Space for Health Care: Modern Approaches to Formation and Diagnostics

In the article an analytical review of theoretical approaches to the definition of the fiscal space is conducted. The peculiarities of the interpretation of the essence of the fiscal space for financing the health care system in the contemporary economic researches are explored. It has been determined that fiscal space for the health care system is in fact one of the conceptual approaches for studying the optimal parameters and proportions of financing of the health care, as well as determining the potential reserves for its increase. Based on the study of foreign experience, it is substantiated that the main factors of fiscal space capacity building for health are: macroeconomic context; the need to ensure the fiscal sustainability in the medium and long-term; peculiarities of models of collection of financial resources, accumulation of financial resources and distribution of financing for the medical services; the priority of public financing of the health care system; the possibility of increasing public financing of health care and the introduction of additional mechanisms for increasing financial resources for health care. It is shown that the state can create fiscal space for financing health care system on the basis of three components: financial resources collection system; systems of accumulation of financial resources; system of distribution of financial resources for the provision of medical services to the population.
 The analysis of the structure and volume of public health financing in OECD countries has been conducted. The results of the analysis allow us to notice the existence of various proportions of financing the health care, even in the context of the use of identical dominant financing mechanisms. It is determined that among the studied countries the share of countries with the budget financing mechanism of health care is the largest. It is shown that financing of the health care system in Ukraine is considerably smaller than in the OECD countries. The necessity of diagnostics the potential of fiscal space for the health care in Ukraine is substantiated. The indicators of diagnostics of fiscal space for the health care system are systematized in four projections, in particular: indicators of macroeconomic potential; indicators of fiscal capacity; indicators of the pressure of changes in health care expenditures on the fiscal sustainability of; indicators of demographic and social pressure. The need to diagnostics of the potential for fiscal space for health care should be interconnected with indicators of medium and long-term fiscal sustainability.

Austria

Living standards in Austria are high, and income inequality and poverty low. The economy has picked up markedly, accelerating to 3 percent in 2017, and 3.1 percent (y/y) in 2018: Q1. This provides an opportunity to implement reforms to raise the economy’s potential output, reduce unemployment further, and ensure long-term fiscal sustainability. Also, further strengthening the financial system would guard against a less benign global financial environment.

Asymmetric Effects of Fiscal Balance on Monetary Variables: Evidence from Emerging Economies

Purpose: This paper aims to investigate the nonlinear impacts of the fiscal balance on interest rates, exchange rates and in inflation in emerging economies, based on the model of sovereign risk premium. Methodology: The paper applies asymmetric cointegration modeling in a nonlinear autoregression distributed lag (ARDL) framework (Shin et al., 2014) to discriminate the effects of negative and positive changes in the fiscal balance on monetary variables in Brazil, Russia, India, and China (BRICs), using quarterly observations from around 2000 to 2016. Findings: The divergence in empirical evidence of asymmetric effects among BRICs is a distinct feature of this paper. Our results underline that monetary variables react di erently to negative and positive changes in the fiscal balance over the long run for Brazil and India, but not for China and Russia. Practical implications: Since monetary variables are more sensitive to worsening fiscal position in periods when budget de ficits tend to rise, fiscal consolidation is an essential criterion for the effectiveness of monetary policy in emerging economies characterized with large fiscal imbalance and debt stocks, such as Brazil and India. The implementation of expansionary fiscal policy should be reconsidered carefully even in economies with a better fi scal performance like China and Russia, as the persistently rising budget de ficits eventually counter the effectiveness of monetary policy by keeping market interest rates and inflation at high levels. Originality/Value: This paper provides evidence in favour of the dominant role of fi scal policy to stabilise interest rates, exchange rates, and inflation in emerging economies with high default risks stemming from chronically high fi scal de cits. We also highlight the importance of long-term fiscal sustainability to improve the effectiveness of monetary policy.

Mainstreaming of climate extreme risk into fiscal and budgetary planning: application of stochastic debt and disaster fund analysis in Austria

While ageing-related costs are perceived as the major drivers of fiscal pressure in the EU, concerns over climate-related public expenditures have received comparatively little attention in securing the EU’s long-term fiscal sustainability. Using the Shared Socioeconomic Pathways (SSPs) scenarios as bridging concept for linking the assessment of public cost of demography- and climate-related expenditures, this study proposes a climate risk mainstreaming methodology. We apply a stochastic debt model and assess the potential flood risk in Austria to the public debt and the national disaster fund. Our results indicate that public debt under no fiscal consolidation is estimated to increase from the current level of 84.5% relative to GDP in 2015 to 92.1% in 2030, with macroeconomic variability adding further risk to the country’s baseline public debt trajectory. The study finds that the estimated public contingent liability due to expected flood risk is small relative to the size of economy. The existing earmarked disaster risk reduction (DRR) funding will likely reduce the risk of frequent-and-low impact floods, yet the current budgetary arrangement may be insufficient to deal with rising risk of extreme floods in the future. This prompts the need for further discussions regarding potential reforms of the disaster fund. As many EU member states are in the early stages of designing climate change policy strategies, the proposed method can support the mainstreaming of climate-related concerns into longer-term fiscal and budgetary planning.