Assessing Fiscal Sustainability in Theory and Practice

The difficulties related to the concept of sustainability and the analytical limits of available indicators for policy purposes are illustrated by Nigel Chalk and Richard Hemming. The authors examine the present value budget constraint and point to some of its limitations. Drawing on the IMF's extensive work in the field, they highlight the divide between theory and practice in the assessment of fiscal sustainability, with the frequent use of indicators not grounded in economic theory. They review the IMF's practice of taking a broad definition of the sustainability of current policies, in which the macroeconomic context is considered along with other factors, such as prospective infrastructure needs, and they examine how sustainability can be assessed on the basis of different definitions of public debt, taking into account public sector assets and implicit pension liabilities. Chalk and Hemming also consider the implications of non-renewable resources and refer to some empirical work modelling this factor. Finally, they stress the need for an integrated approach to fiscal and external sustainability, that relates the fiscal and the current account deficit