Fiscal Sustainability : High Stakes and Low Interest

This study reviews the applicability of new definitions of fiscal sustainability that place greater emphasis on the historical trend of falling nominal interest rates. We explore how these now-broadly applied definitions are misleading and potentially dangerous. In addition, it is important to assess the underlying reasons why economists and policymakers have shied away from using the debt ratio as a measure of fiscal sustainability in recent years. Public choice theory informs us that new definitions of fiscal sustainability may be largely politically motivated, with policymakers operating within a myopic framework that benefits special interests in the short term while burdening wider society in the long term. The idea that the debt ratio “does not matter” or that the measure is not useful for measuring sustainability tends to overlook the preponderance of economic literature on fiscal sustainability, debt risk premia, and the debt-growth nexus