Assessing Fiscal Sustainability: A Review of Methods with a View to EMU

Abstract:     
Balassone and Franco review the literature on fiscal sustainability in order to examine the comparative advantages and disadvantages of different methodologies and indicators and to highlight the areas in which more research effort is still needed. They contrast the intuitive character of the concept of sustainability with the analytical and operational difficulties met with when trying to arrive at a rigorous definition. On the one hand, the literature has not produced a unique definition of sustainability; furthermore, the problem has only been dealt with in a partial equilibrium framework. On the other hand, the statistical definition of the main variables to be used for the assessment of sustainability is not uncontroversial; moreover, as the assessment is based on long-term projections, it is necessarily subject to wide margins of error.

Balassone and Franco also point out that, theoretical issues notwithstanding, the Treaty of Maastricht and the Stability and Growth Pact set fiscal rules which, if complied with, ensure sustainability according to any definition adopted. Techniques developed for the analysis of sustainability can therefore be used for the assessment of prospective compliance with such rules, a crucial task for both policy evaluation and timely corrective intervention. In re-examining the pros and cons of available indicators, their paper categorises the studies on the assessment of sustainability into two main strands: those testing for the sustainability of past policies and those assessing prospective fiscal stances. Among the latter a distinction is drawn between works based on standard national accounting concepts and generational accounting exercises. The paper concludes by stressing the need for further efforts to guide budgetary policy more effectively.

Number of Pages in PDF File: 40

working papers series