A more precise look at fiscal sustainability
In recent years, Europe's fiscal policy has been put in question by the ongoing financial crisis, prompting policymakers and academics to re-examine the policy in its entirety. This was the aim of the EU-funded FISCSUST (Fiscal sustainability in Europe) project, focusing on the development of a theoretical framework to help researchers and policymakers understand and assess the notion of fiscal sustainability. In turn, this framework will be used to address recent debt sustainability issues in the global economy, with a particular focus on Europe. To achieve its aims, the project team collected and analysed extensive data on the topic, looking specifically at how recent crises impacted fiscal accounts. More specifically, they looked at fiscal policy in countries that were affected the most from the fiscal crises, such as Belgium, Ireland, Greece, Spain, Italy and Portugal, exposing the differences and the similarities. FISCSUST also used existing methods to test sustainability in order to gauge their effectiveness in light of recent events and to develop a more effective general equilibrium framework for understanding sustainability. Interestingly, the project team found that public debt levels and standard public budget balances don't explain the differences in cross-country experiences. It highlighted the pivotal role of external imbalances of each country compared to the rest of the world, including political instability and private sector imbalances. This and other findings demonstrate that fiscal sustainability based only on official fiscal imbalances is not very accurate, with many other potential important factors putting nations in insolvency. Project researchers developed a framework incorporating the neglected dimensions mentioned above. This allowed them to investigate the dynamic interaction of fiscal policy with private sector actions and the behaviour of fiscal policy and debt sustainability in response to different types of shocks and policy options. If operationalised, project results can lead to a practical and useful multidimensional fiscal vulnerability index that incorporates changes in high-frequency macroeconomic data. New policy ideas could well emerge from FISCSUST's valuable research, while the framework developed could be used as a complement to the existing methods and generate discussions around this notion.
Keywords
Fiscal sustainability, financial crisis, fiscal policy, FISCSUST, public debt
