Working Papers

Fiscal Sustainability

Publication Number: ECESWP92-E

January, 2004

Author : Willem H. Buiter

Type : Working Papers

This paper reviews some key fiscal sustainability issues in developing and emerging countries. It concludes, first, that the discussion of fiscal sustainability should be focused on the consolidated state budget, including all present and future contingent claims. Second, it points out that the safe level of the net public debt-to-GDP ratio is lower in countries with weak economic and political institutions as well as a history of sovereign default. Third, hard currency borrowing during normal times is apt to turn into a major disadvantage during periods of financial turmoil. Fourth, privatization should be undertaken primarily for efficiency reasons rather than for deficit financing or debt reduction reasons. Finally, the permanent balance rule for government deficits is commendable, where the state could raise its net debt-to-GDP ratio when spending is temporarily high and could lower it when spending is temporarily low.