• Industry: Government & Public Sector
  • Type: White paper
  • Date: 1/21/2013

Factors behind fiscal sustainability 

Factors behind fiscal sustainability
In addition to a clear need for updated financial frameworks, there are a number of additional factors, notably an inability by governments to successfully implement and sustain their fiscal policy targets, that have created today’s fiscal sustainability issues within many of the G20 countries examined in our study:

Short-termism and political expediency: While fiscal sustainability is a widely-held goal of most governments, our research suggests that, in general, success has largely been diminished by the absence of a politically bipartisan, committed and sustained program of implementation. This is not entirely surprising. The path to restored fiscal health can rarely be achieved within the time frames ordinarily afforded to elected leadership. As a result, short-term thinking and political expediency in decision making tend to trump considerations of long-term fiscal sustainability.

Long streams of budget deficits predating the GFC: Our research finds that, during the 5-year period from 2002 to 2007, more than half of the countries had posted unbroken streams of budget deficits. This suggests that in addition to short-termism, there are problems with the fiscal policy settings of these governments.

GFC-driven automatic stabilizers: Our research suggests that countries with high levels of gross debt prior to the start of the crisis (in excess of 60 percent of GDP) were not only severely limited in their ability to adequately respond to the GFC, but are now also facing a longer and more difficult path back to sound fiscal sustainability. So while the EU’s general government gross debt target of 60 percent is likely appropriate in times of economic growth, it is clear that by carrying this level of debt into times of economic crisis, countries are less able to absorb the effects of automatic stabilizers, accommodate shock events, or facilitate additional stimulus when needed.

Slow return to economic growth: High levels of government debt will be further exacerbated by the impact of intergenerational aging and the ongoing shift toward the developing world, which will generally lead to continued sluggish economic growth in developed markets. In turn, slow economic growth will lead to sustained levels of high debt.

Cost of debt: It is not just the size of government debt relative to GDP that matters in fiscal sustainability, but also the cost of that debt to the budget. The US and Japan, for example, enjoy low cost access to funds which invariably means that the quantum of debt remains manageable. However, should the cost of debt increase, then the affordability of that debt will become a much graver concern.


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