Fiscal Sustainability in Focus

As regards the concept of fiscal sustainability, our study finds that in this area a variety of issues can be examined with very different tools. The issues may concern the achievement of fiscal constraints over an infinite horizon, the realisation of a specific target, or the fiscal policy response to indebtedness observed in the past. In some cases additional aspects of sustainability are considered too, such as the effects of ageing, although the consequences of rising inequality are mostly overlooked. The model may also include an estimate of the investment needed to mitigate the effects of climate change, but the impact of the impact of climate change is outside the model framework. To answer these questions, it may also be necessary to include uncertainty, in which case the discounting of future debt, tax revenue and expenditure with an intertemporal budget constraint in a stochastic environment depends on the probability distribution of these factors under different states. Our sustainability analysis, on the one hand, presents the best practice, complemented with the directions we have identified for further improvement. On the other hand, we have made the necessary corrections to avoid oversimplification in calculating debt dynamics.1