Government deficit and level of public debt are among the economic fundamentals. The basic question to ask about fiscal policy is whether it is sustainable. This paper first studies the theoretical problem of sustainability. One implication of the theory is that fiscal sustainability is determined by future fiscal policies. Hence, it is not possible to measure sustainability in the narrow theoretical sense. The authors propose a definition of sustainability that can be used in empirical applications. Next, building on their theoretical analysis, they review the empirical literature on fiscal sustainability, with particular attention to the theoretical criteria of sustainability and the indicators used in the empirical studies. Finally, they present two simple indicators of fiscal sustainability that they use to study the sustainability of fiscal policy in Brazil and Hungary.
Financed by the National Centre for Research and Development under grant No. SP/I/1/77065/10 by the strategic scientific research and experimental development program:
SYNAT - “Interdisciplinary System for Interactive Scientific and Scientific-Technical Information”.