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This paper critically reviews recent work regarding the sustainability of public debt. It argues that Debt Sustainability Analyses (DSAs) should be more than mere mechanical simulation exercises. Instead, a DSA should be linked to some objective regarding the distribution of fiscal burdens and distortions over time (in the tradition of Barro's 1979 tax smoothing objective). The paper discusses objective functions that yield simple and transparent fiscal policy rules

AbstractJapanese government debt is at unprecedented levels with a gross debt to gross domestic product ratio of over 230 per cent and a net debt to gross domestic product ratio of 150 per cent. There are three big challenges to fiscal sustainability: the huge amount of government bonds outstanding; continued budget deficits; and the growing age‐related spending. The debt is sustainable as long as the market as a whole believes it is. The path to fiscal consolidation requires increasing the tax rate, reducing spending, broadening the tax base and growing the economy out of trouble. The longer the delay before moving to a more sustainable consolidation path, the larger the risks and closer Japan moves towards a financial crisis. The policy goal is to keep government debt sustainable, not to repay it all. Just as Japan has done since the burst of the asset bubble in the early 1990s, there is every likelihood that the Japanese economy will muddle through.

The authors study the implications of fiscal policy behaviour for sovereign risk in a framework that determines a country's fiscal limit, the point at which, for economic or political reasons, taxes and spending can no longer adjust to stabilize debt. A real business cycle model maps the economic environment - expected fiscal policy, the distribution of exogenous disturbances and private agents' behaviour - into a distribution for the maximum sustainable debt-to-GDP ratio. Default is possible at any point on this fiscal limit distribution. Calibrations of the model to Greek and Swedish data illustrate how the framework can be used to study actual fiscal reforms undertaken by developed economies facing sovereign risk pressures.

We examine whether US and German state governments pursue sustainable fiscal policies taking into account fiscal transfers. Using panel data techniques we investigate whether the debt-to-GDP ratio had a positive influence on the primary surplus (Bohn-model). We show that including/excluding fiscal transfers changes the results. If fiscal transfers are not included in the primary surplus, the test results do not indicate that the US and German state governments pursued sustainable fiscal policies. Our results also suggest that fiscal transfers were positively related with debt. These findings indicate that intergovernmental transfers have implicitly subsidized debts.

The central objective of this paper is to empirically examine the issue of fiscal sustainability in developing Asia. To do so, we first diagnose the region's public finances by analyzing the evolution of key fiscal indicators over time and across subregions. We then estimate fiscal policy response functions that measure the adjustment of the primary fiscal balance to public debt positions. Overall, our results indicate that the region's public finances are in good shape as a result of responsible fiscal behavior. Nevertheless, failure to withdraw the region's anticrisis fiscal stimulus in a timely manner may jeopardize fiscal sustainability, bolstering the case for strong medium-term fiscal policy frameworks.

This study examines the Russian fiscal sustainability under two possible socio-economic scenarios. It contains the calculations for the current fiscal strategy in the medium and long run under conditions of additional fiscal risks. The size of necessary fiscal consolidation under the current fiscal strategy is calculated, and the alternative strategy based on the "bird-in-the-hand" rule is investigated.