Asia & the Pacific Policy Studies

Long-term fiscal sustainability in advanced economies

By Alan J Auerbach

With the Great Recession leaving nearly all advanced economies with substantially higher debt–gross domestic product ratios, this paper re-evaluates the long-term fiscal sustainability of these economies based on current estimates of their current-policy fiscal trajectories. Through measuring fiscal imbalance, we find that for many countries, short-term fiscal measures such as the debt–gross domestic product ratio and current budget deficits as a share of gross domestic product bear little relationship to the sustainability of policy. The longer-term challenges these countries face are related much more to the future fiscal challenge of growing primary deficits, associated with the cost of providing pensions and health care in the face of growing old-age dependency ratios. While focusing on managing the short-term debt burden may help avoid crises like the one being played out in Greece, attention and policy actions must eventually turn to the longer-term fiscal problem.

(Photo: Raúl Hernández González on flickr)


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