Fiscal Transfers and Fiscal Sustainability

We examine whether the U.S. 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 U.S. and German state governments pursued sustainable fiscal policies. Our results also suggest that fiscal transfers were positively related to debt. These findings indicate that intergovernmental transfers have implicitly subsidized debts.