Debt and Deficit Ceilings, and Sustainability of Fiscal Policies: an Intertemporal Analysis

The likely consequences for the sustainability of the fiscal policy of pursuing goals that rely on restrictive ceilings on deficits and debt are examined. A formal theoretical framework is provided for analyzing the sustainability of fiscal policy based on the government intertemporal budget constraint. Conditions are derived that determine whether a given fiscal stance is sustainable. It is found that many countries do not have a sustainable policy. The evidence in favor of sustainability is strengthened for most countries when the data are extended to incorporate future fiscal consolidation plans, reflecting the general shift toward fiscal austerity in recent years.