Fiscal sustainability, economic instability and the solvency of non-governmental agents

[摘要] English: In several countries the public debt/GDP ratio showed the largest ever peacetime increase during the last 20 years of the twentieth century. According to numerous analysts, the continuous and increasing accumulation of debt has rendered fiscal policy unsustainable in many countries. Towards the latter half of the 1990s several countries initiated steps to check the increase in their public debtlGDP ratio and in so doing establish fiscal sustainability. The mainstream rule on how to re-establish fiscal sustainability is unambiguous: government should, on average, run a sufficiently sized primary surplus (i.e. non-interest revenue less non-interest expenditure). However, policy-makers in several countries have found that the establishment of fiscal sustainability is not always so straightforward. The 'general balance framework' is developed in the thesis to obtain a tool with which to examine why it is not straightforward.. Using this framework, the thesis points out that merely running a primary surplus to restore fiscal sustainability may not ensure the disappearance of unsustainability from the economy. Government may just shift the unsustainability to the non-governmental sectors of the economy, which, in turn, may cause wide-scale insolvency and instability. However, unsustainability and the accompanying instability and insolvency in the financial position of non-governmental agents may also originate from within the ranks of the non-governmental agents. The thesis points out that, given fundamental uncertainty and subjective expectations, economic instability and tenacious recessions that defy the attempts of non-governmental agents to counter them, are recurring phenomena - the economic system is not inherently stable. Economic agents operate in an uncertain world where investment decisions are based on subjective expectations about an uncertain future. Being subjective, these expectations can quickly be altered, causing a change in interest rates, investment and income. Whereas the initial change in expectations may cause imbalances in the financial position of a few economic agents and cause their financial position to become unsustainable, the unsustainability may quickly spread to other agents through the linkages that exist between the financial position of economic agents. As it spreads it causes the economy to become unstable. Because economic instability and tenacious recessions are recurring phenomena, a government may time and again find itself in a position where it may have to stabilise the economy. It is possible, using the general balance framework, to define economic instability as a collective term for recurrent and widespread unsustainability in the financial position of non-governmental agents. Thus, a stabilisation policy is no less concerned with unsustainability than is a policy aimed at restoring fiscal sustainability. The difference between a stabilisation policy and a policy aimed at restoring fiscal sustainability then merely is whose sustainability is at issue: that of government or that of non-governmental agents? In addition, government uses the same policy instruments, in the form of changes in government expenditure and revenue, to influence the sustainability of both its own financial position and that of nongovernmental agents (stabilisation steps). Moreover, a decision on the sustainability of fiscal policy is also a decision on economic stabilisation (and vice versa), as the instruments government uses simultaneously influence the financial position of both government and non-governmental agents. The thesis is not about relaxing the mainstream rule, but about making it more sophisticated and sensitive to uncertainty, expectations, instability/cyclicality, and sectoral balance effects. By taking account of these issues, the mainstream rule is refined into a menu of rules. Although the thesis argues that the rules should not be rigid, it also does not propose pure discretion - rather, it proposes a framework for the sophisticated, non-mechanical and more effective, less damaging application of the mainstream rule - essentially a normative approach to the implementation of the rule.

[发布机构] University of the Free State