Abstract
This chapter examines fiscal sustainability in the context of sustainable development and the capital stocks that are critical to maintaining economic capacity. New indicators consistent with sustainable development are presented, drawing from local indicator projects around the world. While the ratio of national debt to national income (debt/GNI) is often used as a measure of fiscal sustainability, reliance on a single indicator raises the potential for selection bias. Since goals and indicators affect the conceptual framework within which policy is developed, an incorrect or incomplete indicator can interfere with adequately maintaining economic capacity or economic activity. A more comprehensive set of indicators would show the link between future spending needs and investment made in the present.
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Notes
- 1.
There is substantial controversy over whether using shadow prices to monetise capital stocks like health and the environment, as in the IWI, adds or subtracts from precision. The study by Bhuta et al. (2014) concluded that the results do not “provide a clear image of resource scarcity or depletion” (p. 11).
- 2.
The work of Rogoff and Reinhart (2010) is often cited to support concern over high ratios of debt/GNI and potential damage to future economic growth. However, their 2010 paper showed very weak relationships in established and affluent economies between debt/GNI ratios of less than 90% and real economic growth. Subsequent critiques of Reinhart-Rogoff based on re-calculations of the same data (Herndon et al. 2014) showed that the 90% ratio clearly did not apply to the 20 most affluent nations.
- 3.
The IMF (2000) report goes on to discuss the difficulty of identifying critical ranges for debt indicators “across heterogeneous countries without additional information” such as the average interest rate, the country’s tax base, the pace of output and export growth, the composition of debt, exchange rate vulnerability, and indicators of general corporate profitability (point 63).
- 4.
GASB (2011) adds the proviso that costs should not be shifted among generations. This presumably refers to shifting current operating costs into the future through debt financing, since state and local governments in the US regularly use debt to finance infrastructure that yields benefits to future generations. Note that this constraint is potentially much broader than its current application to purely financial matters. If the present-day generation uses fuels that emit carbon and impose costs on future generations, this should be included under the GASB definition.
- 5.
The unit may be a nation-state or one of a whole variety of sub-national governments, such as cities, counties, provinces, departments, cantonments, etc.
- 6.
The best source for debt levels in the US over time is Treasury Direct (2017).
- 7.
Higher wages are also likely to attract new workers into the labour force, including immigrants from abroad, which will somewhat offset the declining worker-to-population ratio.
- 8.
Public health and preventive medicine represent a particularly important area where current investment can reduce future per capita spending. Since medical expenditure for the elderly absorbs a large part of public budgets in most affluent countries, a multifaceted approach to “health” that includes lifestyle modification could improve health at the same time reduces future spending for the elderly population than trend forecasts currently predict. This would free up future public revenue for other types of spending, including debt service or repayment. Better public health and preventive medicine could also positively impact child development and workforce health, contributing to higher labour productivity and income, along with lower medical costs.
- 9.
Waldfogel and Washbrook (2011) also credit widely available and high-quality pre-school programmes in Great Britain with Great Britain’s higher economic and social mobility relative to the US (despite high income inequality and child poverty in both countries).
- 10.
The Global City Indicators Program (GCIP) funded by the World Bank has nine pilot projects, including Sao Paulo, Bogota, Cali, Belo Horizonte, Porto Alegre, and Toronto (The Global City Indicators n.d.)
- 11.
GASB (2014) is consistent with the literature on location incentives, which shows that rates of return on these are consistently low to non-existent. This suggests that fiscal sustainability would be far better served by spending on infrastructure.
- 12.
Spain had a relatively low public debt/GNI, although its high private debt (incurred largely through real estate speculation) led to economic problems once there was a downturn in the real estate market. As with Greece, Spain’s inability to print its own currency contributed to the capital market issues. For more, see Krugman (2010).
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Greenwood, D.T. (2018). Moving Beyond Traditional Indicators of Fiscal Sustainability: Examples from Locally Chosen Indicators. In: Malito, D., Umbach, G., Bhuta, N. (eds) The Palgrave Handbook of Indicators in Global Governance. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-62707-6_14
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