Prudent debt targets and fiscal frameworks

Costa Rica

“…With public debt already very close to 50% of GDP, Costa Rica is dangerously testing the threshold above which excessively high government debt risks undermining economic activity and destabilising the economy. OECD analysis suggests that the threshold above which negative effects on growth may take place could be as low as 30-50% of GDP for emerging economies as they are exposed to capital flow reversals (Fall et al, 2015). Because public debt is mostly held by local rather than international investors, the threshold may be somewhat higher for Costa Rica.…”

“…Because public debt is mostly held by local rather than international investors, the threshold may be somewhat higher for Costa Rica. But the OECD recommends prudent debt targets that are on average 15 percentage points lower than debt thresholds (Fall et al, 2015). Similarly, the IMF suggests a debt-to-GDP ratio of 50% as the upper-limit safe level for Costa Rica, while the Central Bank estimates such a threshold at 48.6% of GDP (Chaverri Morales, 2016;IMF, 2017a).…”

“…Fiscal rules should not be seen as the magic solution to solve fiscal sustainability issues and do not lead to long-term improvement if they are not associated with strong political commitment. There are nonetheless a few tools that can help compliance with the rules, such as expenditure frameworks and fiscal councils (Fall et al, 2015).…”

Improving the allocation and efficiency of public spending in Indonesia

“…Accentuated by a historical tendency for fiscal prudence, that led to the establishment of fiscal rules in 2003, which cap the public deficit and debt at 3% and 60% of GDP, respectively. The latter is considered high as debt has negative economic effects as from between 30% and 50% of GDP for emerging economies, which are exposed to capital flow reversals (Fall et al, 2015).…”

Enhancing public sector efficiency and effectiveness in the Czech Republic

“…When debt (using the national accounts definition) reaches 60% of income averaged over the previous four years, the Ministry of Finance will divert transfers towards debt repayment. The appropriate level is difficult to determine and would depend on factors that vary considerably, such as vulnerability to macroeconomic shocks and history of fiscal prudence (based simulations by Fall et al (2015) for general government debt). A debt brake could complement the ceiling by slowing the accumulation of debt, thereby preventing the painful adjustments required at the ceiling.…”