Public debt sustainability and alternative theories of interest

Aspromourgos, Tony; Rees, Daniel; White, Graham

doi:10.1093/cje/bep010

Cited by 29 publications

(17 citation statements)

References 9 publications

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“…At first, the fiscal sustainability of the welfare state is related to the economic growth [13][14][15][16]. If the economy grows smoothly, the tax is easily collected.…”

Section: Economic Factorsmentioning

confidence: 99%

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How Does a Welfare State achieves Fiscal Sustainability? A Study of the Impact of Tax Equity

Ko¹

2018

Taxes and Taxation Trends

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This study seeks to identify institutional characteristics of financially sustainable welfare states that focus on tax structure. Using data collected from 17 OECD countries from 1986 to 2013, this study investigates the characteristics of fiscal sustainability of each welfare state. The model of simultaneous equations (three-step least-squares method) is used for treating simultaneousness between fiscal sustainability and welfare expenditures. As a result, increasing the level of tax burden generally has a positive effect on the fiscal sustainability of the welfare state. However, the most important point that should be considered is the manner of raising tax revenue that affects the sustainability of economic, political, and social dimensions for securing fiscal sustainability. Specifically, it is necessary to raise the equity between the sources of taxation in accordance with the ability to pay principle. Improving vertical equity can also make a positive contribution to the fiscal sustainability in order to secure the political legitimacy of the tax and mitigate the regressive burden, which may result from the expansion of a consumption tax. Finally, it is beneficial to fiscal sustainability of the welfare state to diversify the financial base by combining the ability to pay principle and the benefit principle.

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“…At first, the fiscal sustainability of the welfare state is related to the economic growth [13][14][15][16]. If the economy grows smoothly, the tax is easily collected.…”

Section: Economic Factorsmentioning

confidence: 99%

“…The effects of interest rates on national debt have also been important [13,16]. In the context of the emphasis on interest rates, some studies have focused on the initial level of debt [17,18].…”

Section: Economic Factorsmentioning

confidence: 99%

How Does a Welfare State achieves Fiscal Sustainability? A Study of the Impact of Tax Equity

Ko¹

2018

Taxes and Taxation Trends

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“…The absence of a limit on the debt/GDP ratio implies that permanently increasing debt/GDP ratios are sustainable as long as the former inequality condition holds. 3 Another common empirical practice is to rely on cointegration tests between government spending and revenues. In a more recent empirical study, Afonso and Rault (2010) examine the …scal sustainability of the 15 EU member countries prior to 2001 over the period 1970-2006 using both stationarity and cointragration tests.…”

Section: Related Literaturementioning

confidence: 99%

Unsustainable sovereign debt—is the Euro crisis only the tip of the iceberg?

Bilkic

Painter

Gries

2013

Int Econ Econ Policy

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As a direct e¤ect of the …nancial crisis in 2008, public debt began to accumulate rapidly, eventually leading to the European sovereign debt crisis. However, the dramatic increase in government debt is not only happening in European countries. All major G7 countries are experiencing similar developments. What are the implications of this kind of massive de…cit and debt policy for the long term stability of these economies? Are there limits in debt-ratios that qualitatively change policy options? While theory can easily illustrate these limits, where are these limits in real economies? This paper examines the relationship between sovereign debt dynamics and capital formation, and accounts for the e¤ects of the 2008 …nancial crisis on debt sustainability for the four largest advanced economies. We contribute to the literature on …scal sustainability by framing the problem in an OLG model with government debt, physical capital, endogenous interest rates, and exogenous growth. For the calibration exercise we extract data from the OECD for Germany as a stabilization anchor in Europe, the U.S., the U.K., and Japan for almost two decades before the 2008 crisis. Except for intertemporal preferences all parameters are drawn or directly derived from the OECD database, or endogenously determined within the model. The results of the calibration exercise are alarming for all four countries under consideration. We identify debt ceilings that indicate a sustainable and unsustainable regime. For 2011, all four economies are either close to-, or have already passed the ceiling. The results call for a dramatic readjustment in budget policies for a consolidation period and long-term …scal rules that make it possible to sustain su¢ cient capital intensity so that these economies can maintain their high income levels. Current conditions are already starting to restrict policy choices. However, the results also make it very clear that none of these economies would survive a second …nancial crisis such as the one in 2008.

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“…Although his primary motivation for this policy is ethical, Keynes also saw it as supporting aggregate demand by (permanently) redistributing income towards wage‐earners and thereby increasing the propensity to consume and the multiplier. Such a regime of permanent ‘cheap money’ also has obvious advantages with regard to the magnitude of sustainable fiscal deficits (Aspromourgos et al. , 2010).…”

Section: Keynes’s Core Policy Positionmentioning

confidence: 99%

Keynes’s General Theory After 75 Years: Chapter 24 and the Character of ‘Keynesian’ Policy*

Aspromourgos

2012

Economic Record

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The Great Financial Crisis led to a revival of interest in ‘Keynesian’ economic policy, understood as temporary, debt‐financed fiscal activism in response to a short‐run, albeit particularly deep, macroeconomic contraction. But Keynes’s theory led him to diagnose involuntary unemployment as a long‐run problem, and one for which competition (via wage and price flexibility) was not a solution. Consequently, his policy proposals were more far‐reaching than short‐run fiscal activism. The final chapter of The General Theory provides the appropriate point of departure for reflecting on the difference between Keynes’s policy position and what later came to be regarded as Keynesian policy.

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Public debt sustainability and alternative theories of interest

Cited by 29 publications

References 9 publications

How Does a Welfare State achieves Fiscal Sustainability? A Study of the Impact of Tax Equity

How Does a Welfare State achieves Fiscal Sustainability? A Study of the Impact of Tax Equity

Unsustainable sovereign debt—is the Euro crisis only the tip of the iceberg?

Keynes’s General Theory After 75 Years: Chapter 24 and the Character of ‘Keynesian’ Policy*

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