The lower the current debt ratio the greater a government’s fiscal space and the lower the probability that future fiscal shocks will cause a government to default and precipitate the economic upheaval that accompanies a sovereign debt default.4 Using the IMF methodology for calculating fiscal space, which is based on the Canadian government’s previous fiscal responses to shocks, Zandi (2019) esti. [...] If the amortization rate is equal to the economic rate of depreciation of the stock of public capital and if the government’s investment rate maintains a constant ratio of the capital to GDP, k, the operating balance, ob, required to maintain a given debt ratio is determined by the following condition: 6 I am grateful to Paulo Mauro for providing the IMF data base. [...] To maintain a given debt ratio, a government must run a fiscal deficit ratio, fd, equal to: In other words, to keep the debt ratio constant, government borrowing, as a percentage of its debt, has to equal the growth rate of nominal GDP As noted above, adopting a ceiling on a debt ratio means that a government has to adopt a fiscal rule for reducing its debt ratio to or below the ceiling in the eve. [...] Calibrating the fiscal balance to fluctuations in the economy is a complex technical exercise, and the experience in the EU has meant in practice that the cyclical adjustments to the fiscal balance have resulted in excessive deficits. [...] A natural policy response to a prolonged breach in the ceiling would be to increase the denominator in the ratio, i.e., revenues, because the numerator, interest payments, are largely beyond the control of a government in the short to medium term.
- Pages
- 18
- Published in
- Canada
