Fiscal sustainability in the EU: From the short-term risk to the long-term challenge

Abstract

The paper analyses fiscal sustainability of public debt using a dynamic computable general equilibrium model. First, we identify the short-term risk for fiscal stress at country level; second, we investigate the assumption of convergence towards the government debt threshold (medium-term challenge); and, third, the requirement that debt projections do not show unsustainable trends (long-term challenge). The empirical implementation includes 18 EU Member States. Our findings show that the constant tax rate that stabilizes the public debt converges to 50 percentage of GDP for all the sample countries and tax revenues are the main driving forces for fiscal sustainability. Also our findings suggest that the contribution in terms of GDP growth is relevant in countries with low (high) debt-to-GDP ratio in the long (short) term.