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Drivers of fiscal sustainability: A time-varying analysis for Portugal

Author

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  • Afonso, António
  • Coelho, José Carlos

Abstract

We assess the drivers of fiscal sustainability in Portugal during the period 1999Q4-2021Q4. We resort to expanding window and Schlicht (2003, 2021)'s time-varying approaches to construct the responses of government revenues to government expenditures and the responses of the primary government balance and the cyclically adjusted primary government balance (CAPB) to the debt-to-GDP ratio. Our results show the prevalence of a Ricardian fiscal regime in Portugal. If the differential between the implicit interest rate of the nominal stock of public debt and the nominal growth rate of GDP is positive, the positive response of the primary government balance to the debt-to-GDP ratio is amplified. An improvement in the external accounts, the increase in the European Commission's fiscal rules index and the extension of the debt maturity were beneficial for fiscal sustainability. Sovereign debt rating downgrades implied a posterior fiscal reaction that improves fiscal sustainability. Moreover, fiscal sustainability increased during the implementation of the international financial assistance program to Portugal, between 2011Q2 and 2014Q2.

Suggested Citation

  • Afonso, António & Coelho, José Carlos, 2024. "Drivers of fiscal sustainability: A time-varying analysis for Portugal," International Economics, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:inteco:v:178:y:2024:i:c:s211070172400009x
    DOI: 10.1016/j.inteco.2024.100486
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    Keywords

    Fiscal sustainability; Primary government balance; Government debt; Expanding window; Time-varying; Portugal;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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