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Fiscal Sustainability and Low Interest Rates: A Note

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  • Martin Werding

Abstract

In this paper, I demonstrate that an indicator which is commonly used to assess the long-term fiscal sustainability of public finances in EU member states (“S2”) is also defined if government borrowing rates are assumed to be permanently lower than the growth rate of GDP. I illustrate this finding based on simulations prepared for the Fifth Sustainability Report published by the German Federal Ministry of Finance. In addition, I discuss the interpretation of the indicator in a low-interest environment and the assumption that relevant interest rates continue to be low if there are substantial challenges for fiscal sustainability, e.g., through demographic ageing.

Suggested Citation

  • Martin Werding, 2021. "Fiscal Sustainability and Low Interest Rates: A Note," CESifo Working Paper Series 8861, CESifo.
    • Handle: RePEc:ces:ceswps:_8861
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    References listed on IDEAS

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    1. Olivier Blanchard, 2019. "Public Debt and Low Interest Rates," American Economic Review, American Economic Association, vol. 109(4), pages 1197-1229, April.
    2. Weicheng Lian & Mr. Andrea F Presbitero & Ursula Wiriadinata, 2020. "Public Debt and r - g at Risk," IMF Working Papers 2020/137, International Monetary Fund.
    3. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 949-963.
    4. Lee, Ronald D., 1992. "Stochastic demographic forecasting," International Journal of Forecasting, Elsevier, vol. 8(3), pages 315-327, November.
    5. Torben M. Andersen, 2020. "Fiscal Sustainability and Low Government Borrowing Rates," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 21(01), pages 31-34, April.
    6. Olivier J Blanchard, 2019. "Public Debt: Fiscal and Welfare Costs in a Time of Low Interest Rates," Policy Briefs PB19-2, Peterson Institute for International Economics.
    7. Olivier Blanchard & Alvaro Leandro & Jeromin Zettelmeyer, 2021. "Redesigning EU fiscal rules: from rules to standards," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 36(106), pages 195-236.
    8. Martin Werding & Klaus Gründler & Benjamin Läpple & Robert Lehmann & Martin Mosler & Niklas Potrafke, 2020. "Modellrechnungen für den Fünften Tragfähigkeitsbericht des BMF," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 111.
    9. Mr. Peter S. Heller, 2005. "Understanding Fiscal Space," IMF Policy Discussion Papers 2005/004, International Monetary Fund.
    10. Huixin Bi & Eric M. Leeper, 2013. "Analyzing Fiscal Sustainability," Staff Working Papers 13-27, Bank of Canada.
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    Cited by:

    1. Raffelhüschen, Bernd & Schultis, Sebastian & Stramka, Sebastian, 2024. "Was kostet der Sozialstaat? Sozialabgaben- und Sozialleistungsgedenktag 2024," Argumente zur Marktwirtschaft und Politik 175, Stiftung Marktwirtschaft / The Market Economy Foundation, Berlin.

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    More about this item

    Keywords

    public budget; public debt; fiscal sustainability; interest rates;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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