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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. Weicheng Lian & Mr. Andrea F Presbitero & Ursula Wiriadinata, 2020. "Public Debt and r - g at Risk," IMF Working Papers 2020/137, International Monetary Fund.
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    4. 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.
    5. 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.
    6. 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, October.
    7. Mr. Peter S. Heller, 2005. "Understanding Fiscal Space," IMF Policy Discussion Papers 2005/004, International Monetary Fund.
    8. Lee, Ronald D., 1992. "Stochastic demographic forecasting," International Journal of Forecasting, Elsevier, vol. 8(3), pages 315-327, November.
    9. 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.
    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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