Essays on Fiscal Sustainability in Algeria

The topic of fiscal policy sustainability has received much attention during the last two decades, as budget deficits in developed and emerging countries have deteriorated. It is no coincidence that the sustainability of public debt became a specific research agenda in macroeconomics and public economics at around the same time. However, the literature lacks a clear consensus about the definition of public finance. In fact, many research papers introduce their own criteria for sustainability, with many similar (but not identical) elements. In this context, the concept of a debt ceiling, limit, or threshold complements debt sustainability analysis (DSA) exercises and gives a better sense of fiscal sustainability. It could be used as a starting point for determining the level at which it would be desirable to stabilize debt. Regardless of how the debt limit is derived, the debt anchor should not be set at this limit; instead, it should be utilized as a mechanism for self-insurance that provides a buffer against adverse macroeconomic and fiscal shocks (Eyraud et al., 2018). Those buffers should reflect the distribution of risks around the predicted debt trajectory (Fournier and Fall, 2015; Debrun et al., 2019). Accordingly, this study focuses on two main aspects of fiscal sustainability in Algeria. In the first essay, we use Ostry et al.’s (2010) “fiscal space and public debt limits” approach to analyze fiscal sustainability. We use Fully Modified Least Squares and threshold models to estimate the fiscal reaction function for Algeria between 1990-2020. Despite the efforts made to rearrange spending and income priorities, the descriptive and econometric results provide clear evidence of the fiscal fatigue state (loss of control of the debt growth) and the decrease in the fiscal space available in Algeria. The results also show the existence of a threshold level in the debt ratio (debt ceiling or fiscal cliff), approximately equal to 61.1 percent, above which Algerian fiscal policymakers are concerned with corrective actions to avoid insolvency. The second essay aims to analyze the relationship between public debt and economic growth and investigate whether a unique debt turning point (threshold) exists for Algeria. For this purpose, we use an innovative methodology: a regression kink with an unknown threshold (Hansen, 2017). The empirical results show a debt-to-GDP threshold of 31.9 percent for 1970- 2020. Our estimated threshold suggests that, in Algeria, debt-to-GDP ratios below 32 percent would boost economic growth by 0.13 percent, while any debt ratios above that threshold would harm economic growth by 0.06 percent.