A Balance-Sheet Approach to Fiscal Sustainability

This paper proposes a new methodology to assess fiscal sustainability. Our approach relies on computing both government´s assets and liabilities as opposed to focuting only on explicity liabilities. Assets are primarily the present discounted value of taxes, while liablities are primarily the present discounted value of expenditures in addition to explicit liabilities. By looking at the government´s balance sheet we can compute the net worth of government, as well as evaluate it´s response to growth, commodity prices or real exchange rate shocks. We show that the implications for fiscal sustainability may be different from those obtained by focusing only on explicit liabilities as in the traditional approaches.