Are the EU new member states fiscally sustainable? An empirical analysis

This paper discusses the theoretical aspects of fiscal sustainability and identifies the main sources of fiscal non-sustainability from the perspective of both general equilibrium models and partial equilibrium models. The study adopts the partial equilibrium approach to investigate empirically whether the EU New Member States are fiscally sustainable. The stationarity test and cointegration analysis are employed to examine this issue. According to the debt stationarity tests, countries such as Lithuania and Slovenia are the only ones that can be regarded as fiscally sustainable. According to a cointegration analysis of government revenues and expenditures none of the analysed countries is fiscally sustainable. However, analyses based upon public debt stationarity test and intertemporal budget constraint do not account for the costs associated with the transition period, therefore the final conclusion of no sustainability in NMS should be put into a broader context of transformation from a centrally planned economy to a market oriented system. This, of course, should not be taken as an excuse for failing to pursue prudent fiscal policy aiming to ensure sustainability over the long-term. The policy implication of this is that the vast majority of the EU New Member States have to undertake significant corrective measures to ensure sustainability over the long-term: certainly more than is being done at the present time.