IMF Working Papers

Beyond Debt: Net Worth Fiscal Anchors

Author/Editor:

Hua Chai ; Jason Harris ; Alexander F. Tieman

Publication Date:

July 9, 2024

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

This paper proposes anchoring medium- to long-term fiscal policy in a Public Sector Net Worth (PSNW) target. Such a target widens the scope of fiscal policy to include public sector assets, in addition to liabilities—the focus of debt-based rules. A PSNW target is directly relevant to ongoing policy debates on green fiscal rules and more generally, the reform of fiscal frameworks (such as the Euro Area’s) to allow for public investment in a high debt environment. Modeling a small open economy with public investment and endogenous growth, we show that, compared to debt-based anchors, a PSNW anchor is more conducive to public investment and economic growth, while providing for sensible policy reactions to changes in long-term interest rates. The net worth anchor also precludes unsustainable debt dynamics. Simulated transition dynamics show that replacing a debt anchor with a net worth anchor does not necessarily lead to higher debt-to-GDP ratios. In addition to the merits of a net worth anchor, the paper also discusses some operational challenges.

Series:

Working Paper No. 2024/137

Subject:

Economic sectors Expenditure Financial statements Public debt Public financial management (PFM) Public investment spending Public sector

Frequency:

regular