International Evidenceon Fiscal Solvency: Is Fiscal Policy "Responsible"?

IMF Working Papers, March 1, 2007

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This paper examines fiscal solvency and public debt sustainability in both emerging market and advanced countries.
Evidence of fiscal solvency is presented as a robust positive conditional relationship between public debt and the primary fiscal balance in both groups of countries.
The evidence of fiscal solvency is much weaker at high debt levels.
The findings suggest that many industrial and emerging market economies, including several subject to recent debates on fiscal solvency, appear to conduct fiscal policy responsibly.
The results cannot reject the hypothesis of fiscal insolvency in groups of countries with high debt ratios.

Fiscal solvency is identified through a robust positive conditional relationship between public debt and the primary fiscal balance.
This robust positive conditional relationship is established for:
- emerging market countries
- advanced countries
The strength of evidence varies by debt level:
- Evidence of fiscal solvency is much weaker at high debt levels.
Implication drawn:
- Many industrial and emerging market economies appear to conduct fiscal policy responsibly.
- However, fiscal insolvency cannot be ruled out for groups of countries with high debt ratios.

The analysis supports the view that responsible fiscal policy is observable across a broad set of countries, but:
- Special concern remains for countries with high public debt ratios where solvency evidence is weaker.
The results imply the need for continued scrutiny of fiscal positions in high-debt countries to assess solvency risks.