Beyond Debt: Net Worth Fiscal Anchors

By Hua Chai, Jason Harris, Alexander F. Tieman

July 9, 2024

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Hua Chai, Jason Harris, and Alexander F. Tieman Beyond Debt: Net Worth Fiscal Anchors, (USA: International Monetary Fund, 2024) accessed December 3, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Current spending, Economic sectors, Expenditure, Financial statements, Public debt, Public financial management (PFM), Public investment spending, Public sector

Keywords: Australia and New Zealand, Current spending, Financial statements, Fiscal anchor, Fiscal policy, Global, PSNW anchor, PSNW target, Public investment, Public investment spending, Public sector, Public sector asset, Public sector balance sheet, Public sector net worth, Transition dynamics show, Unsustainable debt dynamics

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/137
Stock No:

WPIEA2024137
ISBN:

9798400280290
ISSN:

1018-5941

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