if followed, this would result in de facto sustainability in a simple and transparent manner
(Balassone and Franco, 2000).
The arguments provided in this chapter, however, suggest that such an approach would be
inadequate. The problem is that a short-term and “short-sighted” view of the implications
of current policy - over the next three to five years - does not provide sufficient and
relevant information to policymakers. One can envision a situation where policies are
enacted to ensure compliance with the SGP’s constraints, only to soon discover that the
job is not yet finished - indeed, the problem may have grown larger as the budget
window moves forward and the opportunity to save resources in the meanwhile with a
more vigorous adjustment is lost.
Defining sustainability as a non-violation of predetermined levels of deficits and debt is
simply not useful because (as discussed earlier) those indicators alone do not fully reveal
the budget and real economic implications of alternative ways of achieving fiscal
sustainability and economic convergence. The simple projections of future debt and
deficit levels also do not comprehensively reveal the sources of economically meaningful
imbalances - not just in overall budgets, but also in terms of net payments to different
sub-groups, such as young, old, and future generations. The traditional fiscal metrics do
not permit answers to several important questions such as: How decision makers rank
alternative policies that result in the same - say, slightly lower - debt and deficit
trajectories? Who benefits and who loses under each alternative, and what is the likely
impact on the economy? Obviously, policymakers should be provided ways for
answering such questions but traditional measures and a short-horizon focus would be
insufficient. There appears to be no short cut to specifying sustainability in terms of
comprehensive forward-looking measures as described earlier. More work is needed to
complement existing theoretical developments with empirical information in order to
improve the quality of long-term sustainability estimates.
Another issue concerns the incorporation of future policy changes that have already been
enacted. The calculations reported in this chapter are based on current (2005) levels of
taxes, transfers, and government purchases. However, if cuts in pension benefits or
revenue-increasing measures are already scheduled in the laws - information that is
unavailable to the author at the time of writing - those policies should be incorporated
into FI and GI calculations because they are consistent with the definition of “current
policy.” A note of caution needs to be registered, however, that not all scheduled policies
may be politically or economically feasible and some may be very unlikely. In addition,
future policies may be incompletely specified - say, scheduled to terminate at a certain
date with no indication of what would occur thereafter. Although such policy
environments do exist, they make it difficult to implement long-range calculations of FI
and GI measures. In such cases, providing ranges of FI and GI estimates under alternative
policy projections would be more appropriate - and still better than fiscal reporting
exclusively on the basis of traditional short-horizon measures.
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