Fiscal Sustainability and Low Interest Rates: A Note
CESifo, Munich, 2021
CESifo Working Paper No. 8861
In this paper, I demonstrate that an indicator which is commonly used to assess the long-term fiscal sustainability of public finances in EU member states (“S2”) is also defined if government borrowing rates are assumed to be permanently lower than the growth rate of GDP. I illustrate this finding based on simulations prepared for the Fifth Sustainability Report published by the German Federal Ministry of Finance. In addition, I discuss the interpretation of the indicator in a low-interest environment and the assumption that relevant interest rates continue to be low if there are substantial challenges for fiscal sustainability, e.g., through demographic ageing.
Public Finance
Fiscal Policy, Macroeconomics and Growth