Debt and Deficits: Fiscal Analysis with Stationary Ratios
We introduce a measure of a government's fiscal position that exploits cointegrating relationships among fiscal variables. The measure is a loglinear combination of tax revenue, government spending and the market value of government debt that—unlike the debt-GDP ratio—appears stationary in long historical data from the US and the UK and in postwar data from these and 14 other developed countries. The fiscal position must forecast either government debt returns or fiscal adjustment (a combination of high tax growth and low spending growth), or both. We find that fiscal adjustment, particularly through changes in spending, is the empirically relevant channel.
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