Governments use national debt and the budget deficit as measures of fiscal position. But what should government policy aim to achieve with respect to these measures? Are these the right summary measures at which to be looking? This paper considers what the government should use as its fiscal targets to achieve policies that are consistent with long-term fiscal objectives. Among its findings are:
1. Setting long-term targets for fiscal policy should start with a specification of fundamental policy objectives. There are at least three important long-term objectives associated with concerns about debt and deficits: intergenerational equity, economic performance, and fiscal sustainability. These objectives may conflict and their relative importance depends on both social judgments and the economic environment.
2. If governments have incentives not to adhere to fiscal policy targets, then restrictions on fiscal policy actions may be desirable, even though such restrictions reduce the scope for varying policy in response to changes in economic conditions. An independent entity such as fiscal policy council can serve as an alternative mechanism for ensuring compliance, although a certification of non-compliance, alone, may not impose a sufficient penalty.
3. A collection of forward-looking measures, presented in conjunction with an assessment of their dependence on particular assumptions, can provide far more information than short-term deficit targets alone, although care must be taken with respect to the method of presentation to ensure that the multiplicity of measures does not hinder the ability to provide a clear message regarding the desirability of particular fiscal policy paths.