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Debt service and fiscal sustainability
Debt sustainability analysis typically focuses on debt stocks and the interest rate-growth rate differential, but these are not perfect predictors of fiscal stress. This column argues that debt-service costs are key to understanding when fiscal adjustments become necessary. Using long-run historical evidence, it shows that primary surpluses are more closely associated with debt-service costs than with debt ratios, and that fiscal responses intensify when financing conditions deteriorate. […]