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Interconnection of Fiscal Policies on Sustainability of Public Debt

Author

Listed:
  • Atsumasa Kondo

    (Faculty of Economics, Shiga University)

Abstract
This paper investigates the interconnection between certain fiscal policies in achieving a sustainable level of public debt. The fiscal policies that are investigated relate to the consumption tax rate, the income tax rate, and to public spending. The paper focuses on the critical level of public debt-to-GDP ratio, for which if the ratio exceeds this level at time 0, then it diverges to +∞ as time passes. The paper theoretically examines how the critical level depends on the fiscal policies, and reveals some merits of consumption taxation. As the consumption tax rate increases, so income taxation and cutting public spending become more effective in sustaining public debt.

Suggested Citation

  • Atsumasa Kondo, 2016. "Interconnection of Fiscal Policies on Sustainability of Public Debt," Discussion Papers CRR Discussion Paper Series A: General 20, Shiga University, Faculty of Economics,Center for Risk Research.
    • Handle: RePEc:shg:dpapea:20
    as

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    File URL: https://www.econ.shiga-u.ac.jp/risk/DPA20Kondo20160912.pdf
    File Function: First version, 2016
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    References listed on IDEAS

    as
    1. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 949-963.
    2. Chryssi Giannitsarou, 2007. "Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes," Economic Journal, Royal Economic Society, vol. 117(523), pages 1423-1435, October.
    3. Bettina Fincke & Alfred Greiner, 2012. "How to assess debt sustainability? Some theory and empirical evidence for selected euro area countries," Applied Economics, Taylor & Francis Journals, vol. 44(28), pages 3717-3724, October.
    4. Schmitt-Grohe, Stephanie & Uribe, Martin, 1997. "Balanced-Budget Rules, Distortionary Taxes, and Aggregate Instability," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 976-1000, October.
    5. Atsumasa Kondo & Koji Kitaura, 2009. "Does Deflation Impinge On A Government'S Fiscal Standing?," Pacific Economic Review, Wiley Blackwell, vol. 14(5), pages 651-656, December.
    6. Hamilton, James D & Flavin, Marjorie A, 1986. "On the Limitations of Government Borrowing: A Framework for EmpiricalTesting," American Economic Review, American Economic Association, vol. 76(4), pages 808-819, September.
    7. Akira Kamiguchi & Toshiki Tamai, 2012. "Are Fiscal Sustainability And Stable Balanced Growth Equilibrium Simultaneously Attainable?," Metroeconomica, Wiley Blackwell, vol. 63(3), pages 443-457, July.
    8. Teles, Vladimir K. & Cesar Mussolini, Caio, 2014. "Public debt and the limits of fiscal policy to increase economic growth," European Economic Review, Elsevier, vol. 66(C), pages 1-15.
    9. Real Arai, 2011. "Productive Government Expenditure and Fiscal Sustainability," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(4), pages 327-351, December.
    10. Atsumasa Kondo, 2012. "A Note on Public-Debt Sustainability in an Economy with Declining Fertility," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(2), pages 153-164, June.
    11. Alfred Greiner, 2013. "Sustainable Public Debt and Economic Growth under Wage Rigidity," Metroeconomica, Wiley Blackwell, vol. 64(2), pages 272-292, May.
    12. Nourry, Carine & Seegmuller, Thomas & Venditti, Alain, 2013. "Aggregate instability under balanced-budget consumption taxes: A re-examination," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1977-2006.
    13. Atsumasa Kondo, 2007. "On The Sustainability Of Government Borrowing In A Dynamic General Equilibrium," Pacific Economic Review, Wiley Blackwell, vol. 12(5), pages 565-576, December.
    14. Greiner Alfred & Anton Bondarev, 2015. "Public debt and aggregate stability with endogenous growth and a state-dependent consumption tax," Economics Bulletin, AccessEcon, vol. 35(4), pages 2601-2609.
    15. Yakita, Akira, 2008. "Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 897-914, April.
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    Cited by:

    1. Atsumasa Kondo, 2016. "Sustainability of Public Debt in an AK Model with Complex Tax System," Discussion Papers CRR Discussion Paper Series A: General 21, Shiga University, Faculty of Economics,Center for Risk Research.

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    More about this item

    Keywords

    sustainability of public debt; fiscal policies; consumption tax; income tax; public spending; balanced growth path;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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