Beyond Debt: Net Worth Fiscal Anchors

Hua Chai, Jason Harris and Alexander Tieman

No 2024/137, IMF Working Papers from International Monetary Fund

Abstract: This paper proposes anchoring medium- to long-term fiscal policy in a Public Sector Net Worth (PSNW) target. Such a target widens the scope of fiscal policy to include public sector assets, in addition to liabilities—the focus of debt-based rules. A PSNW target is directly relevant to ongoing policy debates on green fiscal rules and more generally, the reform of fiscal frameworks (such as the Euro Area’s) to allow for public investment in a high debt environment. Modeling a small open economy with public investment and endogenous growth, we show that, compared to debt-based anchors, a PSNW anchor is more conducive to public investment and economic growth, while providing for sensible policy reactions to changes in long-term interest rates. The net worth anchor also precludes unsustainable debt dynamics. Simulated transition dynamics show that replacing a debt anchor with a net worth anchor does not necessarily lead to higher debt-to-GDP ratios. In addition to the merits of a net worth anchor, the paper also discusses some operational challenges.

Keywords: Fiscal policy; fiscal anchor; public investment; public sector balance sheet; public sector net worth; PSNW anchor; PSNW target; unsustainable debt dynamics; transition dynamics show; public sector asset; Public investment spending; Financial statements; Public sector; Current spending; Global; Australia and New Zealand (search for similar items in EconPapers)
Pages: 30
Date: 2024-07-09
New Economics Papers: this item is included in nep-fdg
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