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Is the fiscal solvency condition met in the United States, the United Kingdom, Italy, Spain, France and Japan?
The condition for fiscal solvency to be met is that the public debt must be lower than the discounted sum of future primary fiscal surpluses. But, unlike common practice, this calculation requires the introduction of a risk premium resulting from uncertainty about future primary fiscal surpluses. A risk premium appears because of the correlation between primary surpluses or deficits and interest rates, like in the case of equities, where the risk premium results from the correlation in the economic cycle between dividends and the marginal utility of consumption. When we calculate this risk premium by analogy with the equity risk premium, we see that long-term fiscal solvency is not ensured at present in any of the six large OECD countries studied.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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