Which indicator of fiscal solvency should be monitored?

A debate has arisen around which indicator of fiscal solvency should be monitored . It has been suggested that this indicator is the level of interest on the public debt and not the public debt ratio, whereas until now Europe had a norm for the public debt ratio. To examine this point, we begin with the general condition of a country’s fiscal solvency: If the nominal interest rate is lower than the nominal growth rate, the public debt ratio dynamics is convergent and there is no fiscal solvency problem as long as the country has a positive inflation tax and a primary fiscal surplus . B ut even this case does not allow for the primary fiscal deficit to become too large; If the nominal interest rate is higher than the nominal growth rate, fiscal solvency is ensured if the public debt is lower than the discounted sum of primary fiscal surpluses and monetary financing of future fiscal deficits. This creates a constraint not on the public debt ratio or on the interest paid on the public debt, but on the product of the public debt ratio and the interest rate-growth differential. Fiscal solvency therefore requires a more complex constraint than ones relating simply to the public debt or the interest on the debt. Even if the interest rate is lower than the growth rate, there is still a limit to the fiscal deficit.