trends and future of sustainable development - TransEco

Our article addresses the question of what kind of fiscal policy could properly contribute to therequirements of fiscal sustainability which is a major constituent of the sustainable development, as well.After outlining the economic justification of fiscal sustainability we intend to conceptualise theinnovative fiscal policy complementing it with a short review of Finland. The Finnish case may offerempirical support, and at the same time, its example gives us an opportunity to refine our argument onthe institutional conditions required by fiscal sustainability.2. The economic justification of fiscal sustainabilityOne of the research directions of economics of sustainability is inclined to address the question of whatkind of institutional, political and governmental mixture is able to serve the objectives of sustainability.The relevance of this research area is originated in the theory of sustainable development which alsoimplies the sustainability of the whole economy in which the dimension of fiscal sustainability is of greatimportance. Therefore maintaining a sustainable fiscal policy can be treated as a movement towards thegovernance for sustainable development.We can claim by no means that any increase in debt level is totally harmful for the economicdevelopment, because each debt item is ultimately a capital resource, thus the real question is what thedeficit has been spent on. While exploring what public debt level seems to be unsustainable is a complexset of issues, fiscal policy can be regarded as sustainable when maintaining its current condition –without any considerable revenue or expenditure side correction – ensures the state’s solvency in thefuture as well. The conditio sine qua non of this is the strict definition of a fix debt/GDP ratio, and therate of economic growth should be at least as high as the real interest rate paid on debt. Accordingly, thereal emerging burden of public debts is the interest payment, which might have a strongly negativeimpact on the potential growth of an economy. The eclipse of real interest payment could entail debtreduction due to the positive primary balance (Afonso – Hauptmeier, 2009). Albeit the permanent andsubstantial structural deficit could not be outgrown without any treatment, thus it is able to causeserious damages in the life of the current generation. Moreover, it may also exacerbate the life of the nextgeneration through the crowding-out effect. Governments have to set a target of such an optimal level ofdebt, which guarantees sustainability in a longer time horizon, and as such, also provides a highly safeway of repayments even in time of serious economic and social shocks (e.g. demographic challenges). Indeveloping countries, this level of debt is around the average debt rate of advanced economies, but thepast records of repayments ought to be treated as a determinative factor (Reinhart et al. 2003). Besidesthe future consequences of indebtedness, it also has immediate negative effects (slack economic growth,increasing inflation, higher debt service, rising likelihood of potential debt crisis).Having a balanced fiscal policy also means that public finance does not endanger theintergenerational solidarity in the concept of sustainable development, furthermore, sustainable fiscalpolicy serves as a buttress to develop and utilise human capabilities by grounding solid financialbackground. Fiscal sustainability also implies higher flexibility of public finance and significantlyimproved efficiency of automatic stabilisers and a fortiori healthier capability to adaptive strategicplanning.275