Assessing Fiscal Soundness : Theory and Practice

This paper presents a survey of methods to assess fiscal soundness, i.e. the capability of governments to honor their obligations in the short run and in the long run. The need for a comprehensive monitoring of fiscal soundness derives from the risks for economic stability arising from a government's actual or expected difficulties to honor its obligations. For the long run, methods derived from the government's intertemporal budget constraint allow an assessment of the size of a necessary adjustment to achieve sustainability of the debt burden. Uncertainty regarding shocks to the fiscal situation or the behaviour of financial market participants calls for the monitoring of financial flows and government obligations in the short run. Vigilance needs to be higher, the greater the uncertainty regarding long-term sustainability