Theoretical foundations of fiscal gap as a long-term fiscal sustainability indicator and its estimates for Russia

Fiscal gap is an indicator of long run sustainability of government finance. It is used for assessment of the extent to which current fiscal policy is able to keep government budget solvent in the longer period. Fiscal gap is derived from intertemporal budget constraint which connects flows of budget outlays and receipts aggregated along decades. Fiscal gap is defined as a sum of current government debt and present value of future primary deficit flow. In order to get an estimate of Russia’s general government fiscal gap we consider three scenarios which are based on different assumptions regarding demographic trends, productivity growth, extractable reserves of oil and natural gas, long term price of oil and natural gas etc. Estimated value of fiscal gap is positive in all three scenarios which implies that current fiscal policy cannot provide budget sustainability in the long run. There are two major factors of the budget imbalances: rising health and pension expenditures due to demographics trends and shrinking role of tax revenues from energy sector due to extraction stagnation. Fiscal gap value under intermediate scenario is equal to 1613 trln 2014 rubles or 13,6% of present value of GDP which is close to fiscal gap in several advanced economies. This study is an extension of (Goryunov et al., 2013) one made by a group of authors headed by Laurence J. Kotlikoff.