III. Fiscal Sustainability and Options for Fiscal Adjustment14
43. Large hydrocarbon revenues in Kuwait have led to sizable fiscal surpluses and accumulation of sizable financial assets. Kuwait receives substantial earnings from the export of its hydrocarbon resources most of which are oil-related (henceforth referred to as oil). Oil resources, however, are non-renewable, and one can naturally expect that at the national level Kuwait will realize savings out of its oil export receipts to smooth out the consumption path somewhat along the lines implied by the Permanent Income Hypothesis (PIH) of consumption. Kuwait has indeed made large savings over the years and accumulated considerable external financial assets. Oil export receipts accrue exclusively to the government,15 and sizable fiscal surpluses accumulated over the years have contributed to Kuwait’s large savings in the Reserve Fund for Future Generations (RFFG).
44. Excessive dependence of the budget on oil revenues and investment income, together with a very high and growing share of recurrent expenditures in the budget, raises questions about Kuwait’s long-term fiscal sustainability. More than 90 percent of government revenues are estimated to have been oil export receipts and investment income from external financial assets16 in recent years. Both revenue items are subject to a large degree of uncertainty compared with tax revenues. On the expenditure side, recurrent expenditures have been growing at a fast pace and reached a record high level in relation to GDP. The share of capital expenditures that can support growth of the non-oil economy, however, increased only marginally.
45. This chapter assesses Kuwait’s long-term fiscal sustainability and discusses options for fiscal adjustment to address the challenge. It first describes the developments in consumption and savings, which led to the accumulation of large external financial assets. It then turns to the assessment of fiscal sustainability in Section C. As a first step, the PIH rule is applied to check for a specific form of fiscal sustainability. The analysis concludes that an unchanged Kuwaiti fiscal policy is not consistent with the PIH. A standard debt sustainability analysis also reaffirms that an unchanged Kuwaiti fiscal policy would be unsustainable in the sense that it would lead to a rapid depletion of the accumulated assets and thereafter to a buildup of debt at an unsustainable pace. The final Section (Section D) discusses ways to strengthen the budget structure and options for fiscal adjustment. The options include the following: (i) rationalization and targeting of subsidies; (ii) rationalization of transfers associated with very high social security benefits; (iii) increases in capital expenditures in areas which would engender private sector investment; and (iv) an expansion of the tax base.
B. Savings-Investment Balance, 1975–2004
46. Kuwait has saved considerable portions of its gross national disposable income (GNDI), as reflected in its large external current account surpluses during the last three decades (Figure III.1).17 The external current account balances have recorded large surpluses in most years except for a few years following the Iraqi invasion. Kuwait has also built up a good quality infrastructure by investing a part of gross national disposable income in the form of physical capital. A close inspection of the data reveals that physical capital accumulation was intensive during certain periods: before 1980, which corresponds to the period when the country started to transform its infrastructure following the oil boom of 1970s; and again in early 1990s after the end of the Iraqi invasion, which significantly damaged the nation’s physical infrastructures.
Figure III.1:External Current Account Balance Savings and Investment
47. Reflecting the large external current account surpluses, Kuwait is estimated to have built up substantial gross external financial assets over the last several decades. While the data on gross external financial assets are not available, a very rough estimate can be made by calculating the cumulative sum of Kuwait’s external current account balances over the last three decades.18 A simple cumulative sum for the period 1975–2003 amounts to $156.8 billion (Figure III.2). Based on an assumption of nominal annual return of 4 percent, the cumulative savings would amount to $306.7 billion. A rough breakdown of the cumulative sum into public and private sector parts can also be calculated from the national accounts data.
Figure III.2:External Current Account Balance
48. The large external current account surpluses, particularly those during the oil boom in the 1970s and the post-reconstruction period of the 1990s, were attributable to large fiscal surpluses and declining national investment (Figures III.3 and III.4). The fiscal position, however, remained relatively weak during most of the 1980s due to the secular decline in oil prices in real terms, followed by a marked deterioration in the fiscal position in early 1990s due to the liberation efforts and subsequent reconstruction. The lower level of domestic investment in the 1980s and in the second half of 1990s reflected the limited investment opportunities in the non-oil economy. The relatively high level of investment in the 1970s reflected the developmental needs of the economy, and the temporary surge in investment during the post-liberation period was associated with the reconstruction and rehabilitation of the damaged infrastructure.
Figure III.3:External Current Account Balance Figure III.4:Gross Capital Formation
49. Kuwait lags behind other oil-exporting countries in domestic investment despite the very high level of domestic savings. Among selected oil-exporting countries, Kuwait has the lowest gross fixed capital formation in relation to GDP (Table III.1). In particular, the pace of gross fixed capital formation markedly slowed down in the post-reconstruction period (1997–2003).
|Trinidad and Tobago||17.7||23.3|
50. The private sector savings-investment balance has offset to some extent the impact of changes in fiscal balance on the external current account balance (Figure III.3). In the pre-Iraqi invasion period, private sector savings increased above the level of private investment to offset the declining fiscal surpluses. After the Iraqi reconstruction period, however, the trend was reversed as the private sector reduced its net savings amid rising fiscal surpluses. The observation suggests that households partially substituted consumption of publicly provided goods and services and public investment for consumption of privately purchased goods and services and private investment. The negative correlation between the fiscal balance and the private sector saving-investment balance might not necessarily be the sole outcome of an accounting identity. Even when the private sector savings-investment balances were not to develop in such a way to offset the changes in the fiscal balances, the accounting identity would hold.19
51. During the period 2003–04, the central government budgetary position has been strong due to higher oil prices, but the stance of fiscal policy was expansionary, since the government spent a large part of the oil revenue on various expenditure programs. Specifically, expenditures grew by 24 percent in real terms during 2003–04. While a part of the increase in expenditure was attributable to security-related outlays and to a one-time transfer of higher oil revenues to the citizens, other recurrent expenditures including wages and salaries and subsidies and transfers also increased significantly and are estimated to have accounted for almost 70 percent of current expenditures. As a result, non-oil primary deficit as a percent of non-oil GDP increased by more than 8 percentage points (to 61 percent) during the two-year period ending 2004.
52. The recent sharp increase in recurrent expenditures calls for a fiscal sustainability analysis. A large part of the increase in expenditure was financed by higher oil revenues, while domestic tax revenue effort remains low at less than 2 percent of total revenue. Thus, the vulnerability of the budget to uncertainties in oil and investment income receipts has accentuated. The following section analyzes in greater detail the sustainability of Kuwait’s current fiscal stance over the longer term.
C. Fiscal Sustainability
53. Kuwait’s fiscal sustainability has been assessed using two different types of frameworks, both based on an exogenous extraction rate for hydrocarbon resources. The first framework is the PIH of consumption. The second framework is a standard debt sustainability analysis. Under both frameworks, the current Kuwaiti fiscal policy stance is not sustainable.
54. The PIH framework. This framework provides an approach to assess fiscal sustainability. The PIH framework aims at maintaining the government total net wealth, defined as the sum of gross financial and hydrocarbon wealth net of gross financial debt, by limiting the government spending to the annuity value of total net wealth (Box 1). Since hydrocarbon reserves will be eventually converted into financial assets, the path of fiscal position that is determined by the PIH is by construction sustainable.20 One desirable property of the PIH is the recognition of exhaustible nature of hydrocarbon resources. The PIH outlines a specific path of fiscal positions consistent with the objective of ensuring a constant total real net wealth. It also ensures that the fiscal policy stance is sustainable beyond the point hydrocarbon resources are completely depleted. Thus, comparing the current stance of fiscal policy with this path helps determine whether current fiscal policy is consistent with the maintenance of total net wealth and thus satisfies a sufficient condition for fiscal sustainability.
55. While the PIH provides a check for one form of fiscal sustainability, it has its limitations. The path of fiscal position that is implied by the PIH is indeed one of many that ensure fiscal sustainability. In other words, the PIH-based fiscal policy is a sufficient condition for fiscal sustainability and not a necessary condition. For a particular level of gross financial assets net of gross financial debt (in relation to GDP), there are, in general, many fiscal paths that could be consistent with fiscal sustainability after oil is depleted.
Box III.1:Permanent Income Hypothesis (PIH)21
The PIH rule targets a constant total net wealth in real terms. Total net wealth is defined as the sum of the value of hydrocarbon reserve under the ground and gross financial asset net of gross financial debt. Thus, the PIH rule essentially means pursuing fiscal policy under which total net wealth grows at the rate of inflation. Such fiscal policy implies a path of net primary balance and, taking into account the exogenously given hydrocarbon revenues, a path of non-hydrocarbon net primary balance.
Under the PIH rule, non-hydrocarbon net primary deficit should be equal to the real return on total net wealth discounted by a period nominal interest rate. That is,
where PDt is the non-oil net primary deficit; it is the nominal interest rate; pt is inflation rate; FAt is the beginning-of-the-period gross financial asset; FDt is the beginning-of-the-period gross financial debt; and OWt is the present value of exogenously given hydrocarbon revenues which are assumed to be depleted at some time in future.
The PIH rule in principle sets the consumption level equal to the real return out of the total net wealth regardless of the form of the wealth. Underlying this result is a supposition that the government finances its non-hydrocarbon deficits from hydrocarbon revenues. Hydrocarbon revenues can be used either to finance the government spending (consumption) or to accumulate net financial assets (savings). The unused part of hydrocarbon revenues is accumulated in such a way to ensure that total net wealth remains constant in real terms.
56. The PIH framework is best used to provide a normative assessment based on certain criteria.22 The path of fiscal position guided by the PIH ensures one form of intergenerational equity on the assumption that the discount rate used in the PIH framework is equal to the time preference of households who benefit from the government spending. Since the spending is equal to the annuity value of total net public wealth that will be constant in real terms, each generation as a whole enjoys the same level of government services out of the petroleum resources under the rule. The PIH rule, however, is somewhat arbitrary in the sense that the targeted level of total real net public wealth is what an economy happens to own at a particular time. Furthermore, total real net public wealth is held constant regardless of the level of net wealth held by the households. If future generations are projected to be wealthier and earn higher income, holding government spendings constant in real terms might not be compatible with the objective of intergenerational equity.
57. A standard debt sustainability analysis. In order to assess the implications of deviations of the fiscal stance from the implied PIH-based path, it is necessary to conduct a standard debt sustainability analysis.23 A simple comparison of a fiscal stance with the PIH-based fiscal policy stance by itself does not provide the basis for assessing the sustainability of the fiscal policy. A debt sustainability analysis helps assess the likely debt path under the unchanged Kuwaiti fiscal stance and enables quantifying the fiscal adjustment needed to achieve fiscal sustainability. While standard debt sustainability analyses are usually conducted for a medium-term time horizon, a long-term analysis is relevant in the present context to reflect the implications of the exhaustible nature of hydrocarbon resources on debt sustainability. Thus, the simulations in this section cover the period after which oil is depleted. The results of both frameworks are reported below.
58. Given Kuwait’s large size of hydrocarbon reserves, the PIH framework implies that large non-oil fiscal deficits are permissible under the assumptions summarized in (Box III.2). The simulation targets maintaining the projected total public sector net wealth in the beginning of 2010 that is implied by the medium-term macroeconomic framework outlined in the accompanying staff report. The dynamics of the components of total net wealth is shown in Figure III.5. The value of hydrocarbon reserves declines as the reserves are extracted and a part of the resulting oil revenue is converted into financial assets. The ratio of non-oil net primary deficit to non-oil GDP that is permissible under the PIH in 2010 amounts to 63 percent. The deficit ratio steadily declines thereafter as non-oil GDP grows over time (Figure III.6).
Figure III.5.Dynamics of Wealth under the PIH, 2005–2115 Figure III.6.Non-oil Net Primary Balance to Non-oil GDP Ratio, 2005–35 Box III.2.Assumptions underlying the PIH Simulation for Kuwait
A PIH simulation has been performed under the following assumptions:
The simulation targets maintaining the projected total public sector net wealth beginning 2010 that is implied by the medium-term macroeconomic framework outlined in the 2005 staff report;
The long-term Kuwaiti crude export price is projected to increase by 0.6 percent per annum starting from $28 per barrel, which is the projected Kuwaiti crude export price for 2010.
Crude oil production is virtually flat at the projected 2009 production level of 2.5 million barrels per day;
Given the estimated 95 billion barrels oil reserves as of end-2004, oil reserves are projected to be depleted in 112 years;
Real non-oil GDP is projected to grow at 3.5 percent;
The inflation rate is projected to be 1.9 percent; and
The average nominal rate of return on financial assets is assumed to be 3.5 percent.
59. The unchanged Kuwaiti fiscal policy stance is projected to become inconsistent with the maintenance of total net wealth (Figure III.6). The unchanged fiscal policy stance assumes that neither new revenue measures nor new expenditure restraints will be introduced in future. Specifically, the stance of the fiscal policy until 2009 is assumed to be the fiscal policy stance in the medium-term macroeconomic framework of the staff report.24 For 2010 onwards, it assumes that: (a) the ratio of non-oil tax and non-tax revenues (except investment income and profit transfers from state-owned Kuwait Petroleum Corporation) in relation to non-oil GDP will remain constant at the projected 2009 level; (b) oil export receipts and profit transfers from Kuwait Petroleum Corporation will move in step with crude oil production and export prices; and (c) the ratio of primary expenditures to non-oil GDP will remain constant at the projected 2009 level. The simulation indicates that non-oil net primary deficit under the unchanged policy will exceed the permissible level because of projected continued growth of expenditures, while oil revenues decline in relation to GDP.
60. A standard debt sustainability analysis also reaffirms that the unchanged fiscal policy stance is not sustainable. For the first 20 years of the simulation, gross financial assets net of gross financial debts are positive (Figure III.7). However, the net financial asset position deteriorates rapidly and turns into net debt position as the increase in primary expenditure starts dominating the modest increase in revenues. The modest increase in revenues is attributable to a projected rather flat profile for oil export receipts and to the low ratio of non-oil domestic revenues to non-oil GDP.
Figure III.7.Financial Assets Net of Financial Debt, 2005-35
61. Although both the PIH and long-term debt sustainability analysis are sensitive to changes in the key assumptions, the current fiscal stance remains unsustainable even if allowance is made for oil prices being higher than envisaged in the simulation. In the simulation, long-term Kuwaiti crude export price is assumed to increase by 0.6 percent per annum from 2010. Even, if crude oil prices are assumed to increase by 2 percent instead, in line with the projected inflation rate for advanced economies over the long term, the net financial asset position will turn negative in 2029 (rather than in 2026).
62. The unchanged fiscal policy stance cannot be sustained indefinitely no matter how large the accumulated net financial asset is prior to the depletion of oil unless the rate of return on assets exceeds the nominal growth rate of non-oil GDP. After the depletion of oil, net primary deficit is assumed to increase at the rate of nominal GDP growth while the return of gross financial asset and gross financial debt is lower than the rate of nominal GDP growth. Thus, no matter how large is the accumulated net financial wealth prior to the depletion of oil, the increases in debt resulting from the growing fiscal deficits will eventually dominate the increases in gross financial assets, leading to unsustainable government debt levels.
63. Only under unrealistic assumptions for the projected crude oil export prices can net financial wealth be maintained above the current level in real terms for a certain period after the depletion of oil. It is theoretically possible to find a rate of increase in crude export price that ensures that the net financial wealth remains above current levels in real terms under the unchanged fiscal policy for at least, say, 30 years after the depletion of oil. A simulation indicates that an annual rate of increase in crude export price of at least 6.3 percent will be required to achieve such an objective. This required rate of increase is more than three times the assumed long-term rate of inflation for the major industrial countries (2 percent). Furthermore, even under this scenario, gross financial debt will quickly grow and start exceeding gross financial assets 30 years after the depletion of oil. Thereafter, government debt would soon reach unsustainable levels in relation to GDP.
64. To ensure fiscal sustainability, expenditure restraints, preferably combined with non-oil revenue mobilization will be necessary. A hypothetical adjustment path has been generated so as to illustrate the magnitude of fiscal adjustment that would be necessary to ensure fiscal sustainability. For simplicity, we assume a combination of expenditure containment of one percentage point of non-oil GDP a year and non-oil revenue mobilization of half a percentage point of non-oil GDP a year25 (i.e., one and a half percentage points of discretionary fiscal adjustment) is maintained for a period that would be necessary to ensure fiscal sustainability (Table III.2). The result shows that fiscal adjustments would need to be sustained for about 50 years to ensure fiscal sustainability, taking into account the exhaustible nature of hydrocarbon revenues.
|Unchanged Fiscal Policy Stance||Adjustment Scenario|
|Annual reduction in non-oil deficit-to-non-oil GDP ratio (In percentage points)||0.0||1.5|
|Non-oil net primary balance|
|(In percent of non-oil GDP)|
|Net government assets/debt (In percent of GDP) 1/|
65. The financial assets already built up by the government and the hydrocarbon wealth remaining in the ground can be used to undertake a smooth fiscal adjustment. In the adjustment scenario presented above, fiscal sustainability is ensured because net financial assets and hydrocarbon revenues are used to finance the non-oil primary fiscal deficits along the transition path to the steady state. Although financial assets of the public sector will be exhausted by the time fiscal sustainability is achieved, Kuwait’s needs for such assets will also largely disappear. While there is some flexibility in terms of timing and phasing of the required adjustment measures, front loading will provide additional flexibility in the event of adverse shocks along the way.
D. The Budget Structure in Kuwait and Options for Fiscal Adjustments
Structure of the budget
66. A significant part of Kuwait’s fiscal operations is related to transferring oil earnings to its citizens. In Kuwait, all oil export receipts accrue to the government, and oil export receipts and investment income from the assets held abroad account for the vast share of the government revenues (Table III.3). Tax revenues are only a small fraction of the total revenue (2 percent in FY 2003/04). On the expenditure side, subsidies and transfers account for about a quarter of total expenditures. Furthermore, the government has remained in its role as the employer of last resort over the years by absorbing most of the rapidly growing labor force in the public sector. A large part of the fast-growing wage bill, which accounts for more than one-third of the total expenditures, is also de facto transfers to the Kuwaiti citizens.
|(In percent of total revenue)|
|Investment income and transfer of profits of public entities||25.3||20.9||16.0|
|(In percent of toal expenditures)|
|Wages and salaries||36.7||34.1||35.0|
|Subsidies and transfers||24.2||26.9||24.7|
|Goods and services||23.1||22.1||24.5|
|(In percent change)|
|Wages and salaries||5.0||4.0||4.4|
|Subsidies and transfers||8.2||24.7||-6.3|
|Goods and services||5.0||7.7||12.7|
67. Subsidies are not targeted in Kuwait. A lion’s share of the subsidies is for electricity and water (Table III.4). Since charges for these services are very low, revenues from these services are small and are well short of the operating costs associated with the provision of these services. This policy is contributing to misallocation of resources and is also regressive to the extent that the wealthier households tend to consume much more than the less wealthy households.
|Total current subsidies||341||337||439|
|Petroleum product subsidies||6||7||7|
|Electricity, water, and housing authority||329||323||424|
|Social Security Institute||489||510||558|
|Other public entities||33||51||54|
|Private domestic institutions||10||11||12|
|Other public entities||57||94||105|
|Total current subsidies and transfers||1,292||1,210||1,368|
|Subsidies and transfers|
|In percent of GDP||12.3||10.9||10.4|
|In percent of total expenditures||26.9||24.7||25.1|
68. Transfers to the Public Authority for Social Security (PASS) account for a large share of transfers, followed by housing subsidies (transfers to individuals). The PASS pays pension benefits to both private and public employees. Reflecting a very high replacement ratio by international standards,26 the budget makes large transfers to the PASS to supplement the contributions of employers and employees, as well as investment income. While liquidity problem of the PASS will not likely arise for some time because of the demographic composition of the Kuwaiti citizens, growth of the number of the beneficiaries will eventually call for either a fundamental rationalization of the benefits, a move toward a fully funded system by raising the rate of contribution, or a combination of both.
Options for fiscal adjustment
69. Fiscal adjustment can be gradual. One possible fiscal adjustment scenario to ensure fiscal sustainability is to follow the fiscal policy that is anchored by the PIH. The literature suggests that oil economies that are already on a balanced growth path tend to benefit by following PIH-type fiscal rules given households’ consumption smoothing motives.27 In Kuwait, however, non-oil economy appears to have room for development. If investment in capital (both physical and human) is to change the growth path of the non-oil economy, investing in capital (both physical and human) rather than accumulating external financial assets can be welfare improving.28 Thus, fiscal adjustment can be slower than what the PIH rule suggests in order to accommodate expenditures aimed at enhancing growth of the non-oil economy. As already discussed, financial assets of the public sector can be used to smoothen the adjustment path. The growth of non-oil economy would also reduce Kuwait’s needs for financial assets of the public sector. Furthermore, the decline in the public sector financial assets could well be accompanied by an increase in private sector savings-investment balance, consistent with the behavior observed in the past in Kuwait. Such household behavior can mitigate the possible effect of fiscal adjustment on the domestic economy.
70. Fiscal adjustment should be undertaken through both expenditure rationalization and revenue mobilization over the medium term. Simulations in the previous subsection make it clear that large non-oil primary deficit in relation to non-oil GDP, together with increases in the size of non-oil economy relative to oil economy, is a primary source of fiscal unsustainability under the unchanged policy. Thus, any fiscal adjustment would need to address the high level of primary expenditures and the low level of non-oil revenue in relation to non-oil GDP. Sustained expansion of the non-oil economy will also create greater potentials for expanding the tax base.
71. Various options for expenditure rationalization and reallocation should be considered. Primary areas that could be subject to expenditure rationalizations are subsidies and transfers. Raising water and electricity fees at least to cost recovery levels would help reduce budgetary outlays and reduce misallocation of resources. Regarding transfers, maintaining the very high replacement ratio over the long term is not desirable as such a policy would require large increases in contributions over time as the demographic composition tilts more towards the elder population. Hence, future benefits rationalization should be considered. The ongoing efforts to gradually build a funded supplementary system will also help create the basis for future benefit rationalization. Expenditure reallocations will also indirectly facilitate fiscal adjustment. Capital expenditures and expenditures on education can enhance growth of the non-oil economy and employment generation over the medium to long term. Growth of the non-oil economy would also facilitate the reallocation of the Kuwaiti labor force from the government to the private sector, easing the pressure on wages and salaries.
72. Additional revenue mobilization will help the fiscal adjustment over the long-term. Given the low level of the ratio of non-oil noninvestment revenues to non-oil GDP, increasing the tax incidence on the domestic economy is a natural option. The proposed simplification of corporate income tax rates and extension of its coverage to domestic companies, together with efforts to revitalize the non-oil economy, would help broaden the domestic tax base. The authorities should also consider implementation of a broad-based general sales tax (GST), preferably in collaboration with the other GCC members, over the medium term. Initially the basic GST rate could be relatively low, with the option to increase it over the long term, as needed.
Aiyagari, Rao S., 1987, “Intergenerational Linkages and Government Budget Policies,” Federal Reserve Bank of Minneapolis Quarterly Review,Spring issue.
Aschauer, David A., 1985, “Fiscal Policy and Aggregate Demand,” The American Economic Review, Vol. 75, No. 1(March), pp. 117–27.
Barro, Robert J., 1974, “Are Government Bonds Net Wealth?” Journal of Political Economy, Vol. 82(November/December), pp. 1095–1117.
Campbell, John Y. and N. GregoryMankiw, 1990 “Permanent Income, Current Income, and Consumption,” Journal of Business and Economic Statistics, No. 8(July), pp. 265–79.
Davoodi, Hamid, 2002, “Assessing Fiscal Vulnerability, Fiscal Sustainability, and Fiscal Stance in a Natural Resource-Rich Country,” in Republic of Kazakhstan—Selected Issues and Statistical Appendix, IMF Staff Country Report No. 02/64 by van der Mensbrugghe and others (Washington: International Monetary Fund)
Graham, Fred C., 1993, “Fiscal Policy and Aggregate Demand: Comment,” The American Economic Review, Vol. 83, No. 3(June), pp. 659–66.
IMF, 2002, “Assessing Sustainability,” www.imf.org (Washington: International Monetary Fund).
IMF, 2003, “Debt Sustainability in Low-Income Countries—Toward a Forward-Looking Strategy,” www.imf.org (Washington: International Monetary Fund).
Kormendi, Roger C., 1983, “Government Debt, Government Spending, and Private Sector Behavior,” The American Economic Review, Vol. 73, No. 5(December), pp. 994–1010.
Prepared by Hajime Takizawa.
The upstream oil sector is not open to foreign oil companies in Kuwait.
These figures include the transfer of profits of state-owned Kuwaiti Petroleum Corporation.
Gross national disposable income (GNDI) is defined as gross domestic product (GDP) plus net factor income from abroad (NFI) and net transfers (NT). Given the definitions of GNDI and the external current account balance (CAB), gross national savings, which is defined as GNDI minus consumption (C), is equal to gross domestic investment (I) plus external current account balance:
S = GNDI – C = I + CAB.
The data on external current account balance are available for 1975 and thereafter in the Fund’s International Financial Statistics.
For the discussion of fiscal neutrality, see Barro (1974). Subsequent research indicates that fiscal neutrality holds under limited conditions (Aiyagari, 1987). Empirical research for the U.S. economy indicates that the households partially offset the change in the government savings-investment balance (Aschauer, 1985; Campbell and Mankiw, 1990; Graham, 1993; and Kormendi, 1983).
Fiscal sustainability (i.e., public debt sustainability) can be defined as “…a situation in which a borrower is expected to be able to continue servicing its debts without an unrealistically large future correction to the balance of income and expenditures” (www.imf.org “Assessing Sustainability”).
A detailed discussion of the PIH can be found in Davoodi (2002).
Aside from the limitation in the analysis of fiscal sustainability, the PIH rule has serious problems if it were to be made operational. For example, the rule requires notional long-term price as an input, and revising the price could impart significant procyclicality.
Despite no new significant measures, the ratio of primary expenditures to non-oil GDP is projected to decline gradually until 2009, reflecting the changes in fuel cost subsidies for electricity and water in response to the projected oil market developments.
The revenue mobilization does not take into account the indirect effect of improvement in primary fiscal balance on reduction of (increase in) interest payment (investment income).
Percentage of benefits accounting for more than 80 percent of the salary/income of the contributors.
For details of the argument, see Takizawa et al. (2004).
Takizawa, et al. (2004) demonstrate that accumulation of physical capital can yield higher welfare than that achievable from accumulation of external financial assets if the level of initial physical capital is significantly lower than the steady state balanced growth level.