The need for meaningful, yet easily calculable, indicators of fiscal sustainability has long been recognized. Conventionally defined measures of the government deficit and public debt may misstate both government solvency and the sustainability of a given fiscal policy because they focus on only a portion of government assets and liabilities and have a narrow time perspective--generally a single budget year. A number of economists have called for a forward-looking balance sheet approach to analyzing fiscal sustainability that would focus on maintaining a desired level of government net worth over the long term. In this view, net worth would encompass the whole range of government assets and liabilities, including, for example, the expected stream of income from the exploitation of exhaustible natural resources.
This paper proposes that such an approach is particularly useful for assessing the sustainability of fiscal policies in countries in which a significant share of government revenue is derived from petroleum exploitation. Political and growth pressures often push governments in these countries into a cycle of “stop-go” fiscal policies, dictated by the swings in international petroleum prices. Taking a long view is especially important to help these countries avoid this policy pitfall.
The paper argues that for countries in which a significant proportion of government revenue is derived from the exploitation of an exhaustible natural resource, fiscal policy sustainability can best be assessed within a permanent income framework that takes into account total government wealth, including the imputed wealth from reserves of natural resources. Using this framework, the paper takes a sample of six countries in which government revenue from petroleum extraction is significant and draws conclusions about the sustainability of their fiscal policies during 1980-92.