The Cost of Future Policy: Intertemporal Public Sector Balance Sheets in the G7
IMF Working Papers, May 6, 2021
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- The Cost of Future Policy: Intertemporal Public Sector Balance Sheets in the G7
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Bibliographic details
- Authors: Yugo Koshima, Jason Harris, Alexander F. Tieman, Alessandro De Sanctis
- Published: May 6, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513573335.001
Overview
- Authors: Yugo Koshima, Jason Harris, Alexander F. Tieman, Alessandro De Sanctis
- Publication: IMF Working Papers, Working Paper No. 2021/128
- Date: May 6, 2021
- Pages: 48
- DOI: https://doi.org/10.5089/9781513573335.001
- ISBN: 9781513573335
- ISSN: 1018-5941
- Subject areas: Expenditure; Financial statements; Fiscal policy; Fiscal stance; Health care spending; Pension spending; Public financial management (PFM)
Core findings
- The paper compiles the Intertemporal Public Sector Balance Sheets for all G7 countries and examines their relationship with government borrowing costs.
- In 2018, all G7 countries have negative Intertemporal Net Financial Worth (INFW), falling short of their intertemporal budget constraint.
- A decomposition of the evolution of INFW shows:
- Short-term fluctuations are mainly driven by fiscal policy changes.
- In the long run, demographic changes and health and pension obligations play a larger role.
- Estimated market effect:
- On average, a 10 percentage point of GDP increase in INFW reduces the (future) 10-1 year sovereign yield curve spread by 2.8 basis points.
- Interpretation:
- These results suggest that financial markets pay attention to governments’ future policy obligations, in addition to its current assets and liabilities.
Analysis and interpretation
- Balance sheet framework applied across G7 to quantify intertemporal positions and policy-driven dynamics.
- Evolution decomposition separates cyclical/fiscal policy drivers from structural, long-term drivers such as demographics, health care spending, and pension spending.
- Empirical link established between INFW improvements and lower future sovereign yield curve spreads, implying a measurable market premium for intertemporal fiscal health.
Policy implications
- Monitoring Intertemporal Net Financial Worth (INFW) provides additional signals beyond conventional fiscal indicators for assessing government borrowing costs.
- Short-term fiscal policy choices materially affect INFW fluctuations and thus can influence borrowing costs via market perceptions.
- Long-term pressures from demographic change and health and pension obligations warrant policy attention to improve intertemporal fiscal positions and potentially reduce sovereign borrowing costs.
IMF Working Paper No. 2021/128 — "The Cost of Future Policy: Intertemporal Public Sector Balance Sheets in the G7", Yugo Koshima, Jason Harris, Alexander F. Tieman, Alessandro De Sanctis, May 6, 2021.
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