Beyond Debt: Net Worth Fiscal Anchors

IMF Working Papers, July 9, 2024

Source details

Proposal: Anchor medium- to long-term fiscal policy in a Public Sector Net Worth (PSNW) target.
Rationale: Widen fiscal policy scope to include public sector assets in addition to liabilities—the latter being the focus of debt-based rules.
Relevance: Directly pertinent to debates on green fiscal rules and reforms of fiscal frameworks (such as the Euro Area’s) to allow for public investment in a high debt environment.
Approach: Model a small open economy with public investment and endogenous growth to compare PSNW anchors and debt-based anchors.

A PSNW anchor is more conducive to public investment and economic growth compared to debt-based anchors.
A PSNW anchor provides sensible policy reactions to changes in long-term interest rates.
The net worth anchor precludes unsustainable debt dynamics.
Simulated transition dynamics show that replacing a debt anchor with a net worth anchor does not necessarily lead to higher debt-to-GDP ratios.

Model features: small open economy, public investment, endogenous growth.
Comparative outcomes:
- PSNW anchor versus debt-based anchors: greater support for public investment and economic growth.
- Policy reaction to long-term interest rate changes: PSNW anchor yields sensible adjustments.
- Debt sustainability: PSNW anchor prevents unsustainable debt dynamics.
Transition dynamics: simulations indicate that a shift from a debt anchor to a net worth anchor need not increase debt-to-GDP ratios.

Fiscal anchors: Consider adopting a PSNW target to incorporate public assets formally into fiscal policy frameworks.
Public investment: A PSNW anchor can permit and encourage public investment even in high debt environments while maintaining sustainability.
Framework reform: PSNW targets are relevant for reforms such as those discussed for the Euro Area and for integrating green fiscal considerations.
Interest-rate sensitivity: Fiscal rules should account for long-term interest rate movements; PSNW anchors offer a framework for sensible policy responses.

The paper discusses operational challenges associated with implementing a PSNW anchor (details discussed in the full paper).
Implementation would require addressing public sector balance sheet measurement, valuation of public assets, and integration with existing fiscal frameworks.

Hua Chai, Jason Harris, and Alexander F. Tieman; July 9, 2024; IMF Working Paper No. 2024/137.