## Beyond Debt: Net Worth Fiscal Anchors

_IMF Working Papers, July 9, 2024_

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## Bibliographic details
- Authors: Hua Chai, Jason Harris, Alexander F. Tieman
- Published: July 9, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400280290.001

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### Overview
- 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.

### Key findings
- 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.

### Modeling results and scenarios
- 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.

### Policy implications and recommendations
- 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.

### Operational considerations and challenges
- 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2024/07/08/beyond-debt-net-worth-fiscal-anchors-551340_