ABSTRACT
The issue to be explored in this chapter is: can the government follow a policy of perpetual primary deficits (that is, deficits excluding interest payments on federal debt) even if it wanted to? In other words, is such a policy feasible or sustainable? There is no consensus in the literature. It is generally agreed, however, that if the rate of interest at which government borrows is in excess of an economy’s growth rate, then the ratio of the debt to GNP will rise without bounds, so that a policy of perpetual primary deficits will be impossible. The same issue could also be looked at this way: if governments, like private individuals, are subject to a present-value borrowing constraint, then a policy of following a permanent primary deficit is impossible because the constraint will be violated. Thus, we have two ways of testing for the feasibility of fiscal policies practised by countries in our sample. This chapter presents evidence using both approaches.
