Can Fiscal Paths Be Sustainable? Evidence from Poland

ABSTRACT

This article investigates the degree of long-term fiscal sustainability in Poland through two hypotheses: (I) an inability to generate primary surpluses and a significant grow of public debt volumes have hindered past attainment of fiscal sustainability and (II) the recurring problems with generating primary surpluses will block future fiscal sustainability. The research period covers yearly observations between 1999–2017, as well as forecasts for 2018–2028, which include estimations for different possible fiscal paths in Poland. The analysis are based on two different methods, both deriving from the idea of intertemporal budget constraint: primary gap indicator and Ponzi scheme estimations.

KEY WORDS:

• fiscal sustainability
• primary balance
• public debt

JEL:

• H62
• H63
• H68

Notes

1. The most common justification for public borrowing derives from the Keynesian approach. However, the classical economist also provided (sometimes indirect) justification for public debt as an instrument of fiscal policy (see e.g., Barro 1974, 1989; Gali 2013; Neck and Sturm 2008).

2. According to Neck and Sturm (2008, 6), if we define sustainability as the absence of default risk, this condition must be met for sustainable fiscal policy.

3. According to Morgan Stanley Capital International, Poland in 2018 was still recognized as one of the emerging economies (see e.g.: Morgan 2019a, 2019b). At the same time FTSE Russell classified Poland as the developed market (see: FTSE Russell 2018).

4. The differences refer to some public liabilities, like Open Pension Funds (see: Leksykon budżetowy – państwowy dług publiczny 2019; Eurostat 2016; Marchewka-Bartkowiak 2013).

5. According to these criteria, the General government deficit should not exceed 3% of GDP and the General government debt should be lower than 60% of GDP (European Commission 2019).

6. For the discussion on sustainability indicators (including the fiscal sphere), see Gallego-Álvarez, Galindo-Villardón, and Rodríguez-Rosa (2015).

7. An interesting discussion on the interdependence between public borrowing and GDP is presented by Muchova and Kalovec (2014).