SUSTAINABILITY OF PUBLIC FINANCES: THE IMPORTANCE OF ASSESSMENT AND STRESS TESTS
Abstract
The purpose of the article is to substantiate the importance of assessing the sustainability of public finances in the long term, to consider tools and methods for assessing financial stability, in particular stress tests. Considering the importance of fiscal/budgetary space, the definition of ‘sustainability of public finances’ has been clarified: it is the ability of the public finance system to function in the long term, maintaining structural balance and ensuring the fulfilment of obligations and expenditures, and having sufficient fiscal space to manoeuvre in the face of changing economic conditions without the risk of falling into a debt spiral. The criteria for the sustainability of public finances are laid down in fiscal rules. Fiscal risks, as threats to the stability of public finances, should be included in the assessment methodologies. As the existing methodologies for assessing fiscal stability of the European Commission and the International Monetary Fund's fiscal risk assessment tools prove, the time horizon of the assessment should include the long-term period. Ukraine officially uses two methodologies for assessing the sustainability of public finances: in 2013, new Methodological Recommendations for Calculating the Level of Economic Security of Ukraine were approved, which contain a description of indicators of budgetary and debt security of Ukraine (the methodology allows assessing only the current state of public finances and is not predictive); in 2019, a methodology for assessing fiscal risks was approved: the methodology provides for the assessment of fiscal risks in the medium term; it indicates the possibility, but not the obligation, to apply the methodology. Further improvement of domestic methods for assessing the sustainability of public finances should be based on expanding the time horizon, fixing the mandatory use of the scenario approach and stress tests in assessing fiscal risks. In the light of Ukraine's European integration, it is necessary to take preparatory measures to ensure the comparability of domestic public finance statistics for the use of the European Commission's fiscal stability risk assessment system. Further research on this topic will be related to the assessment of the sustainability of public finances using the traditional fiscal reaction function and the Domer debt sustainability condition.
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